HL IB Economics 2.11 Market Failure: Market Power PDF

Head to www.savemyexams.com for more awesome resources HL IB Economics Your notes 2.11 Market Failure: Market Power Contents 2.11.1 An Introduction to Market Structures 2.11.2 Profit Maximisation 2.11.3 M...

Head to www.savemyexams.com for more awesome resources HL IB Economics Your notes 2.11 Market Failure: Market Power Contents 2.11.1 An Introduction to Market Structures 2.11.2 Profit Maximisation 2.11.3 Market Power & Perfect Competition 2.11.4 Market Power & Monopolies 2.11.5 Market Power & Oligopolies 2.11.6 Market Power & Monopolistic Competition 2.11.7 Market Power & Government Intervention Page 1 of 56 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources 2.11.1 An Introduction to Market Structures Your notes What are Market Structures? Market structures are the characteristics of the market in which a firm or industry operates These characteristics typically include The number of buyers The number and size of firms The type of product in the market (homogenous or differentiated) The types of barriers to entry and exit The degree of competition between the firms in the market Market structures can be separated into perfect competition & imperfect competition Imperfect competition includes the following market structures Monopolistic A market structure is one in which there are many firms offering a similar product but with some product differentiation e.g nail salons Oligopoly A market structure in which a few large firms dominate the industry with each firm having significant market power Monopoly A market structure in which there is a single supplier of a particular product & has the power to influence the market supply & price The Meaning of Market Power Market failure can be caused through the abuse of market power Signs of market failure include The ability of suppliers to have control of prices The ability of suppliers to restrict output in a market, so as to raise prices A lack of allocative efficiency A lack of productive efficiency Page 2 of 56 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources Governments often regulate markets and intervene to prevent or reduce the abuse of market power through antitrust laws (anti monopoly) or competition policy Your notes Market power refers to the ability of a firm to influence and control the conditions in a specific market, allowing them to have a significant impact on price, output, and other market variables Market power allows a firm to set prices above the competitive level or restrict output Market power can be measured using indicators like market share, concentration ratios, or barriers to entry A higher market share or concentration ratio suggests a greater degree of market power The level of market power changes for each market structure The closer a firm is to being a monopoly, the higher the concentration ratio, market share and market power Competition is greatly diminished and the benefits of competition are likely to be lost The closer a firm is to being perfectly competitive, the lower the concentration ratio, market share and market power Competition is enhanced and the significant benefits of competition are likely to be gained It is important to distinguish between market power and market competition In competitive markets, no single firm has substantial market power, and prices and outputs are determined by the forces of supply and demand Page 3 of 56 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources In markets with limited competition or where firms have significant market power, market outcomes can deviate from the ideal of perfect competition Your notes Characteristics of Perfectively Competitive Markets The characteristics of perfect competition are as follows 1. There are many buyers and sellers: due to the number of market participants sellers are price takers 2. There are no barriers to entry and exit from the industry: firms can start-up or leave the industry with relative ease which increases the level of competition 3. Buyers & sellers possess perfect knowledge of prices: this assumption presupposes perfect information e.g if one seller lowers their price then all buyers will know about it 4. The products are homogenous: this means firms are unable to build brand loyalty as perfect substitutes exist and any price changes will result in losing customers A perfectly competitive market on the top which experiences allocative & productive efficiency Diagram Analysis Page 4 of 56 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources The firm does not have any market power so it is unable to influence the price & quantity The firm is a price taker due to the large number of sellers Your notes The firm's selling price is the same as the market price, P = MR = AR = Demand The firm produces at the profit maximisation level of output where MC=MR (Y) The firm is productively efficient as MC=AC at this level of output The firm is allocatively efficient as AR (P)=MC The firm is unlikely to experience dynamic efficiency as it is unlikely to have abnormal profits to reinvest Characteristics of Imperfectively Competitive Markets Imperfect competition includes the following market structures Monopolistic Oligopoly Monopoly Characteristics of Imperfectively Competitive Market Structures Characteristic Monopolistic Oligopoly Monopoly Nature of the Differentiated Differentiated (KFC) or Unique product homogenous (petrol) Customer Low High High loyalty Price taker or Low ability to make a Price maker Price maker maker? price Barriers to Low barriers to entry High barriers to entry Extreme barriers including entry (some start up costs (finance, competition etc) mergers and acquisitions, and skills required) supplier control etc Page 5 of 56 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources Number of firms Many competitors/ A few No competitors/substitutes substitutes competitors/substitutes Your notes Degree of More competition No efficiency in resource Sometimes high inefficiency efficiency pushes the firm to allocation better efficiency Type of profit Can be abnormal in Abnormal Abnormal the short-run. Normal (breakeven) in the long-run Level of market Low with power High Absolute power linked to consumer preferences Slope of the Shallow (elastic) Steeper (somewhat Steepest (inelastic) demand curve inelastic) Diagrammatic Illustration of Imperfect Competition Page 6 of 56 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources Your notes An imperfect market on the bottom in which inefficiencies exist at the profit maximisation level of output Diagram Analysis The firm is a price maker This means that its revenue curves are downward sloping The firm produces at the profit maximisation level of output where MC=MR (A) The firm is not productively efficient as AC > MC at this level of output (B-A) Productive efficiency would occur at point E where MC=AC Page 7 of 56 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources The firm is not allocatively efficient as AR (P) > MC at this level of output (D-A) Allocative efficiency would occur where AR=MC Your notes The firm is likely to experience dynamic efficiency as it will be able to reinvest its profits so as to increase innovation Page 8 of 56 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources 2.11.2 Profit Maximisation Your notes Normal Profit, Abnormal Profit & Losses When calculating costs, Economists consider both the explicit and implicit costs of production Explicit costs are the costs which have to be paid e.g raw materials, wages etc. Implicit costs are the