Key AS Micro Terms: Competition and Monopoly

Here is a selection of key terms connected to competition and monopoly. We have also linked to some recent blog articles on these concepts.

Competitive market: A competitive market is one where no single firm has a dominant position and where the consumer has plenty of choice when buying goods or services. There are few barriers to the entry of new firms which allows new businesses to enter the market if they believe they can make sufficient profits.

Anti-competitive behaviour: Anti-competitive practices are strategies operated by firms that are deliberately behaviour designed to limit the degree of competition inside a market. Such actions can be taken by one firm in isolation or a number of firms engaged in some form of explicit or implicit collusion. Where firms are found to be colluding on price it could be seen to be against the public interest.

Horizontal integration: Where two firms join at the same stage of production in one industry. For example two car manufacturers may decide to merge, or a leading bank successfully takes-over another bank

Cartel: A cartel is a formal agreement among firms. Cartels usually occur in an oligopolistic industry. Cartel members may agree on such matters as price fixing, total industry output, market shares, allocation of customers, allocation of territories, bid rigging, establishment of common sales agencies, and the division of profits or combination of these. Cartels are illegal under UK and European competition laws.

Local monopoly: A monopoly limited to a specific geographical area

Market power: Market power refers to the ability of a firm to influence or control the terms and condition on which goods are bought and sold. Monopolies can influence price by varying their output because consumers have limited choice of rival products.

Monopoly: A pure monopolist is a single seller of a product in a given market or industry. This means the firm has a market share of 100%. The working definition of a monopolistic market relates to any firm with greater than 25% of the industries’ total sales

Monopsony: A situation in a market where the buyer has power or leverage against the seller. Typically this happens when the buyer is purchasing a large volume of a product relative to total sales. They may be able to use their buying power to drive down the price paid or to negotiate other favourable conditions with the producer.

Natural monopoly: A market situation in which economies of scale are such that a single firm of efficient size is able to supply the entire market demand

Oligopoly: An oligopoly is a market dominated by a few large suppliers. The degree of market concentration is high with typically the leading five firms taking over sixty per cent of total market sales

Profits: Profits are made when total revenue exceeds total cost. Total profit = total revenue - total cost. Profit per unit supplied = price = average total cost. The standard assumption is that private sector businesses seek to make the highest profit possible from operating in a market

State monopoly: A monopoly that is owned and managed by a government - also known as a nationalised industry