Perfect competition The theoretical free-market situation in which the following conditions are met: (1) buyers and

sellers are too numerous and too small to have any degree of individualcontrol over prices, (2) all buyers and sellers seek to maximize their profit (income), (3) buyers and seller can freely enter or leave the market, (4) all buyers and sellers have access to informationregardingavailability, prices, and quality of goods being traded, and (5) all goods of a particular nature are homogeneous, hence substitutable for one another. Also called perfect market or pure competition. In a perfect competition market structure, there is freedom of entry and exit, products are homogeneous (all are identical), there is a large number of buyers and sellers, and in this market structure firms are price takers. Examples include Financial markets and Agricultural markets. Advantage and disadvantage of perfect competition Circumstances particular to a given industry that create disadvantages for new competitors attempting to enter the market. These may include government regulations, economic factors, and marketing conditions. Barriers to entry may be created, for example, when companies already in a market have patents that prevent their goods from being copied, when the cost of the advertising needed to gain a market share is too high, or when an existing product commands very strong brand loyalty. Advantages of perfect competition i) optimal allocation of resources (ii) competition encourages efficiency (iii) consumers charged a lower price (iv) responsive to consumer wishes: Change in demand, leads extra supply Disadvantages (i) insufficient profits for investment (ii) lack of product variety (iii) lack of competition over product design and specification (iv) unequal distribution of goods & income (v) externalities e.g. Pollution

The advantages of perfect competition Resources are allocated in the most efficient way to meet market demand and maximise consumer satisfaction. - This means that market mechanism works better. It is the cheapest way of using the factors of production we have. - Which says that we are at the lowest part of the AC curve. There is no cost of advertising, selling, marketing, or motions. These are often a form of waste to society as a whole, though beneficial for individual firms. Rapid change is possible to meet new consumer demands it is very flexible. The interests of producers are the same as for consumers. Freedom to choose exists. It avoids all the wastes of monopoly. It prevents the emergence of a few rich and powerful people (Conrad Black? Robert Maxwell?) There are a lot of firms, all small, so that no major powerful personality can rise and dominate others. The disadvantage of perfect (or pure) competition It produces what is demanded under the given distribution of income. We can imagine a scenario with a very few rich people with pet dogs or cats which dine extremely well on chicken and the like, while the masses starve. Spillovers and externalities can exist. These are costs caused to others, e.g. the disposal of nuclear waste or toxic chemicals by dumping them in streams. No economies of scale possible - all the firms are too small. Perfect competition is consistent with a limited choice of range of goods; monopolistic competition may have a much wider range. An example is motorcars there are an awful lot of different models and competition is much less than perfect. Little or no research and development is possible because there are no funds for it. Under perfect competition there are no surplus profits (in the long run they are whittled away!) R&D is possible under monopoly because of the surplus profits available.

2 WHAT IS A MONOPOLY Definition: Technically it is a sole supplier, i.e., there is one firm in the industry. It is the industry. But there are degrees of monopoly - if one firm supplies, say, 80 per cent, it is close to a monopoly and will usually act like one. Types of Monopoly Economies of scale. One firm grows large, its cost curves are lower than the others, so it is able to sell more; in the end it grows to become the sole firm. This is the so-called natural monopoly. 2a) The law. The government may restrict the industry to one nationalised firm. An example was British Steel some decades ago in the UK. 2b) Regulations. A trade union may have a monopoly over the supply of one kind of labour the British Medical Association covers all doctors for instance. Agreement between firms, so that they all act together and behave as one monopolist. This is often illegal but it happens. Exclusive ownership of a unique resource. As an example, all the known supply of iron ore in Australia was once in the hands of a company called BHP; similarly De Beers diamond mining once virtually controlled all (and still controls a lot) of the international supply of diamonds. Copyrights, patents and licences are particular forms of this exclusive ownership. Marginal revenue and monopoly Marginal revenue is the addition to total revenue from the last unit sold. A perfectly competitive firm can sell as much as it wants at an unchanged price. Its MR curve is equal to the price every time it sells one more item it receives, say, an additional 50 pence, which adds 50 pence to TR. A monopolist is the industry, so it faces a normal downward sloping demand curve. So if wants to sell more of the good or service it must lower the price. And of course it must sell all its products at that lower price. This means it loses by selling the items it used to sell earlier at a higher price at the new lower price.