opportunity costs of production This is the cost of the next best alternative to employing the firm's resources E.g. if an investor puts £1m into producing bicycles & they could have put it in the bank to receive 5% interest, then the 5% represents an implicit cost Implicit costs must be considered as entrepreneurs will rationally reallocate resources when greater profits can be made elsewhere Profit = total revenue (TR) - total costs (TC) Total costs include explicit and implicit costs Normal profit occurs when TR = TC This is also called breakeven Abnormal profit occurs when TR > TC A loss occurs when TR < TC Calculations to Demonstrate Profits Output TR (£) TC (£) Profit (TR - TC) 5 150 70 80 6 180 96 84 7 220 220 0 8 250 270 -20 Page 9 of 56 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources Observations Abnormal profit occurs up to the 6th unit of output Your notes Normal profits occur at the 7th unit From the 8th unit, the firm is making a loss The Profit Maximisation Rule Most firms have the rational business objective of profit maximisation Profits benefit shareholders as they receive dividends & also increase the underlying share price An increase in the underlying share price increases the wealth of the shareholder The Profit Maximisation Rule To achieve profit maximisation firms, follow the profit maximisation rule When marginal cost (MC) = marginal revenue (MR) then no additional profit can be extracted by producing another unit of output When MC < MR additional profit can still be extracted by producing an additional unit of output When MC > MR the firm has gone beyond the profit maximisation level of output It is making a marginal loss on each unit produced beyond the point where MC = MR In reality, firms may find it difficult to produce at the profit maximisation level of output They may not know where this level is In the short term they may not adjust their prices if the marginal cost changes Marginal costs can change regularly and regular price changes would be disruptive to customers In the long-term firms will seek to adjust prices to the profit maximisation level of output Firms may be forced to change prices by the government competition regulator The profit maximisation level of output often results in high prices for consumers Changing prices changes the marginal revenue Page 10 of 56 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources Your notes The profit maximisation level of output occurs at Q1 where MC = MR resulting in a market price of P1 Diagram Analysis This firm has market power as the MR and average revenue (AR) curve are downward sloping At the profit maximisation level of output (MC = MR) The selling price is P1 The average cost is C1 The supernormal profit = (P 1 − C 1 ) × Q 1 EXAMINER TIP Profit maximisation is all about the quantity of output. To determine the level of profit from a diagram: 1. identify where MC = MR and then extend the dotted line upwards to the point where it hits the AR curve - this is your selling price Page 11 of 56 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources 2. Where this line crosses the average cost curve (AC) represents the cost per unit at this level of output 3. The profit is the difference between the selling price and the average cost Your notes Calculations To Demonstrate the Profit Maximisation Rule Output MR (£) MC (£) Addition to Profit 5 50 32 +18 6 50 36 +14 7 50 50 0 8 50 68 -18 Observations With the 7th unit of output, MC = MR & no additional profit can be extracted by producing another unit Up to the 6th unit of output, MC < MR & additional profit can still be extracted by producing an additional unit From the 8th unit of output, MC > MR & the firm has gone beyond the profit maximisation level of output It is making a marginal loss on each unit produced beyond the point where MC = MR Profit & Loss Calculations A range of calculations can be made using the above information Additionally, average costs and revenues can also be provided from which the per unit cost or revenue can be determined total cost Average cost = number of units Page 12 of 56 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources total revenue Average revenue = number of units sold Your notes Knowledge of the characteristics of perfect and imperfect market structures can also be built into calculations WORKED EXAMPLE Instants PLC is producing at a level of output equal to 3000 units per month, and its costs and revenues are shown in Table 1. Table 1 Average total cost (ATC) $64 Marginal cost (MC) $64 Average revenue (AR) $60 Marginal revenue (MR) $60 Price (P) $60 Average variable cost (AVC) $56 Answers: a) Using the data in Table 1, state the reason why Instants PLC is operating in a perfectly competitive market. The demand curve is perfectly elastic as P = AR = MR b) Determine whether Instants PLC is producing at the profit-maximising (loss-minimising) level of output. You must give a reason for your choice. The firm is not producing at the profit maximisation level of output (1 mark) as MC ≠ MR (1 mark) c) Using Table 1, calculate the total fixed costs incurred by Instants PLC at the current level of output, Q1. Total Costs (TC) = 3,000 x $64 = $192,000 Total variable cost (TVC) = 3,000 x $56 = $168,000 (1 mark for any valid working) Total fixed costs (TFC) = TC - TVC Total fixed costs (TFC) = $192,000 - $168,000 = $24,000 (1 mark) Page 13 of 56 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources d) Using Table 1, calculate the monthly profit or loss Instants PLC is making at the current level of output Your notes Profit = total revenue - total costs Profit = (3,000 x $60) - (3,000 x $64) (1 mark for any valid working) Profit = 180,000 - 192,000 Profit = -$12,000 (the firm is making a loss of $12,000) (1 mark) e) Determine whether Instants PLC is productively efficient. You must give a reason for your choice. The firm is productively efficient (1 mark) as the ATC = MC (1 mark) f) Determine whether Instants PLC is allocatively efficient. You must give a reason for your choice. The firm is not allocatively efficient (1 mark) as the price (AR) ≠ MC (1 mark) Page 14 of 56 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources 2.11.3 Market Power & Perfect Competition Your notes Market Power in Perfect Competition Market power refers to the ability of a firm to influence and control the conditions in a specific market, allowing them to have a significant impact on price, output, and other market variables The level of market power is low in perfect competition Firms in perfect competition have low market power, low market share and a low industry concentration ratio There is little market failure in perfectively competitive industries This is why governments try to encourage more competition in every sector in their economy Diagrammatic Representation of Perfect Competition In order to maximise profit, firms in perfect competition produce up to the level of output where marginal cost = marginal revenue (MC=MR) The firm does not have any market power so it is unable to influence the price & quantity The firm is a price taker due to the large number of sellers The firm's selling price is the same as the market price, P1 = MR = AR = Demand Page 15 of 56 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources Your notes A diagram that illustrates how an individual firm in perfect competition has to accept the market/industry price (P1) In the short-run, firms can make abnormal profit or losses in perfect competition However, they will always return to the long-run equilibrium where they make normal