Sellers are interdependant, engaging in strategic behaviour
E.g. supermarkets (Coles, Woolworths, IGA,, Aldi) and telcos.
Monopolistic Competition
Many firms
Differentiated products with close substitutes
Low barriers to entry
Information is imperfect
Firms are price Setters
E.g. phones and computers
Barriers to Entry
Economies of scale: permitting lower average costs to be achieved as the firm increases its size
As a result, a large firm can charge a lower price than a smaller firm
This forces smaller firms out of the market, and is $\therefore$ a barrier to entry
Branding: creation by a firm of a unique image and name of a product
Advertising campaigns that try to influence consumer tastes in favour of the product
Does not lead to monopolies, methods used by oligopoly and monopolistic competition, e.g. crapple.
Legal Barriers
Patents: rights given by the government to a firm that has developed a new product or invention to be its sole producer for a specified period of time
They will have a monopoly during this time
Licenses: granted by governments for particular professions or industries
Does not necesserily lead to monopoly, but may prevent competition
Radio, TV.
Copyright: Guarantee that an author has the sole rights to print, publish and sell copyrighted work
Public franchises: granted by the government to a firm which is to produce or supply a particular good or service
Tariffs, quotas and other trade restrictions: limit the quantities of a good that can be imported into a country
Control of essential resources: monopolies can arise from ownership or control of an essential resource
De Beers (diamonds)
Aggressive tactics: when existing firms use tactics to discourage new firms from entering the market
Anti-competitive behaviour
Agreements or arrangements between firms that seek to restrain competition and remove the automatic regulation that competitive markets achieve
Outline the characteristics of an imperfectly competitive market
Explain the concept and causes of market power
A firm has market power if it is able to affect the market price by varying output
Firms in an imperfect market have market power as they are able to do so
E.g. monopolies and oligopolies
Applies not only to a monopoly, but also to oligopoly. Oligopolistic firms sometimes act together (or collude), usually illegally, to acquire monopoly power
Caused by their characteristic barriers to entry
Explain how market power can influence market efficiency, i.e. a deadweight loss
Discuss the policy options to influence market power, including regulation/legislation
Regulation
There is a DWL due to underproduction.
If there is a natural monopoly, it is not in society's interest to break it up into smaller firms
This would result in higher firms
Governments usually regulate natural monopolies to ensure more desirable price and quantity outcomes
Governments also control who enters the market
Deregulation
Government regulations that restrict competition include
Limiting the number of businesses
Limiting ability to compete
Reduce the incentives for businesses to compete
Limiting the choice and information available to consumers
These can be deregulated to increase competition
Legislation
Put in place to limit anti-competitive behaviours to achieve a greater degree of allocative efficiency
ACCC aims to protect, strengthen and supplement the way competition works in Australian markets and industries
They enfore the competition and consumer act 2010 and other legislation prommoting competition and fair trading