So the price of the marginal product is not the MR the firms total revenue increases by less than this sale, because of the bit it lost on the price on all the other products.

Problems with monopoly, what is wrong with monopoly or "the welfare effects of monopoly" A monopoly limits output and keeps price high. A monopoly redistributes income from all the consumers to this one firm or person (an equity issue). Monopolists may develop political and social power over others, which reduces the efficiency of democracy and is inequitable. There are political dangers of a few very rich and powerful people (Marx called them monopoly capitalists who misuse their position and exploit people). A monopoly may behave badly in an anti-social way. For instance it may force out a rival firm by selling its product at give-away prices, well below cost and taking the short term loss. After it has forced out the competitor, it will then put the price back up again. This behaviour may or may not be legal. It depends on the country involved and its legislation but it is always reprehensible. The lack of competition tends to promote inefficiency, the company rests on laurels, there is no need to try hard, and it lacks dynamism. This is probably the main criticism said Austin Robinson The result is lazy managers and owners. This means that technical progress is reduced, leading to slow economic growth of the country and a lower standard of living than we could have. Resources are misallocated. Too many go to the monopolist and they are not fully used by him. This is a waste for society and in addition, the price mechanism is prevented from working properly. A monopoly reduces consumer choice. There is no one else to buy from and no other producers product. A monopolist may ignore small market demands as he cannot be bothered to meet them. You will recall that I mentioned earlier that Henry Ford is supposed to have said about his motor cars You can have any colour you want, as long as its black. The long run effect from the existence of monopolies is slightly slower growth; a lower standard of living; higher unemployment (because the monopolist restricts output and so requires fewer people); higher prices (which monopolies charge); a slightly poorer balance of payments as a result of this; a less equal income distribution; and poorer resource allocation.

Benefits of monopoly there are not many really, but some case can be made. A monopolist can use monopoly profits for research and development, leading to product improvement, faster growth, and lower costs, despite the argument above that they are inherently lazy. - Joseph Schumpeter argued that they are important for innovation; he felt that big firms are the only ones that are able to afford the necessary laboratories, equipment and research staff. - Against this, research exists that shows many of the breakthroughs come from small firms, for example Apple began making those computers in a garage. Monopolists may be able to reap economies of scale, for example the Royal Mail; the provision of telephone lines; the supply of electricity; the supply of gas; and the provision of railways. Economies of scale mean lower costs (although the monopolist Royal Mail is notoriously inefficient in the new millennium). A state monopoly may be safer than a private one. A private monopoly may be more tempted to cut corners and reduces necessary maintenance to lower costs, and this could be particularly serious in some areas like the railways or air traffic control.

Monopolistic competition

Monopolistic competition is a type of imperfect competition such that many producers sell products that are differentiated from one another as goods but not perfect substitutes (such as from branding, quality, or location). In monopolistic competition, a firm takes the prices charged by its rivals as given and ignores the impact of its own prices on the prices of other firms.[1][2] In the presence of coercive government, monopolistic competition will fall into government-granted monopoly. Unlike perfect competition, the firm maintains spare capacity. Models of monopolistic competition are often used to model industries. Textbook

examples of industries with market structures similar to monopolistic competition include restaurants, cereal, clothing, shoes, and service industries in large cities. The "founding father" of the theory of monopolistic competition is Edward Hastings Chamberlin, who wrote a pioneering book on the subject, Theory of Monopolistic Competition (1933).[3] Joan Robinson published a book The Economics of imperfect competition with a comparable theme of distinguishing perfect from imperfect competition. Monopolistically competitive markets have the following characteristics:

There are many producers and many consumers in the market, and no business has total control over the market price. Consumers perceive that there are non-price differences among the competitors' products. There are few barriers to entry and exit.[4] Producers have a degree of control over price.

