Welcome to our special revision webinar on Market structures in the long run so when we're thinking about market performance we we tend to focus on on several key aspects performance of course relates to the actual conduct and behavior of businesses what are the outcomes for both consumers for businesses for governments and for other stakeholders so here are some key features of market performance we we focus for example initially on the trend in the real price level for consumers how many people can afford to buy the product over time time we look for example at the profitability of suppliers in the market is there evidence perhaps of excess Monopoly profit being made we also look in the dynamic sense at how much Innovation there is at The Cutting Edge how much spending businesses are putting into the market on research and development we focus on efficiency issues such as unit labor costs and Trend changes in labor productivity and of course increasingly we have a view on environmental indicators are businesses in the market making progress in cutting for example the carbon intensity of the of the output The crucial question when we think about Market structures I think from an exam point of view is whether the actual conduct the actual behavior of businesses gives rise to efficient outcomes and here we can think about four particular types of efficiency allocative efficiency prices for example relative to the marginal cost of Supply productive efficiency what's happening to the average or the unit cost of production both in the short and the long run Dynamic efficiency is also important the pace of innovation the quality of product performance the range of choice and increasingly of course social efficiency to what extent is the market mechanism taking into account externality effects there are different types of efficiency uh if you're interested in revising these things at this moment there are separate topics on each on our YouTube channel but maybe press the pause button and drop down some key definitions here so it's important in aable economics answers on Market Market structures to bring in to bring in the concept of economic efficiency in different different ways we'll come back to these uh in each of these little sections of this video so perect competition at one extreme of the market structures here's the short run diagram necessarily a short diagram of a firm that's making super normal returns in the short run equilibrium the market price is P1 and that price is sufficient for the firm at output q1 on the right hand side to make it super Al return but of course we're focusing in this session on Long Run in Market structures and in the long run then what tends to happen if firms are making super normal profits is that new firms come into the market that causes an outward shift of market supply the market price tends to fall until a new equilibrium is reached at normal profit where price equals average cost and that's an output Q2 in our diagram here now this equilibrium is is just enough allows firms to make just enough profit to keep resources in their current use and that tends to be the Fairly static idea of equilibrium in a perfectly competitive market if we think about economic efficiency in this industry then perfect competition is excellent for allocative efficiency the price equals the marginal cost in short and long run uh we achieve a par Optimum allocation of resources it's also very good for productive efficiency because at the output Q2 output is supplied at minimum average cost um firms at the lowest point of their average cost curve so they're X efficient but perfect competition is not necessarily as good as other Market structures for dynamic efficiency we assume the the products suppli to the market are homogeneous they're standardized and that means there's relatively little scope for Innovation which one firm can benefit from without other firms immediately getting the spillover effects so PIV competition is ex excellent outstanding for Al itive and productive efficiency less so for dynamic monopolistic competition is a close close neighbor of perfect competition here we have many many firms no barriers to entry of any significance but each firm in this case is producing a slightly differentiated product or service so typically you know many many dry cleaners or War DRS or hairdressing salons in a particular Town offering a differentiated product in some sense now in an opposite competition firms can earn any level of profit in the short run in this case our firm is operating an output q1 and is making super normal profits because the price is greater than average cost but we're focusing in this session on the long run and in the long run equilibrium new products new firms come into the market if supern normal profits are being made so the long run equilibrium tends to be here where the average revenue curve drawn is highly elastic reflecting the large number of closed substitutes in the market where the average revenue is tangential to average cost at output level Q2 and price P2 price equals average cost and only normal profits are being made now what does this mean for economic efficiency well in in monopolis competition we don't get allocative efficiency as we go back to our diagram here price P2 is still above the marginal cost of Supply so it's not allocatively efficient but it's not it's not far off and the number of close substitutes mean that pricing power of firms is limited however the crucial point I think from a point of view of efficiency is productive efficiency okay let's go back to the diagram Q2 is not at the minimum point of average cost and indeed the saturation of the market with many many different types of similar products might lead to businesses being unable to fully exploit the available EC comms of scale therefore there might be a loss of productive efficiency and in this market there's also a parallel criticism that firms spend heavily on advertising and marketing and packaging packaging and some people argue that's both wasteful from an environmental sense excessive packaging and also not good from a point of view of sort of making full use of scarce resources particularly if advertising effects tend to cancel each other out however monopo competition can be quite good news for choice there's a lot of choice in the market each firm selling differentiated products and it may also be quite good news for innovation in terms of cons businesses trying to innovate at the margin to make their product slightly better slightly more sustainable uh than a rival product so Dynamic efficiency could be better than imperfect competition Monopoly of course is at the Other Extreme of the market structure Spectrum but there are different types of Monopoly so you can have a natural monopoly or pure Monopoly uh London Underground is close to a pure Monopoly but faces obviously competition from other forms of Transport Tesco the supermarket industry is effectively a working Monopoly but it's also essentially operating with within an increasingly contestable oligopoly likewise Costa a coffee retailer lots of thousands of small coffee retailers but some big big national players as well and Pepsi