Добавил:
ivanov666
Опубликованный материал нарушает ваши авторские права? Сообщите нам.
Вуз:
Предмет:
Файл:Competition theory. Учебное пособие.pdf
Indicators of a monopoly
E
P
MCP
I
m
m
L
1
=
−
=
P
AC
P
I
l
−
=
TRPQ
QACP
I
L
π
=
−=)(
With regard to the idea that a monopolistic power is the
value negatively related to the elasticity of the product demand,
A. Lerner suggested a special index (1934). This index is as
follows:
, (2.6)
Where IL — Lerner’s index of the monopoly power;
Pm — the monopoly price;
MC — marginal costs;
Е — the elasticity of the product demand.
Under the conditions of perfect competition, MS = P.
Therefore, IL=0. If IL has a positive value (IL> 0), it means
that the firm has a monopoly power. The higher is this indicator, the higher is the monopoly power.
It is difficult, however, to calculate this indicator because
of the difficulty of calculation of real marginal costs. There-
fore, in practice, marginal costs are replaced by the average
value. In this case, the original formula can be written down:
(2.7)
If we multiply the numerator and the denominator by Q,
the numerator will represent the profit, and the denominator
will show the aggregate (gross) income:
(2.8)
51
Thereby, Lerner's indicator treats high profits as a sign of
22
3
2
2
2
1 nHH
SSSSI ++++=
monopoly. It is true, but to a certain extent; there are cases
when high profit margins can’t be undoubtedly regarded as a
sign of monopoly. It happens when the difference between the
accounting income and the economic profit is great, to be more
exact — it happens when we don’t take into account the equity
expenses (especially in capital-intensive industries), additional
financial reward for a successful businessman entrepreneurial
flair, or high-risk transactions.
To characterize the monopoly power, one can also use
the indicator defining the degree of the market concentration. It
is called the Herfindal-Hirshman index (IHH), thus bearing the
names of the scientists who introduced it. Its calculation re-
quires information about the share of the firm’s products in the
market. It is believed that the more is the share of the firm’s
products in a certain industry, the higher are the chances for a
monopoly to appear. All the firms in a certain market segment
can be presented on the product share scale that begins with the
firm with the greatest m arket share and finishes with the one
with the smallest part:
, (2.9)
where IHH — Herfindal-Hirshman;
S1 — the product share of the largest company;
S2 — the product share of the second largest company;
S
the product share of the smallest company.
3 —
If the industry is represented by only one firm function-
ing in it (the case of net monopoly), S1 =100 %, and
IHH = 10000.
If there are 100 identical firms in the industry, S1=1 %,
and IHH=Si×100=100.
In the USA, the industry which has the HerfindalHirshman index exceeding 1800 is considered highly-
52
monopolized. This index is widely used in the antimonopoly
practice. However, it is necessary to remember that it is not one
hundred percent informative if we don’t take into consideration
foreign firms’ product share in the national market.
Oligopoly
Oligopoly is a type of market structure where only a few
sellers dominate, and new producers’ entry to the industry is
limited by special barriers.
Characteristic features. The first characteristic feature of
an oligopoly is a small number of firms in the industry. Their
number does not usually exceed ten. A situation like this hap-
pened, for example, in the American steel industry producing
unprocessed lead, copper, glass, plastic products, etc. The
highest concentration can be observed in the automotive industry of the USA: the share of over 95 % of the national production of cars was in possession of only three companies ("Gen-
eral Motors", "Ford", and "Chrysler") in the 1980s. It is possi-
ble to give examples of a few more segments of the processing
industry of the USA (production of home refrigerators, vacuum
cleaners, washing machines, electric bulbs, postcards, tele-
phones, etc.) that are characterized by a high concentration of
production shared by just a few firms.
However, we have to note that these data, as well as any
other statistics, have certain shortcomings. They can exaggerate the state of affairs as they do not take into account the fact
of foreign and cross-industry competition, neither they consider
competition on the part of suppliers. They can underestimate
the situation as the concentration degree is assessed on a national scale, rather than with regard to regions or certain cities
where there are two or three local companies dominating in the
markets of some goods and services (the production of bricks,
concrete, perishable foodstuff, etc.). Besides, alongside classi-
53
cal (tough) oligopoly in which a major role is played by three
or four firms, there can also be singled out a soft (amorphous)
oligopoly suggesting the main share of products being supplied
by six or eight firms.