The long-run characteristics of a monopolistically competitive market are almost the same as a perfectly competitive market. Two differences between the two are that monopolistic competition produces heterogeneous products and that monopolistic competition involves a great deal of non-price competition, which is based on subtle product differentiation. A firm making profits in the short run will nonetheless only break even in the long run because demand will decrease and average total cost will increase. This means in the long run, a monopolistically competitive firm will make zero economic profit. This illustrates the amount of influence the firm has over the market; because of brand loyalty, it can raise its prices without losing all of its customers. This means that an individual firm's demand curve is downward sloping, in contrast to perfect competition, which has a perfectly elastic demand schedule. Free entry and exit In the long run there is free entry and exit. There are numerous firms waiting to enter the market each with its own "unique" product or in pursuit of positive profits and any firm unable to cover its costs can leave the market without incurring liquidation costs. This assumption implies that there are low start up costs, no sunk costs and no exit costs. The cost of entering and exit is very low. While monopolistically competitive firms are inefficient, it is usually the case that the costs of regulating prices for every product that is sold in monopolistic competition far exceed the benefits of such regulation.[citation needed] However, it would not have to regulate every product and every firm just the most important ones. That alone would be an improvement on the current situation. A monopolistically competitive firm might be said to be marginally inefficient because the firm produces at an output where average total cost is not a minimum. A monopolistically competitive market is productively inefficient market structure because marginal cost is less than price in the long run. Monopolistically competitive markets are also allocatively inefficient, as the price given is higher than Marginal cost. Product differentiation increases total utility by better meeting people's wants than homogenous products in a perfectly competitive market.[citation needed] Another concern is that monopolistic competition fosters advertising and the creation of brand names. Advertising induces customers into spending more on products because of the

name associated with them rather than because of rational factors. Defenders of advertising dispute this, arguing that brand names can represent a guarantee of quality and that advertising helps reduce the cost to consumers of weighing the tradeoffs of numerous competing brands. There are unique information and information processing costs associated with selecting a brand in a monopolistically competitive environment. In a monopoly market, the consumer is faced with a single brand, making information gathering relatively inexpensive. In a perfectly competitive industry, the consumer is faced with many brands, but because the brands are virtually identical information gathering is also relatively inexpensive. In a monopolistically competitive market, the consumer must collect and process information on a large number of different brands to be able to select the best of them. In many cases, the cost of gathering information necessary to selecting the best brand can exceed the benefit of consuming the best brand instead of a randomly selected brand. The result is that the consumer is confused. Some brands gain prestige value and can extract an additional price for that. Evidence suggests that consumers use information obtained from advertising not only to assess the single brand advertised, but also to infer the possible existence of brands that the consumer has, heretofore, not observed, as well as to infer consumer satisfaction with brands similar to the advertised brand.[ In many U.S. markets, producers practice product differentiation by altering the physical composition of products, using special packaging, or simply claiming to have superior products based on brand images or advertising. Toothpastes, toilet papers, computer software and operating systems are examples of differentiated products.

oligoploy An oligopoly is a market form in which a market or industry is dominated by a small number of sellers (oligopolists). Oligopolies can result from various forms of collusion which reduce competition and lead to higher costs for consumers. [1] With few sellers, each oligopolist is likely to be aware of the actions of the others. The decisions of one firm therefore influence and are influenced by the decisions of other firms. Strategic planning by oligopolists needs to take into account the likely responses of the other market participants. Oligopoly is a common market form where a small number of firms are in competition. As a quantitative description of oligopoly, the four-firm concentration ratio is often utilized. This measure expresses the market share of the four largest firms in an industry as a percentage. For example, as of fourth quarter 2008, Verizon, AT&T, Sprint, and T-Mobile together control 89% of the US cellular phone market. Oligopolistic competition can give rise to a wide range of different outcomes. In some situations, the firms may employ restrictive trade practices (collusion, market sharing etc.) to raise prices and restrict production in much the same way as a monopoly. Where there is a formal agreement for such collusion, this is known as a cartel. A primary example of such a cartel is OPEC which has a profound influence on the international price of oil. Firms often collude in an attempt to stabilize unstable markets, so as to reduce the risks inherent in these markets for investment and product development.[citation needed] There are legal restrictions on such collusion in most countries. There does not have to be a formal agreement for collusion to take place (although for the act to be illegal there must be actual communication between companies)for example, in some industries there may be an acknowledged market leader which informally sets prices to which other producers respond, known as price leadership. In other situations, competition between sellers in an oligopoly can be fierce, with relatively low prices and high production. This could lead to an efficient outcome approaching perfect competition. The competition in an oligopoly can be greater when there are more firms in an industry than if, for example, the firms were only regionally based and did not compete directly with each other. In industrialized economies, barriers to entry have resulted in oligopolies forming in many sectors, with unprecedented levels of competition fueled by increasing globalization. Market shares in an oligopoly are typically determined by product development and advertising. For example, there are now only a small number of manufacturers of civil passenger aircraft, though Brazil (Embraer) and Canada (Bombardier) have participated in the small passenger aircraft market sector. Oligopolies have also arisen in heavily-regulated markets such as wireless communications: in some areas only two or three providers are licensed to operate.

