Monopolistic competition   Perfect competition   Oligopoly   Monopoly Market structures and efficiency    Different types market power

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1 Introductory concepts 2  Market mechanism  3 Elasticities  4 Market structures 5  Market failures  6  Macro economic activity/eco growth  7 Inflation 8  Employment & unemployment  9  External Stability  10  Income distribution 11.Factors affecting economy  12  Fiscal/Budgetary policy  13  Monetary Policy   14 Aggregate Supply Policies  15 The Policy Mix

Market structure and efficiency in the allocation of resources and living standards

As a market structure becomes more concentrated (i.e. less competitive), the efficiency in the allocation of resources is likely to fall, providing incentives for governments to promote competition and reduce the incidence of anti-competitive behavior.  Imagine what would happen if the market was highly concentrated, with one firm dominating the market, and the demand for a product increased?  In a competitive market, new suppliers would enter the market to meet the new demand.  In this respect, firms in a competitive market are 'price takers' as they are limited in their power to raise prices (because they will lose market share and profits).  However, with a monopoly, supply can be maintained at current levels (or even further restricted), forcing up the price, maximizing profit for the supplier (increasing the producer surplus) and reducing the benefits to the consumer (i.e. eroding the consumer surplus).  In this respect, the monopolist has what is regarded as 'market power' and is therefore a 'price maker.' It has the power to raise prices without compromising its market share (as it has a 100% share of the market) and/or level of sales.  Indeed, as discussed earlier, a monopolist with a low price elasticity of demand has incentive to raise prices because it will lead to higher total revenue and profits.  This is often considered to be an 'abuse of market power.'

 A monopoly will typically result in an under allocation of resources to the production of a product.  In addition, efficiency of production (e.g. productivity) may fall over time in the face of zero competition, as was the experience when Telstra was the sole supplier of telecommunications services in Australia.  This type of inefficiency is often referred to as X-inefficiency and occurs when there is little pressure for a firm to attain the 'best' production techniques or inputs, and they become complacent.

Accordingly, a highly concentrated market structure will tend to result in a misallocation of resources and a deterioration of average living standards of Australians as they will be forced to pay higher prices for goods and services.  In addition, a highly concentrated market structure leads to a more inequitable distribution of income over time, as a relatively small number of firms (and their owners) will reap the benefits of higher profits (super-normal profits) that stem from the erosion of consumer surpluses and the increase in producer surpluses.

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