CHAPTER 8 (2014)Apunte Inglés
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ECONOMICS. CHAPTER 8
MONOPOLY, OLIGOPOLY AND MONOPOLISTIC COMPETITION.
TYPES OF MARKET STRUCTURE.
Monopoly = One seller.
Oligopoly = Few sellers.
WHAT DETERMINES THE NUMBER OF FIRMS IN A MARKET? 1-LONG-RUN BARRIERS TO ENTRY … - Control of necessary resources or inputs: Oil, diamonds, etc.
- Increased returns to scale in production: Car, local utilities, etc.
- Technological superiority: Micro-chips.
- Network externalities: Facebook, social networks, etc.
- Government regulations: Banks, patents, copyrights, etc.
WHY SOME MARKETS HAVE DIFFERENTIATED GOOD/SERVICES? - It depends on the nature of the goods and on the consumer’s preferences.
- Some goods can be made into different varieties in the eyes and tastes of the consumers.
Ex: Soft drinks, cereals, etc.
-Most extreme departure from perfect competition.
In practice, monopolies are hard to find: Oligopoly is much more common.
-They play an important role in some sectors of the economy, as in pharmaceuticals.
Monopolist: Firm that is the only producer of a good that has no close substitutes. — An industry controlled by a monopolists is known as a MONOPOLY.
ECONOMICS. CHAPTER 8 -MARKET POWER: The ability of a monopolist to raise its price above the competitive level by reducing output.
In a perfect competition — P = MC In a monopoly — P > MR = MC Monopolist has market power, which results in higher prices and less output than a competition. Results in both short run and long run profits from WHY DO MONOPOLIES EXIST? 1- Control of a scarce product or input.
2- Increasing returns to scale (natural monopolies).
*A natural monopoly exists when increasing returns to scale provide a large cost advantage to single firms that produces all of an industry’s output.
3- Technological superiority.
4- Network externality.
5-Government created barriers.
Patents, copyrights, etc.
-They give incentives to industries to discover new things and to improve technological research.
MONOPOLY AND PUBLIC POLICY.
-Monopolists benefit at the expenses of consumers.
-Monopolist is a source of inefficiency.
Deadweight loss: The loss to consumers from monopoly is larger than the gains to the monopolists.
MARKET FAILURE — Monopoly hurts the welfare of society as a whole.
WHAT TO DO? 1-PREVENT MONOPOLIES.
Depends on whether or not the industry is a natural monopoly.
-If it is not a natural monopoly: 1. Prevent monopolies to arise.
2. Break up the existing ones (USA, standard oil).
2-DEAL WITH THEM (If it’s not possible to prevent them).
It is not a good idea to break up natural monopolies.
-Two ways of dealing with it: 1- Public ownership: The government owns the monopoly.
2- Regulation: Leave it in private hands but regulate it.
-Price regulations: limits the price that a monopolist is allowed to charge.
a ECONOMICS. CHAPTER 8 -Regulators don’t have the exact or required information.
-An oligopoly consisting in two firms is called a DUOPOLY.
Both companies realize that they would have more profits if they limited their production.
*The two companies can engage a collusion: They cooperate to raise each others’ profits.
CARTEL: Agreement by producers to restrict output to increase joint profits. — Each firm has an incentive to cheat.
NON-COOPERATIVE BEHAVIOR: Ignoring the effects of their actions on each others’ profit.
COMPETING IN PRICE AND COMPETING IN QUANTITY.
*Companies may decide to engage in quantity or in price competition.
QUANTITY COMPETITION: Firms are restricted in how much quantity they can produce.
*It is easier for them to avoid excessive competition and to “divvy up” the market.
-Price above marginal cost and earn profits.
PRICE COMPETITION: Firms produce perfect substitutes and have sufficient capacity to satisfy demand when price is equal to marginal cost.
*Undercut its rival’s price until the price reaches marginal cost (perfect competition).
IT IS GOOD TO BE AN OLIGOPOLIST? -Oligopolists benefit are the expenses of consumers.
*Part of consumer surplus goes to producer surplus.
-Oligopoly is a source of inefficiency.
*Deadweight loss -Oligopoly hurts the welfare of society — SOURCE OF MARKET FAILURE.
Anti-trust policies: Efforts undertaken by the government to prevent oligopolistic industries to act like monopolies.
PERFECT COMPETITION Firms have some market power to set prices MONOPOLY Firms have some competitors OLIGOPOLY There are many firms, there is free entry and there is no potential for collusion Product differentiation: Way of acquiring market power.
1-Differentiation by style or type.
2-Differentiation by location.
3-Differentiation by quality.