Market Power

Types of Markets

Few large firms
Goods are close substitutes
Barriers to entry exist
Sellers are interdependent - Engages in strategic behaviour
E.g. Supermarkets (Coles, Woolworths, IGA, Aldi), Telecommunication (Telstra, Optus, Vodaphone)

Economies of Scale: Permitting lower average costs to be achieved as the firm increases in size
- Average total costs of a large firm are substantially lower than the average costs faced by a smaller firm
- Large firms can charge a lower price than the smaller firm, and force the smaller firm into a situation where it will not be able to cover its costs
Branding: Creation by a firm of a unique image and name of a product
- Advertising campaigns that try to influence consumer tastes in flavour of the product, attempting to establish consumer loyalty
- Does not lead to monopolies, methods used by oligopoly and monopolistic competition
- E.g. Apple Products
Control of Essential Resources: Monopolies can arise from ownership or control of an essential resource
- E.g. DeBeers, the South African diamond firm
Aggressive Tactics: When existing firms use tactics to discourage new firms from entering the market

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 e.g. patents on new pharmaceutical products
Licenses: Granted by governments for particular professions or particular industries
- Do not lead to monopoly buy limit competition
- E.g. license may be required to operate a radio or television show
Copyrights: 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 of service
Tariffs, Quotas and other trade restrictions: Limit the quantities of a good that can be imported into the country, thus reducing competition.

Agreements or arrangements between firms that seek to restrain competition and remove the automatic regulation that competitive markets achieve.

A firm has market power if it is able to affect the market price by varying output
Firms is an imperfect market have market power as they are able to do so
- E.g. Monopoly, Oligopoly
- Applies not only monopoly, but also to oligopoly.
Caused by their characteristics and barrier to entry

If there is a natural monopoly, it is not in society’s interest to break it up into smaller firms, as this would result in higher average costs and would be inefficient.
Government usually regulate natural monopolies, to ensure more socaillt desirable price and quantity outcomes.
Government also control who enters the market.

Government regulations that restrict competition include
- Limiting the number or types of business
- Limiting the ability of business to compete
- Reduce the incentives for business to compete
- Limiting the choice and information available to consumers
Some government regulations need to be de-regulated to enhance competition

Legislation: Put in place to limit anti-competitive behaviour to achieve a greater degree of allocative efficiency
ACCC (Australian Competition and Consumer Commission): Aims to protect, strengthen and supplement the way competition works in Australian markets and industries
- They enforce the competition and consumer act 2010 and other legislation promoting competition and fair trading