and Coca-Cola depending depending on how I Define the market essentially operating as two significant duopolists now the Monopoly diagram in the short run is essentially the same as the Monopoly diagram in the long run although in the long run you can also bring in Ecom of scale so with Monopoly typically we assume that monopolis able to use their Market power to earn big supern normal returns shown in this diagram average revenue is higher than average cost and price is greater than marginal cost as well of course in the long run a monopoly is able to use barriers to entry we have a separate topic video on that on YouTube to sustain their supernormal profits into the long term the economic case against Monopoly typically is that prices are higher and output is lower than the competitive market the left hand side here we see perly competitive market in the long run with the ENT of new firms driving the price to P1 whereas a monopoly barriers to entry effectively preclude the entry of new products and the price can stare to high level P2 and of course that LE that results in a loss of efficiency so there's our supernormal profit for Monopoly but price is well above marginal cost and as a result you lose efficiency there's also an ADD potential efficiency loss as a result of of of X inefficiency relatively few students are taught this but it's an important idea that if you have the absence of effective competition daytoday in the market then firms often allow their costs to drift higher because they don't necessarily face the stringent discipline of intense day-to-day competition so they could be a degree of what's called managerial slack that businesses allow their expense accounts to get out of control or they try productivity suffers and X inefficiency means that the actual average cost of production for monopolist is higher than on their average cost boundary there's a loss of productive efficiency there the big debate in Monopoly of course is the extent to which monopolies achieve economies of scale and one of the uh one of the aspects of this is the out of a natural monopoly natural monopoly has falling long run average costs across the entire range of outp marginal cost lies below average cost again we have a separate topic video on this on our YouTube channel but if you if you're a profit maximizing business you can make a profit at Price P1 and make a super normal profit but if you're forced to price at marginal cost on the right hand side of the diagram here particularly if if you're a nationalized industry then if you're forced to price at marginal cost you're going to make a loss so there's a potential trade-off here between profitability and efficiency big debate at at the moment of course about the the rise and Rise of the so-called digital platforms be Googling web search uh WhatsApp in messaging Amazon and e-commerce Uber Airbnb Netflix those kind of businesses many weren't even businesses 10 15 years ago it's almost now they're becoming markets and industries in their own right and there's a question about whether they their power their scale their rapid scale of the business is turning them into natural monopolies what are the consequences for example of these businesses for economic welfare as well as for social welfare these are important issues for the competition authorities to to think about so here's a quick overview so we think about Monopoly we've talked about perfect competition and Monopoly competition of course another aspect of Market structures is contestable markets I think this is quite an important contrast to make so in a contestable market any number of firms is possible in fact the number of firms is not the most important characteristic of a contestable market The crucial characteristic is that the entry and exit costs are low barriers to entry are low and this means there's always the threat of new firms coming into the market which will impact on the behavior of existing firms and the performance of the market so where it's a monopoly may have pricing power because of barriers to entry in a contestable market the price that's charged is affected by both actual competition and crucially potential competition we find is that although Monopoly tends to lead to less economic efficiency although good for dynamic uh contestability should help move a market closer towards efficient outcomes innovation in both tens of markets tends to be quite strong so a monopoly Innovation is a way of creating and sustaining barriers to entry using profits for example to to to fund R&D whereas in a contestable market innov Innovation tends to be very strong because you have those kind of creatively disruptive technologies that are especially of new businesses looking to break into the market with a different product or a different pricing model oligopoly of course is a an important Market structure here's a good example essentially oligopolistic market and petrol retailing in the UK notice how the four big supermarkets in in Britain have made substantial progress so four of the top seven petrol retailers are now supermarkets and in oligopoly there are various model including collusion and this is the king demand curve diagram the king demand curve model again we have a separate topic video on this on YouTube so we won't go through the entire model now the king demand curve analysis predicts that you may end up anchored at a relatively sticky price in the market once firms have anchored their price and then nonprice competition becomes a really important part of the dynamic in the long run in the market so businesses looking to invest looking to research uh engage in research development and other forms of nonprice competition really quite significant you can make a case for saying actually that an a contestable oligopoly is perhaps best from the point of view of dynamic efficiency because of that strength of real competition between scale businesses here's a quick summary of imperfect competition the number of firms the types of products crucially from a long run perspective the barriers to entry are really important so barish G tend to be quite high in Monopoly and oligopoly they're much lower in the case of monopo competition and highly contestable markets now the barriers to entry dictate in a sense the pricing power obviously Regulators can get involved as well but when barriers to entry are high pricing power is strong and of course the pricing power and barriers to barriers to entry then dictate affects the rate of profit in the long run and this of course then has complications implications for economic efficiency so there we go this has been a quick look at Market structures in the long run it's important to revise each in turn we have separate topic videos on all of them on our YouTube channel so check those out just search in our channel for the relevant Market structure and you'll find some some individual revision topics the key is that the long run is really driven determined by the barriers to entry and exit of the market and the extent to which there is flux constant change uh between competing businesses okay thank you I hope you found that useful and I look forward to joining you again sometime soon