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James
MARKET STRUCTURE MONOPOLY AND PERFECT COMPETITION THE MARKET STRUCTURE SPECTRUM
Oligopoly: 3+ big firms in an industry, dominating production. E.g. Tesco, ASDA, Sainsbury’s, Morrisons (“The Big Four”). Duopoly: 2 big firms in an industry, dominating production. E.g. Pepsi and Coca Cola.
PERFECT COMPETITION
Four Characteristics
An increase in the supply by ONE firm would result in a small rightward movement along the demand curve, and therefore demand will not change. If output was doubled, the price would fall. If one perfectly competitive firm raises their prices, then there are many other substitutes available to consumers. Likewise, it would be pointless to sell for below the market price – they would lose potential profit. The demand curve is horizontal – perfectly elastic.
(1) All firms are producing a homogenous product. (2) There are many buyers and sellers (contribute little to the final output of an industry). (3) Buyers and sellers have the same information & knowledge of the market. (4) Few/no barriers to
THE GROWTH OF FIRMS Why do firms want to grow? •
Greater Market Share. They can buy more products with less competition.
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Economies of Scale. This ensures a firm can reduce its average costs and maximize profits.
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Stifle Competition. Allows a firm to reach a greater
A concentration ratio is a method of measuring the potential power of the largest and most important companies in a particular market. They look at a firm’s market share in the industry, and how many workers are employed. A three-firm concentration ratio would be the total share of the market (output, employment etc).
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MERGER
TAKEOVER
HORIZONTAL
When two companies competing in the same market join together.
When a firm takes over another firm in the same industry.
E.g. Ford and Volvo.
E.g. Fullers takeover Gales.
VERTICAL
When two firms, each working at different stages in the production of the same good, combine.
When one firm takeover another firm, operating in another stage of the production process.
E.g. Time Warner and Turner Corporation.
E.g. Wolverhampton & Dudley brewery takes over Pitcher & Piano brewery.
CONGLOMERATE
James
When a firm merges with a different firm in another industry.
When a firm buys out a different firm in another industry.
E.g. Virgin merging with NTL, to become Virgin Media.
E.g. Orange taking over Wanadoo (ISP).
FOR EXTERNAL GROWTH
AGAINST EXTERNAL GROWTH
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Growth in both size and economic power.
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Lack of expertise in a new field.
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Easier to infiltrate foreign countries.
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Risk of becoming too big Diseconomies of scale (e.g. McDonalds).
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Easier to diversify.
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Achieve faster economies of scale.
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Safety risks (e.g. BP & and the oil accident).
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Greater control over the productive process.
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Only an option for large firms lack of funds for small companies.
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Fend off a takeover.
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Only ¼ of mergers/takeovers
MONOPOLY Pure Monopoly: A company who is the sole supplier of a particular good/service. E.g. Letter deliveries. Monopoly Power: Spectrum of power – exists where several firms share the market power (legally, 25%). E.g. Eurotunnel, SWT, Tesco. Local Monopoly: Firms with monopoly power on a local scale. E.g. Village shop/pub.
Sources of Monopoly Power 1. Availability of
substitutes/ potential competitors. 2. Advertising and Product Differentiation/Brandi ng. 3. Barriers to entry:
Innocent: Exist naturally Natural Monopoly: When extensive economies of scale already exist. E.g. SWT – Rail network already exists. Page 2