Oligopolistic situations can arise in industries making
both standard goods (aluminum, copper, etc.) and differentiated
products (automobiles, laundry detergents, cigarettes, house-
hold devices, etc.).
The second characteristic feature of an oligopoly is stiff
barriers against entering the market. First of all, they have to do
with a economy of scale that acts as the most important reason
of a large-scale distribution and long functioning of oligopolistic structures.
Scale effect is an important reason, but it is not the only
one as the concentration degree in many industries exceeds an
adequate effective level. Oligopolistic concentration is a result
of some other barriers against new companies’ entry to the in-
dustry. It can be related to the patent monopoly as it happens in
knowledge-intensive industries controlled by such firms as
"Copier", "Kodak", IBM, etc. Throughout a whole validity pe-
riod of the patent, the firm is reliably protected against internal
competition.
Other reasons are as follows: a monopoly controlling rare
sources of raw materials, incredibly high advertizing expenses
(cigarettes, soft drinks, show business). There are also some
other barriers that have been either naturally developed or arti-
ficially made. Barriers are different in reliability. Though there
are no barriers that are impossible to overcome, still new ones
are constantly introduced.
The third characteristic feature of oligopoly is an abso-
lute (total) interdependence. Oligopoly arises when the number
of firms in the industry is so small that each of them when
forming an economic policy is forced to take into account the
reaction of its competitors. Just like a chess player who has to
54
keep in mind all possible moves of the opponent, an oligopolist
has to be ready for different (quite often alternative) ways of
the development of market situations as a result of its competi-
tors’ different actions.
The total interdependence is also observable in the case
of the competitive struggle aggravation as well as under the
conditions of an agreement with other oligopolists, which re-
sults in a possibility to transform the industry into the one of an
absolutely monopolistic character.
Forms of firms’ behaviour. Under the conditions of oli-
gopolistic structures, two main forms of firms’ operation are possible: non-cooperative (implying the use of its own independent
competitive strategy) and cooperative (implying coordination of
the actions). As a result, in the first case, we can have an oligopo-
listic pricing war, in the second — secret collusion.
Pricing wars. In the case of noncooperative behavior, each
seller solves the problem of price fixation as well as that of the
production amount independently. The price is used as an element
of an aggressive market strategy and the market parameters start
resembling the conditions of perfect competition. If firms think
that a decrease in prices will help them to drive the competitor out
of the market, it results in pricing wars between them. A pricing
war is a cycle of gradual decrease in the existing price level for
the purpose of squeezing competitors from an oligopolistic
market. A decrease in prices, however, has its boundaries (the
price isn’t lower than the losses).
55
MC
P
Q
MC
D
ATC
MR
Q0 A
B
P0
N
0
With
Figure 2.11. Profit maximization
in the case of secret collusion
Consumers benefit as a result pricing wars, while pro-
ducers lose. However, pricing wars are transient and happen
quite seldom today. A competitive struggle of firms with each
other often results in an agreement considering possible actions
of the other producers.
Secret collusion
Secret collusion is a secret agreement on prices, market
sharing and other methods of competition restriction (blocking)
that are punishable by law.
If the participants of some collusion has come to a stable
agreement, an oligopoly degenerates into a net monopoly, and
all the demand curves combine and form just the only one. The
sales volume is marked by the B point, where MR=MC. This
point is projected onto the D curve, i.e. the A point (Fig-
56
ure 2.11) helps to define the monopoly price P0 and economic
profit (P0ACN square).
However, secret collusions cannot be stable for a long
time. Both the monopoly price and high profit attract new pro-
ducers to this industry, which aggravates the competition. The
higher is the number of the participants, the more difficult it is
for them to come to an agreement. As the production develops
and the market is saturated, the differences in both the demand
and the collusion participants’ costs of production are getting
higher and higher. Those who have managed to reduce their
costs and to increase demand, make the competitors envious, as
these competitors think that they have been twisted around
their little finger. The producers’ objective differentiation is
accompanied by the subjective factor — fraud. As it sometimes
happens, secrete sales take place on some favorable terms ne-
glecting the agreement. All these phenomena are especially
popular during some decline in production when everyone
wants to survive at the expense of other producers. In this case,
there has to be used another factor protecting the agents against
secrete collusions — anti-trust legislation.
Therefore, in our modern world, what happens oftener is
not a legal contract (cartel), but rather an implicit agreement
(price leadership).