profit Abnormal Profit in Perfect Competition in the Short- run Firms in perfect competition are able to make abnormal profit in the short-run The MC curve is the supply curve of the firm Page 16 of 56 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources Your notes A diagram illustrating a perfectly competitive firm making abnormal profit in the short-run as the AR > AC at the profit maximisation level of output (Q1) Diagram Analysis The firms is producing at the profit maximisation level of output where MC=MR (Q1) At this point the AR (P1) > AC (C1) The firm is making abnormal profit = (P 1 − C 1 ) × Q 1 Moving from Abnormal Profit in the Short-run to Normal Profit in the Long-run If firms in perfect competition make abnormal profit in the short-run, new entrants are attracted to the industry They are incentivised by the opportunity to make supernormal profit There are no barriers to entry It is easy to join the industry Page 17 of 56 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources Your notes A diagram illustrating how new entrants shift the industry supply curve to the right (S1→S2 ) which changes the industry price from P1→P2. The firm can now only sell its products at P2 and abnormal profits are eliminated Diagram Analysis The firm is initially producing at the profit maximisation level of output where MC=MR (Q1) At this level of output, the AR (P1) > AC (P2) & the firm is making abnormal profit Incentivised by profit, new entrants join the industry & supply increases from S1→S2 Overall quantity in the industry increases from Q1→Q2 The industry price falls from P1→P2 The firm now has to sell its products at the industry price of P2 The output of the firm falls from Q1→Q2 as it now has a smaller market share of the larger industry At the profit maximisation level of output (MC=MR) the firm is now producing at the point where AR= AC The firm is making normal profit In the long-run, firms in perfect competition always make normal profit Firms making a loss leave the industry Firms making abnormal profit see them slowly eradicated as new firms join the industry Page 18 of 56 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources Losses in Perfect Competition in the Short-run Firms in perfect competition are able to make losses in the short-run Your notes A diagram illustrating a perfectly competitive firm making losses in the short-run as the AR < AC at the profit maximisation level of output (Q1) Diagram Analysis The firms are producing at the profit maximisation level of output where MC=MR (Q1) At this level of output, the AR (P1) < AC (C1) The firm's loss is equivalent to (P 1 − C 1 ) × Q 1 Moving from Loss in the Short-run to Normal Profit in the Long-run If firms in perfect competition make losses in the short-run, some will shut down The shut down rule will determine which firms shut down There are no barriers to exit, so it is easy to leave the industry Page 19 of 56 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources Your notes A diagram illustrating how firms leaving the industry shift the industry supply curve to the left (S1→S2 ) which changes the industry price from P1→P2. The firm can now sell its products at P2 which returns it to a position of normal profit Diagram Analysis The firm is initially producing at the profit maximisation level of output where MC=MR (Q1) At this level of output, the AR (P1) < AC (C1) & the firm is making a loss Some firms leave the industry & supply decreases from S1→S2 Overall quantity in the industry falls from Q1→Q2 The industry price increases from P1→P2 The firm now has to sell its products at the industry price of P2 The output of the firm increases from Q1→Q2 as it now has a larger market share of the smaller industry At the profit maximisation level of output (MC=MR) the firm is now producing at the point where AR= AC The firm is making normal profit Page 20 of 56 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources In the long-run, firms in perfect competition always make normal profit Firms making a loss leave the industry Your notes Firms making supernormal profit see them slowly eradicated as new firms join the industry Efficiency in Perfect Competition Allocative efficiency occurs at the level of output where average revenue = marginal cost (AR = MC) At this point, resources are allocated in such a way that consumers & producers get the maximum possible benefit No one can be made better off without making someone else worse off There is no excess demand or supply Productive efficiency occurs at the level of output where marginal cost = average cost (MC=AC) At this point average costs are minimised There is no wastage of scarce resources & a high level of factor productivity Page 21 of 56 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources A perfectly competitive market benefits from both productive and allocative efficiency in the long-run Your notes Diagram Analysis The firm produces at the profit maximisation level of output where MC=MR (Y) The firm is productively efficient as MC=AC at this level of output The firm is allocatively efficient as AR (P)=MC Page 22 of 56 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources 2.11.4 Market Power & Monopolies Your notes Market Power in a Monopoly Market power refers to the ability of a firm to influence and control the conditions in a specific market, allowing them to have a significant impact on price, output, and other market variables The level of market power is high/absolute for monopoly firms Monopoly firms have high market power, high/total market share and a high/perfect industry concentration ratio There is significant market failure in monopoly firms Governments regulate and intervene in mergers and acquisitions in order to ensure (in many economies) that no single firm gains more than 25% market share Characteristics of Monopoly Markets A monopoly is a market structure in which there is a single seller There are no substitute products The firm has complete market power & is able to set prices & control output This allows the firm to maximise supernormal profit in the short-run Page 23 of 56 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources There is no long-run erosion of supernormal profit as competitors are unable to enter the industry High barriers to entry exist Your notes One of the main barriers is the ability of the monopoly to prevent any competition from entering the market E.g. by purchasing companies who are a potential threat Characteristics of Monopoly Market Structures Characteristic Monopoly Characteristic Monopoly Nature of the Unique - no substitutes Degree of Usually high product efficiency inefficiency as there is no competition Customer High - no substitutes Type of profit Abnormal loyalty Price taker or Price maker Level of market Absolute maker? power Barriers to entry Extreme barriers including mergers Slope of the Steepest (inelastic) and acquisitions, supplier control etc demand curve Number of firms No competitors/substitutes A Monopoly Making Abnormal Profits As a single seller of goods/services, the firm in a monopoly market is also the entire market There is no differentiation between the firm & the industry It is a price maker This means that its revenue curves are downward sloping In order to maximise profits, it produces at the point where marginal cost (MC) = marginal revenue (MR) Page 24 of 56 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources Your notes A diagram illustrating a monopoly making supernormal profit in the short-run & long-run as the AR > AC at the profit maximisation