Welfare effects of monopoly.

Without a proper regulation monopolies are incredibly ineffective for the economy. They produce fewer quantities of products than is needed and charge high prices pocketing the difference. It reduces the sum of consumer and producer surpluses compared to a perfect competition.

Price discrimination helps to reduce inefficiencies of monopolies. Even though, the dead-weight loss is always present, unlike in a competitive model.

Natural monopolies are usually obliged to offer higher quantities at lower prices. There are two strategies: 1) average cost pricing (P=ATC); 2) marginal costs pricing (P=MC). In the first situation, monopolies only receive normal profits and zero economic profits.

30. Oligopoly and monopolistic competition.

Monopolistic competition has the following market characteristics: 1) large number of independent sellers; 2) differentiated products; 3) firms compete on price; 4) quality and advertisement are important; 5) Law barriers to entry.

Like in the situation of monopoly, firms in monopolistic competition maximize profits when MR=MC. The efficiency of monopolistic competitions is not clear. Companies spend millions to advertise their products, but those expenses are treated sometimes as a benefit for customers – they learn more about the product. Firms also tend to innovate a lot to receive an edge over competitors.

Oligopoly is a form of market competition where: 1) small number of companies; 2) interdependence between competitors; 3) significant barriers to entry (economies of scale and scope); 4) products may be similar or differentiated.

The demand curve of an oligopoly marked is kinked, more elastic above the break and less elastic beyond it. Firms follow the leader. A conspiracy (collusion) may take place, when firms fix the price. Prisoner’s dilemma explains the situation. For the own benefit, firms have more reasons to betray their agreements than to honor them.

Date: 2015-02-03; view: 796