Monopolistic competition
The model and the concept "monopolistic competition"
appeared after the introduction of E. Chamberlin's book "The
theory of monopolistic competition" (1933). However, today’s
idea of monopolistic competition is somewhat different from
the one provided by E. Chamberlin. The only thing that stays
the same is that monopolistic competition represents a certain
combination of the characteristics of both monopoly and com-
petition.
57
Causal Factors. Monopolistic competition arises when
dozens of firms do business in a market where no form of se-
cret collusion between them is possible. Each firm takes certain
risks when it establishes its own price policy. It is practically
impossible to predict and monitor the actions of all the other
participants of the competition.
Monopolistic competition appears when the product differ-
entiation is needed; producers have to pay more attention to public tastes so as to sale their products. Monopolistic competition is
very common in industries supplying commodities. One can think
of numerous examples of such commodities with regard to light
industry, food manufacturing, service industry: dresses, suits,
coats, fur goods, assorted chocolates, cafes, theaters, variety
shows, etc. Product differentiation can be based not only on the
differences in goods quality, but also on those services that are
related to its service. Attractive packaging, more convenient shop
location and working hours, better service, an availability of discounts and special offers can serve as a reason for a buyer’s
choice. It is typically the case in small shops, hairdressing salons,
dry-cleaners’, petrol filling stations, etc.
In the case of goods differentiation, it is difficult to find
two firms that would make the same product or service. The
boundaries of the industry become unclear and the branch as a
separate segment disappears, as a result of which what we have
is somewhat like a continuum of products and services.
It’s not only the price that becomes of primary im-
portance, but also non-monetary factors: advertising, sales
terms, a possibility to buy goods by installment, an availability
or non-availability of after-shop warranties, etc.
Monopolistic competition suggests that there should be
no high barriers against entering the industry. The scale effect
is not of great importance, and the money that is required to
start up a business is not big, as a rule.
58
An easy entry to the industry does not mean that there are
P
0
M
Dm N
Pm
AC
Dc
Q
no entrance barriers at all. These barriers include patents for
products, licenses, manufacturing marks or trademarks. However, unlike net monopoly, patents have no exclusive character
as goods-substitutes can be patented (licensed).
Price setting and production volume determination. In
the case of perfect competition, the demand curve (Dc) is parallel to the abscissa axis, while in the case of monopolistic com-
petition, it has a small angle of slope (Figure 2.12).
It means that the demand curve is less elastic, than the
one under the conditions of perfect competition, but is more
elastic than in the case of net monopoly. Elasticity degree un-
der the conditions of monopolistic competition depends both
on the number of competitors, and on the extent of product
(services) differentiation.
Thus, the product differentiation influences the price differentiation. The consumer who is used to buying these or
those goods or services, will hardly refuse to buy them imme-
diately even in the case of some increase in price.
Pc
↑
Qm Qc
Figure 2.12. Monopolistic competition
59
The negative angle of the demand curve means that less
product is produced in comparison with the case of monopolistic competition. While at a perfectly competitive market, the
product Qc is supplied at a price of Pc, at a monopolistic market — Qm is supplied at a price of Pm.
In the short run, firms can both gain profit, and suffer
losses. However, a lack of high barriers against entering the
industry where firms enjoy sustainable economic profit results
in other entrepreneurs’ being attracted by these favourable
conditions. As a result, what we have is a long period situation
similar to perfect competition: there is neither profit, nor losses
(the economic profit is equal to zero).
Thus, under the conditions of monopolistic competition,
the production volume of the firm is less than that in the case
of perfect competition. As for the average total costs and the
price, they are higher, as a rule.
Non-price competition. An important role in the product
differentiation is played by non-price competition. The con-
sumer is interested in purchasing goods that will cause no trouble while being consumed. If the refrigerator purchased con-
stantly breaks, the TV-set does not provide a qualitative screen
picture, and the audio system does not produce a clear sound,
the problem of warranty repairs turns out to be of paramount
importance. An availability of these services is as important as
lower prices.
Constant scientific progress facilitates a constant increase
in the number of goods and services supplied. An important
role in their introduction to the market is played by advertising
that is an essential instrument of non-price competition. Advertising tries to adjust the consumer demand to a new product.
The firm is interested in advertising as it enables an increase in
demand and promotes a decrease in price demand elasticity.
Advertising adherents state the necessary of advertising
as it makes the product change for the better, strengthens com-
60