Happy new years everyone! Like last year when I posted the top 10 posts of 2011, its time to reveal the most viewed posts of 2012.
10. Once again its Trade Unions, posted on 16 November 2011
9. Word of the Day: Economic Growth posted on 3 August 2011
8. New entry Production Possibility Frontier and Long Run Aggregate Supply posted on 5 August 2011
7. Oligopoly, up from last year posted on 21 April 2012
6. Negative Externalities posted on 16 September 2011
5. Monopoly posted on 23 August 2011
4. Another new entry! Unemployment notes posted on 22 January 2012
3. Non mover Word of the Day: Elasticity posted on 13 August 2011
2. Another non mover Perfect Competition Long Run Equilibrium posted on 11 August 2011
1. A further non mover! The most viewed entry in 2012 was Perfect Competition Short Run Equilibrium posted on 10 August 2011
Seems market structures are popular topics that a lot of you are struggling with, but I'm glad that my posts are being viewed to help you out.
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Showing posts with label Market structure. Show all posts
Showing posts with label Market structure. Show all posts
Wednesday, 9 January 2013
Saturday, 21 April 2012
Oligopoly
·
A type of market structure where there are a
small number of firms dominating the market, all selling similar goods
·
What’s your definition of ‘dominating’ the
market? How do economists go about determining whether a market is dominated by
a few firms or not? They measure the concentration
ratio – the market share of the biggest firms in the market. For example, a
four firm concentration ratio shows the percentage of output produced in the
market by the four largest firms. Statistically, this method is okay to
use, but at A-level (and GCSE), it is better that you know that the essence of understanding the oligopoly
market is that firms in the market make decisions on price and output based on
the decisions of rival firms. They attempt to predict what the other firms are
doing, to compile their own strategy.
·
An example of an oligopoly market is
supermarkets
·
Can compete on price (resulting in a price war,
see here and here) or not, instead competing on other bases such as:
o Loyalty
schemes (Tesco Clubcard, Sainsbury’s Nectar points)
o Advertising
and marketing
o Home
delivery options (e.g. Asda and Tesco)
o Discounted
petrol (e.g. Asda, Morrisons)
o Extension
of opening hours (e.g. Metro Bank open on Sundays)
o Lateral
growth in other industries (Asda opticians, Tesco banking and insurance)
·
There are barriers to entry in the market
Kinked Demand Curve Theory
The theory explains how a competitive oligopolist may be
affected by rivals’ reactions to its price and output decisions.
The oligopolist sets price to P1 initially. When the curve is relatively elastic, if a firm in the
market increases the price, other firms will not
follow because the resulting fall in demand is greater than the proportionate
change in price. The firm loses too much demand to attract other firms to
follow.
When the curve is relatively
inelastic, if a firm lowers the price,
other firms will follow because they benefit from the resulting increase in
demand. Even though the resulting increase in demand is lower than the fall in
price, firms benefit because consumers ‘shop around’ for lower prices; if Tesco
are selling a notebook for £1 and Asda are selling a notebook for 80p, provided
that Asda is just as accessible as Tesco, the consumer may decide to shop at
Asda instead. This is under the assumption that the oligopoly market compete on
price. If this happens, a price war may
result.
Now consider the MR and MC curves. The oligopolist sets
price and output level to P1 and Q1. The profit maximising level of output is Q1.
The initial MC curve is MC2, but if the MC curve was to shift to
above MC1 or below MC3, the oligopolist would have to
charge a different price to ensure profit maximisation (assuming AR = selling
price). Price stability is achieved because
the MC curve can be anywhere between MC1 and MC3.
Furthermore contributing to price stability, the
oligopolist may decide to leave price and output at point X because of the uncertainty from rivals’ price and
output decisions.
The Kinked Demand Curve is only a theory and an estimate
of how demand changes when the oligopolist changes price because there is not
perfect information in the market for olipogolists to know the exact position
and shapes of their demand and revenue curves. The theory is useful because it
illustrates how firms are interdependent on rivals, and affected by
uncertainty.
Sunday, 16 October 2011
Oligopoly Case Study
News of tough economic times ahead could be one of the driving forces behind a possible price war between Asda, Tesco and Sainsbury's, among others. The supermarket market is prone to have price wars frequently, particularly ahead of seasonal periods. This article here, explains the strategies used by Asda, Tesco and Sainsbury's, yet competition is getting stronger with European supermarkets Aldi and Lidl increasing their market share (measured by the concentration ratio). Apparently there is no price war going on, yet if consumer prices get lower and lower in the coming weeks, we may have to reconsider what really is happening.
This is a good case study to use and gives you an idea about oligopolistic markets at work.
This is a good case study to use and gives you an idea about oligopolistic markets at work.
Sunday, 28 August 2011
Word of the Day
OFT
The Office for Fair Trading uses market structure, conduct and performance indicators to scan the UK economy for evidence of monopoly abuse. This is used to analyse and evaluate costs/benefits of monopoly. The OFT, along with the Competition Commission, creates incentives for firms to resist temptation to exploit possible monopoly power. Firms will not want to risk getting caught by these regulatory bodies therefore uses these incentives.
The Office for Fair Trading uses market structure, conduct and performance indicators to scan the UK economy for evidence of monopoly abuse. This is used to analyse and evaluate costs/benefits of monopoly. The OFT, along with the Competition Commission, creates incentives for firms to resist temptation to exploit possible monopoly power. Firms will not want to risk getting caught by these regulatory bodies therefore uses these incentives.
Friday, 26 August 2011
Word of the Day
Monopsony
A type of market structure where there is only ONE buyer and many sellers. An example of pure monopsony is a firm that is the only buyer of labour in an isolated town. Such a firm is able to pay lower wages than it would under competition. Although cases of pure monopsony are rare, monopsonistic elements are found wherever there are many sellers and few buyers. Monopsonies, like monopolies and oligopolies, are a form of imperfect competition.
A type of market structure where there is only ONE buyer and many sellers. An example of pure monopsony is a firm that is the only buyer of labour in an isolated town. Such a firm is able to pay lower wages than it would under competition. Although cases of pure monopsony are rare, monopsonistic elements are found wherever there are many sellers and few buyers. Monopsonies, like monopolies and oligopolies, are a form of imperfect competition.
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