Monopolistic Competition, Oligopoly, Market Failure etc. (9-12)
Negative externalities of consumption
Consumption by individuals that adversely affects third parties (cigarettes, air pollution, noise)
What could the government do to limit negative externalities of consumption?
Create bans, impose taxes, education
How are producers able to separate markets?
Time, age, gender, income, geographical distance, types of consumer (i.e. households v. businesses; residents v. non-residents)
The existence of externalities
When a production or consumption of a good/service has an effect upon a 3rd party)
What is market failure?
When resources are not allocated in an efficient manner
What is game theory?
Analysis of various strategies rival firms may be developing and employing
Lack of public goods
Usually public goods are non-excludable (creates a free-rider problem) and non-rivalrous and will not be provided by the free market
What are the assumptions of an oligopoly?
1) A few firms dominate an industry, 2) The industry may have quite a few firms or not very many, but the key thing is that a large proportion of the industry's output is shared by just a small number of firms, 3) oligopolistic industries vary in nature (some have higher barriers to entry than others, different degrees of differentiation)
What are the 3 conditions of price discrimination?
1) Producer must have some price-setting ability (more common in monopolies and oligopolies), 2) The consumers must have different price elasticities of demand, 3) The producer must be able to separate the consumers so they are not able to buy the product and resell it
What are the 4 assumptions of a monopolistic competition?
1) The industry is made up of a fairly large # of firms, 2) the firms are small relative to the size of the industry, 3) the firms produce slightly differentiated products, 4) firms are free to enter and leave the industry
What does CR4= 90% mean?
4 firms represent 90% of the market
How is a small number in an oligopoly determined?
A common indicator of concentration is known as the concentration ratio; expressed in the form of CRx, where x represents the number of the largest firm
Price Discrimination
Exists when a producer sells the exact same product to different consumers at different prices
Kinked Demand Curve
Firms are afraid to raise price above current market price because other firms will not follow. Firms are afraid to lower their prices below current market price because other firms will follow, undercut them and possibly harm the entire industry. Prices are generally very rigid, with little incentive to raise or lower prices. Increase = decreased demand, decrease= other companies will do the same and will result in profit losses
What happens in a non-collusive oligarchy?
Firms do not collude and must be very aware of the happenings of other firms
What is tacit collusion?
Firms in an oligopoly charge the same price without an official statement
What is formal collusion (cartel)?
Firms openly agree on the price which causes higher price; illegal in most countries. Example of a legal cartel: OPEC
Brand loyalty in monopolistic competition means that...
Firms will have some degree of independence, thus making them price-MAKERS albeit they will be facing relatively ELASTIC demand.
What is the difference between a perfect competition and a monopolistic competition?
In monopolistic competition, there is differentiation (brand name, color, appearance, quality...)
Over-supply of demerit goods
Including cigarettes, alcohol, hard drugs, child pornography
Under-supply of merit goods
Including education, healthcare, sports facilities
What is a key feature in all oligopolies?
Interdependence, which means it is usually in a firm's best interests to COLLUDE with other firms
What are the advantages of price discrimination for firms?
It enables producer to gain higher level of revenue, may enable producer to produce more and gain from economies of scale, may enable a firm to drive competitors out of an elastic market from profits gained in an inelastic market
What is collusion?
It exists when firms in an oligopolistic market agree to charge the same prices, in effect acting as a monopoly.
What are the advantages of price discrimination for consumers?
It may allow some consumers to purchase a product that they wold not have been able to if other consumers were not paying a higher price (i.e. Doctors visit, in-state v. out-of-state tuition), usually increases output in market, economies of scale may lead to lower prices
What are the types of market failure
Lack of public goods, under-supply of merit goods, over-supply of demerit goods
Positive externalities of production
Occur when the production of a good or service creates external benefits that are good for third parties
Negative externalities of production
Occur when the production of a good or service creates external costs that are damaging to third parties
2nd degree of Price Discrimination
Occurs when a firm charges different prices to consumer depending upon how much they purchase
3rd degree of Price Discrimination
Occurs when consumers are identified in different market segments and a separate price is charged in each market segment that recognizes the different price elasticities of each segment
Positive externalities of consumption
Occurs when consumption provides external benefits to third parties, i.e. healthcare
1st degree of Price Discrimination
Occurs when each consumer pays exactly the price that he/she is prepared to pay. Consumer SURPLUS is ELIMINATED
What are monopolies characterized by?
Price rigidity, which means that oligopoly prices > prices in competitive markets
How could the government help the economy get to Qoptimum?
Subsidize or offer training for specific professions
How could the government attempt to limit externalities of production?
Tax or fine firms, ban certain types of firms, pass laws relating to specific externalities, issue tradeable emission permits
In the short run, firms in monopolistic competition may earn
abnormal profits
In the long run, firms in monopolistic competition will earn
normal profits