Government Intervention In Response To Abuse Of Market Power
Advantages of Large Firms:
+ Economies of Scale (total costs will always increase at higher output levels while average costs
will be very small >> allows cheaper price for consumers in comparison to smaller firms)
+ Highly likely to make abnormal profits in the short & long run >> some of these can be
allocated towards research and development >> consumers benefit from new, innovative
products
Firms in the same industry also benefit from the new technologies >> positive externalities of
production
+ Increased employment
+ Contribute to national GDP
- Industry supply – positive relationship between P & Q
– the industry equilibrium is at the intersection of
MC/AR curves (S/D)
- There is NO supply curve as monopoly/oligopoly
determined
its output by MC = MR rule for profit maximisation.
They can charge different prices depending on the
position of the industry’s D curve >> for the same Q
they can charge a different price
Disadvantages of Large Firms:
- Allocative inefficiency
- Lack of competition >> higher prices, less innovations
- Lower output >> market power makes it possible to restrict output away
from allocative efficiency
- Loss of consumer surplus >> goes towards producer surplus
Monopoly Powers
= when a firm possesses over 25% of the total market share
Abuse of monopoly power = Anti-competitive practises
1. Charging very high prices, price discrimination
2. Reducing prices to a very low level (sometimes below production costs) >> price wars –
prevent new entrants and drive existing competitors out of industry
3. Putting pressure on suppliers so they don’t sell to competitors
- Degree of monopoly power:
o Monopolies – private, unregulated monopolies are illegal, natural monopolies have gov
permission
o Oligopolies – collusive oligopoly acts as 1 monopoly and is illegal
Advantages of Large Firms:
+ Economies of Scale (total costs will always increase at higher output levels while average costs
will be very small >> allows cheaper price for consumers in comparison to smaller firms)
+ Highly likely to make abnormal profits in the short & long run >> some of these can be
allocated towards research and development >> consumers benefit from new, innovative
products
Firms in the same industry also benefit from the new technologies >> positive externalities of
production
+ Increased employment
+ Contribute to national GDP
- Industry supply – positive relationship between P & Q
– the industry equilibrium is at the intersection of
MC/AR curves (S/D)
- There is NO supply curve as monopoly/oligopoly
determined
its output by MC = MR rule for profit maximisation.
They can charge different prices depending on the
position of the industry’s D curve >> for the same Q
they can charge a different price
Disadvantages of Large Firms:
- Allocative inefficiency
- Lack of competition >> higher prices, less innovations
- Lower output >> market power makes it possible to restrict output away
from allocative efficiency
- Loss of consumer surplus >> goes towards producer surplus
Monopoly Powers
= when a firm possesses over 25% of the total market share
Abuse of monopoly power = Anti-competitive practises
1. Charging very high prices, price discrimination
2. Reducing prices to a very low level (sometimes below production costs) >> price wars –
prevent new entrants and drive existing competitors out of industry
3. Putting pressure on suppliers so they don’t sell to competitors
- Degree of monopoly power:
o Monopolies – private, unregulated monopolies are illegal, natural monopolies have gov
permission
o Oligopolies – collusive oligopoly acts as 1 monopoly and is illegal
