Market Structures in the Long Run: Key Concepts

Introduction

• Market Performance: Focuses on business conduct, outcomes for consumers, businesses, governments, and stakeholders.
• Key features:
  • Real price levels for consumers.
  • Profitability of suppliers and monopoly profits.
  • Level of market innovation and R&D spending.
  • Efficiency indicators such as unit labor costs and labor productivity.
  • Environmental indicators like carbon intensity.

Economic Efficiency Types

• Allocative Efficiency: Prices relative to marginal cost of supply.
• Productive Efficiency: Average or unit cost of production.
• Dynamic Efficiency: Innovation pace, product quality, and choice.
• Social Efficiency: Consideration of externalities in market mechanism.

Market Structures

Perfect Competition

• Short Run: Firms may earn supernormal profits.
• Long Run: Entry of new firms shifts supply outward, normal profits achieved (P = AC).
• Efficiency:
  • Excellent for allocative and productive efficiency.
  • Less optimal for dynamic efficiency due to standardized products and limited innovation.

Monopolistic Competition

• Characteristics: Many firms, slightly differentiated products, no significant entry barriers.
• Short Run: Firms can earn supernormal profits (P > AC).
• Long Run: New firms enter, normal profits achieved where AR is tangent to AC.
• Efficiency:
  • Allocative efficiency not fully achieved (P > MC).
  • Potential loss of productive efficiency due to market saturation and inability to exploit economies of scale.
  • Good for choice and innovation.

Monopoly

• Types: Natural monopoly, pure monopoly, working monopoly in contested oligopolies.
• Short and Long Run: Use market power to sustain supernormal profits.
• Efficiency:
  • Higher prices and lower outputs than competitive markets (P > MC).
  • X inefficiency due to lack of competition, leading to higher average costs.
  • Debate on economies of scale vs. marginal cost pricing.

Contestable Markets

• Characteristics: Low entry/exit costs, threat of new entrants.
• Impact: Pricing and behavior influenced by both actual and potential competition.
• Efficiency:
  • Innovation is strong due to potential competition.
  • Moves market closer to efficient outcomes.

Oligopoly

• Example: Petrol retailing with large supermarkets in the UK.
• Models: Includes kinked demand curve, non-price competition.
• Dynamic Efficiency: Strong real competition benefits dynamic efficiency.

Summary

• Barriers to Entry: Crucial for long-term market structure.
  • High in monopoly/oligopoly, lower in monopolistic competition and contestable markets.
• Implications: Pricing power, long-term profitability, and economic efficiency impacted by entry barriers.

Final Notes

• Importance of revising each market structure individually.
• Check out YouTube channel for detailed topic videos on each market structure.
• Long-term market structure influenced by entry/exit barriers and competition dynamics.