level of output (Q1) Diagram Analysis The firm produces at the profit maximisation level of output where MC = MR (Q1) At this level the AR (P1) > AC (C1) The firm is making abnormal profit = (P 1 − C 1 ) × Q 1 EXAMINER TIP Some exam questions require application of your knowledge. E.g. You may be asked to draw a cost and revenue diagram to show the likely impact of a reduction in sales on profits. This requires you to modify the diagram presented above by shifting the demand curve inwards. You will draw a second AR & MR curve to the left of the existing ones & then illustrate the new level of profit. A Monopoly Making Normal Profits In a monopoly market, normal profit refers to the level of profit necessary to keep the monopolist in the market in the long run Page 25 of 56 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources It represents the minimum amount of profit needed to cover the opportunity cost of the resources used by the monopolist Your notes At this point, total revenue TR) equals the total cost (TC), including both explicit and implicit costs If the monopolist is earning normal profit, it indicates that there is no abnormal profit The monopolist is simply earning a competitive return and covering its costs of production A monopoly may make normal profit in the short-run and this occurs at the profit maximisation level of output and where the price (AR) = ATC Diagram Analysis The firm is following the profit maximisation rule and producing at the level of output where MR = MC (Q1) At this level of output, the selling price P1 (AR) = ATC This means the firm is breaking even and this is considered to be normal profit A Monopoly Making Losses in the Short-run Page 26 of 56 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources In a monopoly market, a loss minimisation position occurs when the monopolist incurs losses but aims to minimise those losses in the short run Your notes The loss minimisation position arises when the market price (AR) is below the average total cost (ATC) but above the marginal cost (MC) of production In the long run, a monopolist cannot sustain losses indefinitely If losses persist the monopolist might consider exiting the market or changing its production strategies A monopoly firm is making short-run losses as seen by the fact that at the profit maximisation level of output (MC = MR), the selling price is below the average total cost (ATC) Diagram Analysis The firm produces at the profit maximisation level of output where MC = MR (QE) At this level the AR (P1) < AC (C1) The firm is making a loss = (C 1 − P E ) × Q E Page 27 of 56 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources Side by Side Comparison of Perfect Competition & Monopoly Your notes Perfect competition tends to achieve both productive and allocative efficiency due to the presence of competition, whereas monopolies generally result in inefficiencies in both aspects Side by side comparison of efficiency in perfect competition and monopoly markets Diagram Analysis Perfect competition on the left The firm produces at the profit maximisation level of output where MC=MR (Y) The firm is productively efficient as MC=AC at this level of output The firm is allocatively efficient as AR (P)=MC There is no welfare loss Monopoly market on the right The firm produces at the profit maximisation level of output where MC=MR (A) The firm is not productively efficient as AC > MC at this level of output (B-A) Productive efficiency would occur at point X where MC=AC The firm is not allocatively efficient as AR (P) > MC at this level of output (D-A) Allocative efficiency would occur where AR=MC (point F) Page 28 of 56 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources The welfare loss is equal to the area of the shaded triangle - ADF Costs & Benefits of a Monopoly Market Structure Your notes In several instances where a government regulator (e.g. The European Competition Commission) has acted to decrease/limit monopoly power, the firms have taken the Regulator to court to attempt to convince them that the firms market power will benefit consumers Theoretically this is possible, however in many cases the desire to maximise profits would prevent this from happening The Advantages & Disadvantages of Monopoly Power Stakeholder Advantages Disadvantages The Firm Abnormal profits generate money Due to a lack of competition, there is a for continued investment in reduced incentive to be efficient technology & product innovation Cross subsidisation can create Market power enables the firm to inefficiencies increase its global competitiveness Monopolies lead to a misallocation of Economies of scale can increase resources as P > MC. The price is above thereby lowering the average cost the opportunity cost of providing the goods Producer surplus increases Due to a lack of competition, innovation sometimes lacks effectiveness Employees Abnormal profits often result in Having only one supplier in the industry higher wages limits the opportunity to change employers Consumers Product innovation due to the firm's A lack of competition is likely to result in abnormal profits may result in a higher prices as no substitute goods are better-quality product available Cross subsidisation can lower prices A lack of competition may result in no on some products that the firm product innovation & worse product provides quality over time Prices may fall If firms pass on their May experience worse customer service cost savings (due to economies of as the incentive to improve it is limited Page 29 of 56 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources scale) in the form of lower product Cross subsidisation is likely to increase prices prices on some products offered by the firm Your notes Consumer surplus decreases Suppliers Increased sales volume for some There is less competition for their suppliers as they are able to supply products & a monopoly often has the products that are distributed power to dictate what price they will pay nationally or internationally to suppliers (monopsony power) This price may not be profitable in the long run EXAMINER TIP When evaluating monopolies demonstrate critical thinking by acknowledging the positives as well as the negatives. For example, Amazon has partly become a monopoly by being very good at what they do & consumers benefit from lower prices & greater choice. However, this power means that they can also abuse the suppliers on their platform. Natural Monopoly A natural monopoly occurs when the most efficient number of firms in the industry is one This is often due to associated infrastructure issues e.g. delivery of utility services like water where it does not make sense to have multiple pipelines It can also be due to the significant cost that is generated when entering the industry e.g. the sunk costs It can also be due to the ability of economies of scale to lower prices for consumers e.g. it makes sense to have one firm building five nuclear power stations as opposed to five firms as average costs will be lower with one firm producing Natural monopolies usually occur in utility industries & are regulated by the Government to ensure that consumers are not charged higher monopoly prices This regulation is often in the form of a maximum price Page 30 of 56 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources Your notes Natural monopolies spend large sums in production and make a profit between Q1 and Q2. If another firms enters the market their demand will decrease and they will make a loss Diagram Analysis Assume a utility company spends $billions