Profit maximization conditions: An oligopoly maximizes profits by producing where marginal revenue equals marginal costs.[2] Ability to set price: Oligopolies are price setters rather than price takers.[2] Entry and exit: Barriers to entry are high.[3] The most important barriers are economies of scale, patents, access to expensive and complex technology, and strategic actions by incumbent firms designed to discourage or destroy nascent firms. Additional sources of barriers to entry often result from government regulation favoring existing firms making it difficult for new firms to enter the market.[4] Number of firms: "Few" a "handful" of sellers.[3] There are so few firms that the actions of one firm can influence the actions of the other firms.[5] Long run profits: Oligopolies can retain long run abnormal profits. High barriers of entry prevent sideline firms from entering market to capture excess profits. Product differentiation: Product may be homogeneous (steel) or differentiated (automobiles).[4] Perfect knowledge: Assumptions about perfect knowledge vary but the knowledge of various economic factors can be generally described as selective. Oligopolies have perfect knowledge of their own cost and demand functions but their inter-firm information may be incomplete. Buyers have only imperfect knowledge as to price,[3] cost and product quality. Interdependence: The distinctive feature of an oligopoly is interdependence.[6] Oligopolies are typically composed of a few large firms. Each firm is so large that its actions affect market conditions. Therefore the competing firms will be aware of a firm's market actions and will respond appropriately. This means that in contemplating a market action, a firm must take into consideration the possible reactions of all competing firms and the firm's countermoves.[7] It is very much like a game of chess or pool in which a player must anticipate a whole sequence of moves and countermoves in determining how to achieve his or her objectives. For example, an oligopoly considering a price reduction may wish to estimate the likelihood that competing firms would also lower their prices and possibly trigger a ruinous price war. Or if the firm is considering a price increase, it may want to know whether other firms will also increase prices or hold existing prices constant. This high degree of interdependence and need to be aware of what other firms are doing or might do is to be contrasted with lack of interdependence in other market structures. In a perfectly competitive (PC) market there is zero interdependence because no firm is large enough to affect market price. All firms in a PC market are price takers, as current market selling price can be followed predictably to maximize short-term profits. In a monopoly, there are no competitors to be concerned about. In a monopolistically-competitive market, each firm's effects on market conditions is so negligible as to be safely ignored by competitors. Non-Price Competition: Oligopolies tend to compete on terms other than price. Loyalty schemes, advertisement, and product differentiation are all examples of non-price competition. In an oligopoly, firms operate under imperfect competition. With the fierce price competitiveness created by this sticky-upward demand curve, firms use non-price competition in order to accrue greater revenue and market share.

