Competition and monopoly
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Lektionsnotizen
Market structures
- A pure monopoly is one seller in a defined market without close substitutes. Monopoly power is broader influence over price or other conditions. Oligopoly has a few significant interdependent suppliers, which can compete strongly without collusion. Perfect competition is an idealised model with price-taking firms, identical products, free entry and full relevant information.
- Define product, geography, period and value or volume before calculating shares. A fictional £30m seller in a £100m annual market has 30% value share. A, B and C with £30m, £25m and £20m sales have a three-firm concentration ratio of 75%. Concentration alone does not prove unlawful conduct, and 25% is not a universal automatic dominance or illegality rule.
Structure is not the same as conduct
Barriers to entry
- Barriers can include sunk start-up costs, scale requirements, control of inputs, switching costs and customer loyalty. Explain how these prevent viable entry or expansion, rather than just naming a large firm. Useful free information may reduce search barriers.
- Patents can restrict specified unauthorised uses of protected inventions in the relevant territory while in force. They may support research returns but can limit imitation and access. Licences, scope, substitutes and other rights matter; owning a patent does not automatically give a monopoly over the entire market or permission to use every technology.
Trace an entry barrier
Effects of monopoly
- Large scale may reduce unit costs and resources can support research. Consumers gain if these advantages improve prices, quality, access or reliability. Lower production cost and higher profits alone are not proof of a consumer benefit or innovation.
- Weak competitive pressure can permit high prices, reduced choice or poorer service and may weaken cost-control incentives. Entry threats, buyer power, substitutes and regulation can constrain this. Productive efficiency concerns resource cost; allocative efficiency concerns output choices relative to social costs and benefits.
Potential consumer effects
Competition policy
- Competition policy addresses anti-competitive agreements, abuse of dominance and mergers that meet the relevant tests. Price fixing, market sharing and bid rigging are examples of cartel behaviour. Similar prices can also arise without an agreement; an oligopoly is not automatically a cartel.
- The CMA’s merger-jurisdiction share-of-supply tests have specific conditions and differ from proving dominance or harm. A firm is not automatically unlawful at 25% share. Market power depends on competitive constraints; dominance itself is distinct from abuse. Remedies and enforcement powers depend on the procedure, while sector regulators act within their own remits.
Keep policy questions separate
Competition benefits
- Effective rivalry can encourage better value through price, quality, service, choice and innovation. Different firms may compete through different combinations, and lower prices are not the sole measure of consumer benefit.
- Effects depend on entry, information, switching costs and market conditions. Price wars may reduce margins and stimulate demand, but firms anticipate rivals’ reactions. Avoid asserting all oligopolists avoid price competition or every competitive market achieves every form of efficiency.
Network costs and natural monopoly
- A natural-monopoly concern arises where one supplier can serve relevant market demand at lower total cost than multiple suppliers. In a fictional model each network costs £300 plus £2 per user. For 100 users, one network costs £500, or £5 per user.
- Two identical networks with 50 users each cost £400 each, or £800 total, averaging £8 per user. This comparison illustrates duplication at the stated output only; it does not prove every demand level or the best ownership model. Access rules, prices, quality and investment need separate assessment.
Fictional cost duplication
Evaluate a merger or market-power claim
- Ask how the proposal changes rivalry, entry, quality and innovation, as well as price. A merger may reduce duplicated costs, but savings need evidence and must be weighed against lost competitive constraints. Size alone does not establish the outcome.
- Use defined-market data, alternatives available to buyers, entry conditions and likely responses. Distinguish measured concentration from inferred power and proven conduct. A balanced conclusion states which conditions would make the consumer benefit or harm more likely.
Assess competition with evidence
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Übungsfragen
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1.In the strict pure-monopoly model, which describes the seller side of a defined market?
Easy- Aone seller with no close substitute for its product
- Bmany firms
- Cno firms
- Da government
2.What is competition?
Easy- Aone firm only
- Bno choice
- Cgovernment control
- Drivalry between firms for customers
3.What is an oligopoly?
Easy- Amany tiny firms
- Bno firms
- Ca few large firms dominate
- Done firm
4.What is a barrier to entry?
Easy- Aa product
- Bsomething that makes it hard for new firms to enter
- Ca type of tax
- Da subsidy
5.What is a price taker?
Easy- Aa firm that must accept the market price
- Ba firm that sets prices
- Ca consumer
- Da government
6.Which fictional market structure is an oligopoly?
Easy- Ahundreds of equally small price-taking suppliers with free entry
- Bone seller with no close substitute
- Ca market with no sellers
- Dfour significant suppliers account for almost all sales and watch each other’s decisions
7.Which is a barrier to entry?
Easy- Aeasy access to customers
- Breadily available low-cost premises
- Can enforceable patent restricting use of a key invention
- Dfreely available technical information
8.Which is a barrier to entry related to size?
Easy- Asmall firms
- Blarge efficient-scale requirements giving established firms a unit-cost advantage
- Cfree entry
- Dlow start-up cost
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