building out a new delivery network Their average total costs (ATC) are initially very high, but fall as they are able to gain economies of scale As they gain an increasing number of customers (D1 = AR1), the firm is initially in a loss making position experienced between 0 → Q1 customers Between Q1 → Q2, the firm is now making a profit as the AR > ATC Should another firm enter the market, the demand will be split between two firms and the demand curve for this firm will shift from D1 → D2 This shift of demand puts the monopoly in a position where AR < ATC and the firm is making a loss at every level of output It therefore makes no sense to have more than one firm in the industry Page 31 of 56 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources EXAMINER TIP Your notes When evaluating natural monopolies, consider the government failure that may occur with regard to regulation & the imposition of maximum prices. There is a lot of disagreement about the level of profits that natural monopolies should be allowed to make. It is a normative issue. Page 32 of 56 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources 2.11.5 Market Power & Oligopolies Your notes Market Power in Oligopoly Market Structures Most markets are imperfectly competitive Most imperfectly competitive industries operate in an oligopoly market structure E.g., Banks, insurance companies, department stores, supermarkets, petrol retailers, sport stores etc. Market power refers to the ability of a firm to influence and control the conditions in a specific market, allowing them to have a significant impact on price, output, and other market variables The level of market power is high for oligopoly firms Oligopoly firms have significant market power, a large market share and the concentration ratio of the top 5 firms is usually high There is significant market failure in oligopoly market structures Governments regulate and intervene in mergers and acquisitions in order to ensure (in many economies) that no single firm gains more than 25% market share Characteristics of an Oligopoly Market Page 33 of 56 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources High Barriers to Entry & Exit High Concentration Ratio Your notes Entering the industry is difficult due to the A concentration ratio reveals what existing dominance of relatively few firm percentage of the total market share a specific number of firms have Start-up costs tend to be high e.g. setting up a renewable energy company costs billions A 10-firm concentration ratio reveals the total market share (concentration) of the Leaving the industry is difficult due to the high top 10 firms in the industry level of sunk costs e.g. mobile phone companies are bidding billions on 5G auctions run by the A 5-firm concentration reveals the total Government and they cannot recoup this money market share (concentration) of the top 4 if they leave the industry firms in the industry The higher the value - and the lower the number of firms - the more concentrated the market power in the industry e.g. the UK supermarket's 5-firm concentration ratio is constantly around 67% Interdependence of Firms Product Differentiation With relatively few competitors, firms study each Products tend to be highly differentiated other's behaviour and are highly interdependent in their actions Occasionally products are similar (e.g. petrol). However, the brand around the This interdependence generates the use of game product is highly differentiated to the point theory where consumers perceive it as different and are extremely brand loyal There is a strong incentive to collude as this will lead to greater profits There is little incentive to compete on price as this does not change each firms market share by much - and lowers profits Measuring Concentration Ratios The most commonly used concentration ratios in the UK are the five-firm, ten-firm, & twenty-firm concentration ratios Page 34 of 56 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources A five-firm concentration ratio of around 60% is considered to be an oligopoly Your notes A one-firm concentration ratio of 100% would be a pure monopoly many government regulators define a monopoly as a firm with more than 25% market share They act to prevent mergers or acquisitions from taking place which would give one firm more than 25% market share WORKED EXAMPLE The following table shows the value of UK Supermarket sales for the 3 months to the 31st March 2022. Company Value of Sales Company Value of Sales (£ million) (£ million) Tesco 136.5 Waitrose 24 Morrisons 55 Asda 77.5 The Co-operative 30 Lidl 33 Sainsbury's 75 Iceland 15 Aldi 44 Others 10 Calculate the five-firm concentration ratio. Show your working. Answer: Step 1: Identify the top five firms by value of sales & add the value of their sales together Tesco (136.5) + Asda (77.5) + Sainsbury's (75) + Morrisons (55) + Aldi (44) = 136. 5 + 77. 5 + 75 + 55 + 44 (1 mark for any correct working) = £ 388 million Step 2: Calculate the percentage of total sales that the top five firms have 388 × 100 500 (1 mark) = 77.6 % Page 35 of 56 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources Reasons For Collusive & Non-collusive Behaviour Collusive behaviour in oligopolies occurs when firms cooperate to fix prices & restrict output Your notes They cease to compete as vigorously as they can The incentive to collude is high Non collusive behaviour in oligopolies occurs when firms actively compete to maintain/increase market share Price wars may break out occasionally between competitors Little is to be gained as competitors can quickly follow each others actions resulting with very little change in market share - but a significant loss in profits due to the lower prices generated by the price war A collusive oligopoly removes competition and causes the firms in the industry to act as a monopoly Diagram Analysis Five firms with a concentration ratio of 80% meet secretly and agree to fix prices at a particular level Page 36 of 56 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources The five firms present in the market as a single firm The firm produces at the profit maximisation level of output where MC = MR (Q1) Your notes At this level the AR (P1) > AC (C1) The collusive oligopoly is making higher levels of abnormal profit Reasons for Collusion Reason Explanation Few This makes it relatively easy for each firm to understand other competitors' firms/competitors actions & responses, or to collaborate on prices/output Similar costs Firms face almost identical costs as any remaining competitors have all experienced economies of scale Similar revenue Competitors' goods/services sell for similar prices as there is little incentive to lower them as other firms would respond by keeping their market share the same but decreasing the profits High barriers to The barriers to entry make it unlikely that new entrants will emerge to disrupt entry the status quo Ineffective A lack of regulation empowers firms to collude as there is little consequence regulation for their actions Brand loyalty There is usually a high degree of brand loyalty in oligopoly markets & firms have an established market share. This decreases the benefits of competition as consumers are unlikely to change brands Types of Collusion Collusion can be overt or tacit The net effect of collusion is that a group of firms end up acting more like a monopoly in the market 1. Overt collusion occurs when firms explicitly agree to limit competition or raise prices (price fixing) Page 37 of 56 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources A cartel is the most restrictive form of collusion & is illegal in most countries The consequences of overt collusion include: Your notes Higher prices for consumers Less output in the market Poor quality products and/or customer service Less investment in innovation Overt collusion often happens in the following ways Price fixing Setting output quotas which limit supply & naturally results in price increases Agreements to block new firms from entering the industry Agreements to pay suppliers the same price thereby driving down prices in the supply chain (monopsony power) 2. Tacit collusion occurs when firms avoid formal agreements but closely monitor each other's behaviour usually following the lead of the largest firm in the industry The most common form of tacit collusion is price leadership This occurs when firms monitor the price of the largest firm in the industry & then adjust their prices to match It is difficult for regulators to prove that collusion has occurred It provides similar benefits to firms as overt collusion, but perhaps not to the same degree It has similar consequences for consumers as overt collusion, but perhaps not to the same degree Game Theory - Interdependence Between Oligopoly Firms Game theory is a mathematical framework which is used by firms to ensure optimal decisions are made in a strategic setting where there is a high level of interdependence (such as in oligopoly markets) Any game has three elements The players - (firms) The strategies available to the players The payoffs (outcomes) that each player receives for each combination of strategies Page 38 of 56 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources It was first illustrated using a simple model called The Prisoners Dilemma Two criminals are caught after a train robbery (Carol & Doug) Your notes The prosecutor does not have much evidence The criminals are guilty but have agreed with each other that they will deny all involvement The prosector wants one (or both) to confess The strategies & payoffs available to the prisoners are presented in a payoff matrix A prisoner's dilemma payoff matrix which illustrates game theory Diagram Analysis If Carol & Doug stick to their plan & deny involvement, they each get 3 years jail time If Doug confesses & indicates Carol's involvement, then Doug gets a lenient sentence of 1 year & Carol gets 10 years If Carol confesses & indicates Doug's involvement, then Carol gets a lenient sentence of 1 year & Doug gets 10 years There is a strong incentive to collude as it will yield the most beneficial outcome for Carol and Doug (3 years each) Page 39 of 56 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources Fearing the worst, both players decide to confess and receive 5 years each This outcome is called the dominant strategy as it carries the least risk Your notes How Firms Use Game Theory Firms typically use game theory in the following situations: When making decisions to raise or lower prices When making decisions about new advertising & branding initiatives When making decisions about investment in product innovation When making decisions on product bundling e.g. combined phone & broadband packages Below is a payoff matrix representing the strategic options available to Burger King & McDonald's when making advertising decisions The £ payoffs represent the likely profits for each combination of choices selected A payoff matrix which illustrates the strategies & payoffs available to firms when they are deciding to advertise or not to advertise Page 40 of 56 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources Diagram Analysis If Burger King & McDonald's collude & agree not to advertise (top left), they can each enjoy £3 bn. in Your notes profits There is a strong incentive to collude If Burger King advertises & McDonald's does not, then Burger King's profits are £5 bn. & McDonald's are £1 bn. If McDonald's advertises & Burger King does not, then McDonald's profits are £5 bn. & Burger King's are £1 bn. Both firms decide to advertise & receive £2 bn. of profits each This outcome is called the dominant strategy as it carries the least risk The risk of collusion is that one player will cheat and by doing so, get ahead WORKED EXAMPLE The grid below shows the possible pricing strategies of two coffee companies. The Bean and Black Gold. Assuming that demand is price inelastic. Black Gold's price The Bean's price High Low High A B Low C D Which strategy in the grid would maximise the revenue of the two firms? Explain your answer. Answer: Step 1: Use the information provided to select the correct option A (1 mark) Step 2: Explain your answer using economic knowledge With reference to the revenue rule, firms whose demand is price inelastic should raise their price to maximise revenue. Due to the fact that consumers consider coffee a necessity, they will continue to pay the high prices. (1 mark) However, there is a strong likelihood that firms will charge a low price (D) as the payoff matrix carries the lowest risk. (1 mark) Page 41 of 56 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources If firms do collude to charge the high price, then B & C represent higher revenue for any firm that first decides to cheat on the agreement (lower their price so that heir market share will increase) (1 mark) Your notes Price Competition Firms in an oligopoly market engage in three types of price competition 1. Price wars: occur when competitors repeatedly lower prices to undercut each other in an attempt to gain or increase market share. This often occurs when there is a lower level of non-price competition & where firms find it difficult to collude (either formal or tacit) 2. Predatory pricing: this is the practice of lowering prices when a new competitor joins the industry in order to drive them out. Prices are often lowered to a point below the cost of production. Once they have left the market, prices are raised again. This pricing strategy is usually illegal as it is anticompetitive 3. Limit pricing: occurs when firms set a limit on how high the price will go in the industry. A lower price reduces profit & disincentivize other firms from joining the industry. The greater the barriers to entry the higher the limit price is likely to be as firms are already disincentivized Types of Non-price Competition Firms engage in a wide range of non-price competition strategies The aim is to increase product differentiation, develop or increase brand loyalty, & to increase market share A Range of Strategies used in Non-price Competition Loyalty cards & rewards Branding Packaging Celebrity/influencer endorsement Corporate sponsorship e.g. Nike After sales Delivery Product warranties sponsoring Rafael Nadal service policies Page 42 of 56 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources 2.11.6 Market Power & Monopolistic Competition Your notes Characteristics of Monopolistic Markets Market power refers to the ability of a firm to influence and control the conditions in a specific market, allowing them to have a significant impact on price, output, and other market variables Firms in monopolistic competition have some market power, a slightly higher market share than perfect competition and a low industry concentration ratio The level of market power is relatively low in monopolistic competition A monopolistic market structure is one in which there are many firms offering a similar product but with some product differentiation Examples include Nail salons Hairdressing or barber shops Massage parlours Fruit and veg stores Characteristics of Monopolistic Competition