Market Power

HL Economics
Starter
In groups, prepare a slide which outlines the following:

1.Identify 3 businesses which operates in market with a high level of

competition.

2.Identify 3 businesses which operates in market with a low level of

competition.

3.With reference to your examples, outline the advantages and

disadvantages of competition to consumers, firms, and the economy.
Market power refers to a firm’s ability to control the price of a product.
Based on a firm’s level of market power, markets can be categorized into
market structures. Every market structure is determined by the following
three factors:
Can you think of any Monopoly
example in the real life?
Know the
difference between
Costs Revenue Profit
How many types of
Market Structure you
know?
Types of Market Structure

1 2
Perfect Competition Monopoly

3 4
Monopolistic Competition Oligopoly
 Enquiry question

What is perfect competition?

Does this market structure exist in the real world or is it purely a

theoretical concept.
Knowing how to draw the curve
Average Costs

Marginal Costs

Profit Maximizing Output:

MC = MR
Conditions of perfect
competition
Conditions of perfect ●
●
Very large numbers of sellers and buyers
Each too small to influence the market supply /
competition ●
demand and hence market price
Price takers and not price makers
● All firms sell the same homogeneous (identical)
product, making them indistinguishable for
consumers and hence no brand loyalty.
● Perfect knowledge for both buyers and sellers
● Each producer is fully aware of the costs and prices
set by their competitors.
● Consumers are also fully aware of prices in the
market and the quality and availability of those
products.
● No barriers of entry and exit
Activity 1
Activity 1
Activity 1

Watch the following short video and then answer the following two questions:

(a) According to the video what are some of the assumptions of a perfectly
competitive market?

(b) Which two sectors within South Africa come under criticism in the video for not
operating in a competitive market?
Activity 4
Activity 5
How to illustrate on a graph
Activity 5
(a) What is the relationship between P and MR?

(b) Are the firms in perfect competition producing at the profit maximising level of
output?

(c) Why would demand be perfectly elastic for an individual firm in a perfectly
competitive market?

(d) Why is the PED elasticity for individual firms in perfect competition equal to Ѡ?

(e) Complete the diagram by drawing the AR and MR curve and mark the equilibrium
level of output and price.
Monopoly
Enquiry What is a monopoly and what role do barriers
to entry play in permitting the monopolist to
Question: earn long run economic profit (abnormal
profit).
Beginning
activity
Key Terms
Monopoly - a market structure where there is only
one firm in the industry or a single firm dominates
the market.

Barriers to entry - methods employed by

monopolies to prevent other firms from entering the
industry, thus maintaining their monopoly position
in the long run.
What are the differences between
Monopoly and Perfect Competition?
Examples of entry barriers:
Economies of scale: A monopoly, as it grows is likely to be in a position where they can
take advantage of the economies of scale available to them, making it almost impossible for
a new business to compete financially with the dominant firm.

Natural monopoly: This is another type of economy of scale and exists in an industry
where the economies of scale are so great that there is only room for one firm in the
market.

Legal barriers: Sometimes there are legal barriers to prevent other firms joining the
market. This can be granted for a period of time as a result of a patent, copyright or
trademark or maybe for an indefinite period as with some public utilities.

Brand loyalty: Some firms e.g. Coke and Pepsi are so synonymous with particular
industries that it is almost impossible to enter the market.

Anti-competitive behaviour: Where a monopoly firm uses anti-competitive behaviour to

maintain their dominant position in the market − either legally or illegally.
Using the 1. General Motors
definition of
2. Luxottica
monopoly as a
business which 3. YKK
controls at least 4. Adidas
25% market 5. ABInBev
share, which of 6. Netflix?
the following
businesses count
as monopoly?
How to illustrate on a graph?
Watch the following short video and then using the monopoly diagram included, answer the following questions.
One of the contentious political issues in many parts of the world is the extent to which
governments should seek to restrict the power of monopolies. Watch the following video
about the proposed merger between Heinz and Kraft and then outline the advantages and
disadvantages of the proposed merger from the point of view of the following stakeholders:

● the consumer
● the shareholders
● rival companies
● the government
The meaning of
“Natural monopolies”
Natural Monopoly
Monopolistic
competition
Consider the following industries in your
local area:

● private taxi cars

● cafes and independent bars (not those which form part of a chain)
● hair dressers
● sellers of mobile phones (not the manufacturers).

Start by writing down some of the characteristics of these types of businesses.

Characteristics of 1. Many firms selling the product as well as a large number
of buyers, each too small to influence industry supply /
monopolistic competition demand and hence price. Each firm assumes that they are
able to act independently of their competitors.

