2.11a market failure - market power

Question 1

market power

Answer 1

market power refers to the extent to which each individual firm in the industry is able to control price at which it sells its products.
When price is set & output produced is below social optimal output → allocative inefficiency occurs, market fails.

Question 2

perfect competition

Answer 2

inability to control price - zero market power and zero mkt failure

Question 3

imperfect competition (3 kinds)

Answer 3

monopoly
oligopoly
monopolistic competition

Question 4

monopoly

Answer 4

Greatest ability to control price
Very significant amount of mkt power
Largest degree of allocative inefficiency

Question 5

oligopoly

Answer 5

great ability to control price
significant amount of mkt power
large degree of allocative inefficiency

Question 6

monopolistic competition

Answer 6

some ability to control price
some mkt power
smallest degree of allocative inefficiency

Question 7

types of market structures

Answer 7

perfect competition
monopoly
monopolistic competition
oligopoly

Question 8

perfect competition characteristics (3+example)

Answer 8

a) Infinite number of sellers & buyers
• Extremely large numbers of sellers → no mkt shares → no mkt power → sellers are price-takers.
• Extremely large numbers of buyers → each buying only a small qty → no bargaining or buying power.
b) Homogeneous Product
• Products are identical → Perfect substitute to one another.
c) Free Entry & Exit of Firms
• No barriers to entry or exist.
• Firms may freely leave or enter the industry depending on the size of profits or losses occurring in the industry

e.g Agriculture, with a large amount of producers (sellers) and almost perfectly substitutable product is an approximation to the perfect competition model.
There are other close examples like the stock exchange market and the currency market, etc

Question 9

monopoly (3+eg)

Answer 9

a) One seller but many buyers
• Sole producer dominating the mkt with a very large mkt share → have very significant mkt power to control price or qty → monopolist is a price-setter.
• Note that monopolist can control price or limit qty produced but cannot determine the qty of the good sold as it is determined by the mkt DD curve.
• Unlike a pure monopoly with 100% mkt share, Microsoft Corp has a monopoly in OS software with Windows, with about 75% mkt share of laptops & desktops running Windows in an international mkt.
b) Unique Product
• No close substitutes (assumption of a pure monopoly) c) Significant Barriers to Entry
• Monopolist owes its dominance & the absence of competitors partly to the inability of other firms to enter the industry.

eg. Vietnam Electricity (residential & industrial uses)
The Regional Rail Monopolies in UK SP Powergrid Ltd in Singapore
Postal letter (not parcels) services are monopolised by a single operator in most countries
Microsoft Corporation (Windows OS software on laptops & desktops internationally)

Question 10

monopolistic competition (3+eg)

Answer 10

a) Large number of firms
• Large numbers of small independent firms in the mkt but not as many as PC mkt.
• Large numbers of sellers → small mkt shares → some mkt power → price-setter.
b) Slightly differentiated products with close substitutes
• Firms in monopolistic competition practice product differentiation such as quality, servicing and packaging.
• G&S are slightly differentiated and have enough in common to be close substitutes.
c) Free Entry & Exit of Firms
• No barriers to entry or exist.
• Firms may freely leave or enter the industry depending on the size of profits or losses occurring in the industry.
Monopolistic Competition
Small independent restaurants, fashion boutiques, cafes, hair salons, electronics shops, ornamental fish shops & hawker food stalls

Question 11

oligopoly (3+eg)

Answer 11

a) Few dominant firms
• Few large & dominant firms → actions of one firm affects the others → interdependency among firms.
• Each firm has very significant mkt power to control price or qty → Price-setter. b) Homogeneous or differentiated product
• Products may be either homogeneous (crude oil) or differentiated (cars).
c) Substantial barriers to entry
• High barriers to entry.
• Many established oligopolies would spend enormous sums on product differentiation
making it difficult for new entrants to match such expenditure to effectively compete.
• Non-price competition is one very important strategy for oligopolistic mkt structure to increase sales, mkt share & profit. (eg, advertising, R&D on product development and innovation & services, etc).

e.g Car industry, airlines,
electrical appliances, mobile phones, banks,
retail petrol stations (differentiated products)
Steel,
aluminum,
gold,
cement,
crude oil industries (homogeneous products)