Page 43 of 56 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources Characteristic Explanation Characteristic Explanation Your notes Nature of the The products are slightly Degree of More competition product differentiated efficiency pushes the firm to better efficiency This structure exists as consumers have different desires Allocative efficiency in the long-run E.g. two nail bars differentiate their product through express or pampered service - a relatively homogenous product has now been differentiated Customer Relatively low due to number of Type of profit Can be abnormal in loyalty substitutes the short-run However, can also be relatively Normal (breakeven) strong based on client/customer in the long-run relationship e.g loyalty to a specific hairdresser Price taker or Some price setting ability Level of market There is a low degree maker? power of market power Barriers to There are low barriers to entry and Slope of the Shallow (elastic) entry exit from the industry demand curve Same shape as Firms can start-up or leave the monopoly revenue industry with relative ease which curves, but those are increases the level of competition steeper (more inelastic) Number of There are a large number of small firms firms Each one is relatively small and can act independently of the market Page 44 of 56 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources There is some market failure in monopolistic competition, especially in the short run when firms are making abnormal profits Your notes A side by side Comparison of Monopolistic Competition and a Monopoly The diagrams are essentially the same, however the monopoly revenue curves are steeper (more inelastic) The diagram on the left is a monopoly diagram as it has steeper revenue curves and is making abnormal profits Diagram Analysis The monopoly market on the left has steeper revenue curves as the demand for the product is price inelastic There are few or no substitute products This market is also making abnomal profit in the long run (P > ATC) at profit maximisation level of output (Q1) Page 45 of 56 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources The monopolistic market on the right has shallower revenue curves as the demand for their product is more price elastic Your notes There are a large number of substitute products The market is making normal profit in the long run (P = ATC) at the profit maximisation level of output (Q1) Abnormal Profit in Monopolistic Competition in the Short-run In order to maximise profit, firms in monopolistic competition produce up to the level of output where marginal cost = marginal revenue (MC=MR) The firm can make abnormal profit in the short-run The average revenue (AR) curve is the demand curve of the firm and it is downward sloping The firm has some market power due to the level of product differentiation that exists To sell an additional unit of output, the firm will have to decrease its price The marginal revenue (MR) curve will fall twice as quickly as the AR Page 46 of 56 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources A diagram illustrating a monopolistically competitive firm making abnormal profit in the short-run as the AR > AC at the profit maximisation level of output (Q1) Your notes Diagram Analysis The firm produces at the profit maximisation level of output where MC = MR (Q1) At this level the AR (P1) > AC (C1) The firm is making abnormal profit = (P 1 − C 1 ) × Q 1 Losses in Monopolistic Competition in the Short-run Firms in monopolistic competition are able to make losses in the short-run A diagram illustrating a monopolistically competitive firm making losses in the short-run as the AR (PE ) < AC at the profit maximisation level of output (QE) Diagram Analysis Page 47 of 56 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources The firm produces at the profit maximisation level of output where MC = MR (QE) At this level of output, the AR (PE) < ATC (C1) Your notes The firm's loss is = (P E − C 1 ) × Q E Normal Profit in Monopolistic Competition in the Long-run From Abnormal to Normal Profit If firms in monopolistic competition make abnormal profit in the short-run, new entrants are attracted to the industry & the number of sellers increases They are incentivised by the opportunity to make supernormal profit There are low barriers to entry and It is easy to join the industry Abnormal profit will be eroded & the firm will return to the long-run equilibrium position of making normal profit From Losses to Normal Profit If firms in monopolistic competition make losses in the short-run, some will shut down The shut down rule will determine which firms shut down There are low barriers to exit, so it is easy to leave the industry For the remaining firms, losses will be eliminated & the firm will return to the long-run equilibrium position of making normal profit Page 48 of 56 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources Your notes A diagram illustrating the long-run equilibrium position for a monopolistically competitive firm which is making normal profit. AR (P1) = AC at the profit maximisation level of output (Q1) Diagram Analysis The firm is producing at the profit maximisation level of output where MC=MR (Q1) At this level of output P1 = AC & the firm is making normal profit In the long-run, firms in monopolistic competition always make normal profit Firms making a loss leave the industry Firms making supernormal profit see it slowly eradicated as new firms join the industry Efficiency in Monopolistic Competition Due to the more competitive environment, there are higher levels of efficiency in monopolistic competition than in other forms of imperfectively competitive market structures This is true even when they are making abnormal profits in the short-run There are also more products/services available for customers In the long run, there are even higher levels of efficiency Page 49 of 56 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources Your notes Efficiency in Monopolistic Competition in the Long-run Diagram Analysis The firm produces at the profit maximisation level of output where MC=MR The firm is not productively efficient as AC > MC at this level of output Productive efficiency would occur where MC=AC The firm is not allocatively efficient as AR (P) > MC at this level of output Allocative efficiency would occur where AR=MC Page 50 of 56 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources 2.11.7 Market Power & Government Intervention Your notes The Advantages and Disadvantages of Market Power Market power refers to a situation in which a firm has the ability to influence prices, output levels, or other market outcomes due to its significant market share or unique competitive advantage The advantages to firms of having market power The advantages and disadvantages of market power can vary depending on the specific industry, market dynamics, and the behaviour of the firms involved Government intervention and anti monopoly policies play a crucial role in ensuring fair competition, protecting consumers, and addressing potential negative consequences associated with market power An Explanation of the Advantages Offered by Market Power Page 51 of 56 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources Advantage Explanation Your notes Higher Profits Firms with market power can often set prices above their marginal costs, allowing them to earn abnormal profits Higher abnormal profits improve the reputation of the company amongst its shareholders and make it easier for the firm to access greater finance Research, Higher