Five banks (Barclays, Halifax, HSBC, Lloyds TSB and Natwest) dominate the UK banking sector, they were accused of being an oligopoly by the relative newcomer Virgin bank.[25] Four companies (Tesco, Sainsbury's, Asda and Morrisons) share 74.4% of the grocery market.[26] The detergent market is dominated by two players, Unilever and Procter & Gamble.[27] Six utilities (EDF Energy, Centrica, RWE npower, E.on, Scottish Power and Scottish and Southern Energy) share 99% of the retail electricity market.[28

Price wars with oligopoly: If there are two firms, it is best if neither starts a price war if they co-operate and keep the price high, that is as good as it gets. Lets think of an example. Assume that currently each sells 10 units at 4 each, so total revenue is 40 for each firm or 80 in total. But if firm A cuts his price to 3 he hopes to sell, say, 17 units at 3 and his total revenue would then be 51, a distinct improvement. The other would of course be able to sell fewer items. Possibly he might be able to sell 4 units or so at the unchanged price of 4, so that his total revenue would be $12 with much reduced profits. The total revenue of both together is $51 + $ 12 = $63 (and remember it was previously $80!) As a pair they are losing out, even if one does better. Then B might respond: it is tempting for B to cut his price perhaps to 2.50 and hope to sell a lot more. This process might continue with both firms cutting prices in turn, and both losing out even more. Game theory suggests they would be better off to collude and go back to the original situation of a price of $4 each and total revenues of $80 for the two, or $40 each! REGULATORY CAPTURE What is it? It is part of the economics of regulation. We are aware that some leading members in industry and commerce, left to their own devices, are likely to behave in ways of which society disapproves. In the absence of regulation and inspection, some members will engage in price fixing and collusion, bribery of government officials, lie to customers, break various laws, such as dumping waste produce in National Parks, and the like. What does society do to try to protect itself and the general public? The government frequently establishes one or more regulatory bodies to oversee the industry and try to control it, in order to protect society as a whole.

What often happens? The body in charge gets taken over by various vested interests until the regulatory body eventually starts to work for the vested interests and ceases to protect society. In other words, there has been Regulatory capture. In a less extreme form, the regulatory body may not be entirely taken over, but a cosy relation- ship between the body and the industry tends to build up over time so the policing powers become weak. There is always the risk of total capture but many economists feel that this extreme position is perhaps not all that common. How can the body be influenced or captured in this way? The industry is likely to have a lot more money than the government body and so can hire more and better staff. The regulatory body frequently consists of members who have several jobs or advisory positions, and can devote only limited time to the work of the body. The industry, by contrast, can employ full-time workers to try to present a better case and improve the position of the industry. The industry can pay for research that demonstrates what a good bunch they are and how well they behave. The industry can lobby individual Members of Parliament (and offer inducements for support, some of them not entirely legal). The industry can plant articles in newspapers and elsewhere that support their case. The appointments to the regulatory body are often top civil servants who know and have worked with leading members of the industry and so have already developed a friendly relationship. Examples It has been alleged (NB I suggest you ALWAYS put in this phrase when you are writing about the issue in public; it can protect you from being sued by powerful people!) the UK governments Medicines and Healthcare Products Regulatory Agency is effectively promoting the pharmaceutical industry in its efforts to sell drugs and increase profits, rather than protecting the public and helping to keep down the drugs bill of the National Health Service.. It has been alleged that the Food Standards Agency does not work hard to stamp out additives to foods that might be dangerous to children, including some that promote hyperactivity and poor learning. It is suggested that the Agency tends to pass the buck to the equivalent European body, as well as to the parents of the children, rather than act to improve things themselves. What might be done to improve the situation and break the cosy relationship between a regulatory agency and the people it is supposed to police? It might be possible to: Insist that all appointees to a regulatory body are approved by, say, a Parliamentary committee.