2. All firms in the market sell a similar but slightly different

product. This means that some brand loyalty does exist,
though this is likely to be restricted to small unique
differences compared with other competing firms in the
market. For example in a street there may be a large
number of almost identical sandwich shops but each
makes their sandwiches in a slightly different manner.

3. No barriers to entry or exit within the industry, making it a

market that is easy to enter or leave the business when
losses are made.
Activity 1

1. Look again at the characteristics of monopolistic firms. Which characteristics

are similar to those of perfectly competitive firms and which do they share with
monopoly firms?

(a) Why does brand loyalty make this structure different to perfectly competitive
markets?
 Your favourite hairdresser / sandwich bar / cafe raises their price so that it becomes slightly more
expensive than other similar firms in the area. Do you stop going to your favourite place or continue
your patronage at the slightly higher price?
Oligopoly
Key term
Oligopoly - a market structure where a small handful of firms dominate the industry, generally between 2 and 8

Concentration ratio - represents the market share held by the largest firms in the market. This is expressed as a formulae as CRx where X is
the number of firms.

Interdependence - this describes the relationship between all firms within this market structure. Much like chess players are interdependent,
each firm operating within an oligopoly will consider the actions of the other firms in the market before making their own decision.

Colluding - in a colluding oligopoly the participating firms will actively collude on prices. Under either an official agreement (called a cartel) or
a more informal agreement, firms will set the same prices and agree output targets to determine market supply and push up price levels to
their mutual advantage.
 (a) Investigate the CR4 for each of the above
Investigate the following
industries. Represent this on a pie chart
markets in the US: highlighting the % market share enjoyed by each
pharmaceuticals, beer firm.
manufacture, wine (b) Which of the above industries is the most and
production, oil industry. least concentrated?
Characteristics of an
oligopoly?
● Oligopolies are industries defined by just a small number of
dominant firms, perhaps 2 – 8.
● This means that oligopolies have a high concentration ratio.
● In other words the largest 4 firms in the industry enjoy a very
large market share
Characteristics of an oligopoly?

Interdependence of firms – this Barriers to entry and exit – this

means that firms must consider the means that the industry is difficult to
actions of their competitors when enter due to high start up costs and
making price and output decisions strong brand loyalty. High start up
costs also make leaving the industry
difficult
Types of Oligopoly

Collusive Oligopoly (Acting like Non-collusive Oligopoly

Monopoly)
Refers to competing firms with
Is an agreement between two or mutual interdependence
more oligopolistic firms to limit
competition by using restrictive They need to consider the likely or
trade practices, such as price possible actions and reactions of
fixing or collectively limiting output their competitors when
determining pricing and non-
pricing strategies
Collusive Oligopoly = Monopoly
An alliance of oligopolistic firms = Cartel (OPEC is the example)
● Anti-competitive pricing strategy (Collectively raise or reduce prices at the
same time)
● Oligopolistic firms in the cartel may agree to simultaneous raise their prices to
exploit customers by charging premium prices
● They might agree to implement limit pricing -
Introduction of Oligopoly
Sticky prices
Firms in oligopoly are generally associated with sticky prices, making price
competition between businesses in oligopolies difficult.
Graph
 Compare all market
Summary structures - Characteristics,
Graphs, Advantages and
Disadvantages
Perfect Competition
Characteristic:
● Perfect information
● Price Taker
● No barriers to entry
● Many buyers and sellers
Perfect Competition/ Monopolistic Competition
Characteristic: Characteristic:

● Imperfect information
● Perfect information
● Low barriers to entry
● Price Taker ● Many firms and sellers
● No barriers to entry ● Price maker (some degree)
● Many buyers and sellers ● Heterogeneous product
● Some degree of brand loyalty
● No Brand loyalty
● Cannot achieve allocative efficiency
● Homogenous product
● Can achieve allocative efficiency

*Only NORMAL PROFIT in the LONG *Only NORMAL PROFIT in the

RUN LONG RUN
Monopoly/ Oligopoly
● Price Maker ● Price Maker
● High barriers to entry ● High barriers to entry
● One firm dominate the market ● 2 - 8 firms dominating the market
● Imperfect Information ● Imperfect Information
● Heterogeneous Product ● Heterogeneous Product
● Natural Monopoly ● Collusive/ non-collusive Oligopoly
● Water supply, electricity ● E.g. supermarket, banking, cinema
● CAN MAKE ABNORMAL PROFIT OR ● CAN MAKE ABNORMAL PROFIT OR
LOSS EVEN IN THE LONG RUN LOSS EVEN IN THE LONG RUN
● Create market failure ● Create market failure

Abnormal Profit LOSS