profits provide the means and incentive for firms to invest in Development & research and development, innovation, and expanding their operations Innovation This may result in a better quality product for consumers Economies of Scale Larger firms can take advantage of economies of scale to lower their average costs With lower costs, firms can leave price levels the same and enjoy higher profits - or firms can lower prices and pass on the cost benefits to their customers Branding and Market power enables firms to build strong brands and reputations Reputation This can create customer loyalty and trust Established brands often have a competitive advantage, allowing firms to charge premium prices Strategic Decision- Firms with market power have more strategic options in terms of their Making business decisions They can pursue long-term goals, undertake mergers and acquisitions, engage in vertical integration, and explore new markets This strategic freedom can lead to increased market dominance and sustained profitability. Page 52 of 56 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources An Explanation of the Disadvantages Created by Market Power Your notes Advantage Explanation Reduced A firm with significant market power is likely to limit the entry of new Competition competitors or engage in anti-competitive practices that stifle competition This can lead to higher prices, reduced consumer choice, and decreased efficiency in the market Lack of Innovation In the absence of competition, firms may have less motivation to improve & Efficiency their products, lower costs, or invest in research and development This can harm consumer welfare and hinder overall industry progress Regulatory & Legal Firms with significant market power often face increased scrutiny and Risks regulation from anti-monopoly authorities These firms may be subject to legal actions, fines, or forced divestitures if their market power is deemed anti-competitive The Use of Legislation & Regulation to Reduce Market Power Legislation involves the creation of new laws by government Regulation involves enforcing the laws This is usually assisted by the creation of regulatory agencies such as the Environmental Protection Agency (EPA) in the USA or the European Competition Commission Legislation and regulation play a critical role in reducing market power and promoting fair competition within industries Governments implement laws and regulations to prevent anti-competitive practices and protect consumers, workers and the environment Page 53 of 56 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources Overregulation can stifle competition and deter investment, while insufficient regulation can lead to market dominance and anti-competitive behaviour Common Approaches used in Legislation & Regulation to Reduce Market Power Your notes Approach Explanation Example Creating a One way to control monopoly The Competition & Markets Authority Competition power is to prevent it from (CMA) is the UK Government regulator Regulator forming in the first place tasked with ensuring that the creation of monopoly power is avoided A key function of agencies is to monitor merger activity with the aim of preventing any single There are similar regulators in Europe firm gaining more than 25% (European Competition Commission) & in market share the USA (Antitrust Commission) If there are concerns about the merger then the E.g. in July 2022 the CMA launched an regulator has the authority investigation into the merger of two to stop it from happening companies which produce foam used in bedding & cleaning products as they believed it would lead to higher prices & Competition regulators also less choice intervene by placing maximum prices, especially when monitoring natural monopolies Protecting Monopsony power is abusive Autorité de la concurrence (Competition Suppliers towards suppliers & over time Authority in France) launched an can change the nature of entire investigation in 2018 on big retailers for industries in an economy unfair practices in the food sector They fined several supermarket chains for Governments can pass anti using abusive commercial practices monopsony laws and issue against their suppliers, such as unilaterally fines if breaches occur changing contract terms and imposing excessive payment delays They can set minimum prices which buyers have to pay These actions aimed to protect suppliers suppliers from unfair treatment and ensure fair competition within the industry. Page 54 of 56 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources Protecting Wage bills for firms are often National minimum wage legislation Employees one of their highest costs as a Your notes proportion of expenditure Legislation on health & safety, working hours & employment conditions e.g. With a goal of profit maternity pay maximisation firms will always seek to reduce their wage expenditure as this will result in Permitting trade unions to operate in the higher profit economy (some countries limit or ban the existence of unions as they view them as anti-competitive e.g. Singapore) There is a role for government to protect workers who could be exploited by firms The government uses the following methods to protect employees The use of Government Ownership to Reduce Market Power Nationalisation can occur for various reasons, including Governments may choose to nationalise industries or companies that are considered strategically important for national security or economic stability e.g energy and telecommunications Nationalisation can be implemented to ensure the provision of essential services to the public such as healthcare or education Nationalisation can be used to promote economic development, address market failures, or redistribute wealth by bringing key industries under state control The Advantages & Disadvantages of Nationalisation Explanation Advantages Disadvantages Nationalisation occurs This can generate efficiencies, especially Government firms when the Government when delivering utilities (gas, water, can often run very Page 55 of 56 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers  Head to www.savemyexams.com for more awesome resources takes control and electricity) to the national population inefficiently ownership of firms which There is an were in the private sector It creates more equity in society as all opportunity cost Your notes citizens have the same access to the associated with same resource at the same price e.g. the money Norway nationalised much of the oil required to run it industry when oil was first discovered in 1972. The profits belong to the citizens The Government may lack the expertise to run The business can generate significant the business revenue for the government The use of Fines to Reduce Market Power Fines are usually imposed by regulators in specific markets In Europe, firms are fined 10% of their sales revenue for breaching anti-competitive practices These fines can be significant as many firms have profit margins of less than 10% Advantages of Using Fines Corrects anti-competitive behaviour Generates additional revenue for the government to redistribute Disadvantages of Using Fines Monopoly firms have high profits and use these to take legal action against regulators The court cases often take years to settle The firms settle out of court and pay reduced fines The level of the fine is often less than the profit generated by the anti competitive behaviour so does not necessarily change their behaviour Page 56 of 56 © 2015-2024 Save My Exams, Ltd. · Revision Notes, Topic Questions, Past Papers