Growth and power
Why do firms want to grow?
As they get larger they get stronger. They start to eliminate competition, and start to gain control of the market. They move from being a 'price taker' in a situation of perfect competition towards being a 'price setter' (or price maker) in a monopoly situation.
A price taker is a firm which cannot influence the price of the product on the market. If it puts its price above the one ruling in the market it sells little or none. Firms in perfect competition are price takers.
A price setter (or price maker) is a firm that can determine or fix the price of the product on the market. It sets the price, but the quantity sold is determined by the demand curve.
Firms start to develop monopoly power as they grow and increase their market share.
The power, or ability to influence a market, influence the survival of others, and establish the price. It enables it to increase profits.
Sources of monopoly power
One of the features of monopoly is that, unlike perfect competition, supernormal profits may be made in the long run. If there were free entry to the market this could not of course happen as the arrival of new firms would have the effect of shifting the market supply curve to the right and lowering the market price until the supernormal profits were eliminated. The existence of long run supernormal profits therefore implies the presence of barriers which prevent the entry of new firms into the industry. Indeed the basis of monopoly power is the ability to prevent entry of new firms. So what are the barriers to entry that exist? They may include:
- Legal restrictions
- Capital costs
- Limited sources of supply
- Agreements between producers to limit competition
- Non-price competition as a barrier to entry
- Tariffs and quotas
For more detail on any of these, follow the links.
Examples - web links
It is worth being aware of recent examples of monopoly and oligopoly and government policy towards them. The best bet is probably to do a search in the Biz/ed In the News archive. You can do this in the window below:
Try searching on terms like:
- Economies of scale
N.B. When you are searching on more than one word, it is best to check the 'match exact phrase' box.