 Not to allow top civil servants to leave and join the industry (e.g., when they retire) until, say, 4 years have elapsed. Regularly change the members of the regulatory body, to prevent cosy relationships developing. Not allow inspections of companies in the industry by single inspectors but insist on at least two, in order to make offers of bribes or other inducements more difficult. Rotate the teams of inspectors, so that on each visit the industry has to deal with new people. Protect whistle blowers people who reveal what is actually going on. Experience suggests that whistle blowers regularly do badly once they have revealed an unpalatable truth; they are infre- quently promoted; they are often given poor references should they leave; and their names might even appear on secret blacklists Pricing strategies Pricing strategies Pricing strategy and promotions These never exist with perfect competition as all firms are price takers! There is no need to advertise ones own product as the tiny firm can sell all that it can produce at the same market price. Under monopoly there is some need to advertise to keep the product name alive; some of the ads might be of the Our Company is really nice type which you will see on TV now and then. Oligopolistic firms very commonly advertise because they have a competitive structure and a downward sloping demand curve. They have constantly to compete with their rivals. With monopolistic competition there is also a lot of advertising, again because of the very competitive structure and the downward sloping demand curve for their product. Cost-plus pricing The price is set as the average cost of item + a percentage mark-up. Predatory pricing This is when a firm deliberately makes a loss by charging a low price in the short term in order to drive out rivals or new entrants; in the long term this means higher profits for the firm as it can enjoy a higher price. It also means an easier life with fewer worries about the actions or reactions of rivals. Limit pricing This can be a feature of oligopoly: the firms may try to prevent new entrants by agreeing on a price that they will all charge. It will ensure that they all make good profits but not maximum profits. The price and profits are not quite high enough to attract other firms to the industry but will be above those set in perfect competition. Advertising and sales promotion policies

Advertising is designed to move the demand curve outward and to the right. It may also serve to make the demand curve for the firms product less elastic when compared with competitors curves. This means a higher price can be charged and more revenue and profits gained. Non-price competition One often sees this with supermarkets. It may include: Special promotions. These may take the form of competitions where one has to send in two or more box tops to enter; or special offers like 2 for 1 a form of price competition that can stopped and started easily without changing any printed advertising material. Home delivery. Store loyalty cards (which also track what each customer buys and how often, which is most useful information for the store). Extended opening hours, including Sundays and holidays. Selling petrol on the forecourt. Services such as a chemist being available, dry-cleaning, or photo-printing. Internet shopping facilities. Contestable markets This occurs where we have a monopoly or oligopoly, but that has few or no barriers to entry and exit. This can force the firm(s) to keep price reasonably low and competitive in order to prevent others entering. So although it may be a monopolist it does not actually behave like a monopolist and therefore does not enjoy high monopoly profits. William Baumol invented the model. He saw such firms producing at the bottom of their average cost curve. They have to be efficient or other firms would enter. For policy purposes, it means it may be better to consider reducing the barriers to entry and exit rather than focussing on the degree of competition or market concentration ratios as we usually do. Barriers to entry include: High sunk costs (fixed costs). Whether a firm can lease equipment or not. If it is possible to lease, then a new firm can enter or an existing one leave easily, because it does not have to buy or sell the aeroplane or whatever is necessary. Advertising and brand recognition. It is harder to break into an industry if there is a wellknown product already dominating it. The existence of over-capacity which was deliberately built so that the existing firm can flood the market quickly with more products at lower prices, if a new entrant tries to get in. Predatory pricing. The simple undercutting of the newcomer until he goes bankrupt.

4 Duolpoy A true duopoly is a specific type of oligopoly where only two producers exist in one market. In reality, this definition is generally used where only two firms have dominant control over a market. In the field of industrial organization, it is the most commonly studied form of oligopoly due to its simplicity. There are two principal duopoly models, Cournot duopoly and Bertrand duopoly:

The Cournot model, which shows that two firms assume each other's output and treat this as a fixed amount, and produce in their own firm according to this. The Bertrand model, in which, in a game of two firms, each one of them will assume that the other will not change prices in response to its price cuts. When both firms use this logic, they will reach a Nash equilibrium.

The most commonly cited duopoly is that between Visa and Mastercard, who between them control a large proportion of the electronic payment processing market. In 2000 they were the defendants in a US Department of Justice antitrust lawsuit.[1][2] An appeal was upheld in 2004.[3] Examples where two companies control a large proportion of a market are:

Woolworths and Coles in the Australian supermarket market (share 79% of the supermarket market)[4] Mitre 10 MEGA and Bunnings Warehouse in the Australian and New Zealand retail/trade timber and hardware market (Share 85% of the timber and hardware market).[5][not in citation given] Intel and AMD in X86 CPU market and Nvidia and AMD in consumer and professional GPU market.