GR 12 PRESENTATIONS IMPERFECT MARKETS

MICROECONOMICS GR 12 IMPERFECT MARKET - Monopoly - Oligopoly - Monopolistic competition

The monopoly is a market structure where there is only one supplier of a product or service Entry to the market is The monopolist The product is completely is the sole unique with no blocked(as a supplier and close result of therefore also substitutes patents, the industry exclusive rights)

CHARACTERISTICS OF A MONOPOLY Demand curve • Even though the monopolist is the only supplier, he competes with the disposable income of consumers • Normal demand curve with a negative slope exists Price/Level of production • Monopolist decides at which price and quantity he wants to produce • Monopolist is exposed to market forces. Faced with substitutes • Irrespective that the monopolist delivers a unique product or service, there is still the threat of substitutes, eg. cell phones vs landlines Enjoy favourable conditions • In certain geographical areas, suppliers of eg milk / raw material may enjoy an extraordinary advantage. • Laws may protect supplier eg the post office

Exploitation of consumers may occur • Monopolis can limit production levels and increase prices excessively. • Authority takes action against exploitation. Market information • Sellers and buyers have full knowledge of prevailing market conditions Market entry • Market entry may be completely blocked • Market entry is hindered by e.g. economies of scale, limited market size, exclusive ownership of raw materials, patents, licenses, exclusive rights Natural monopolies vs Artificial monopolies • Natural monopolies arise due to economic costs eg high set-up costs eg power supply, or the business is state owned • Artificial monopoly arises from non-economic barriers such as licenses, patents, which give a legal right eg mobile phone companies

Question 1 1.1 Answer the following questions. 1.1.1 Give TWO examples of variable costs. (2 x 1) (2) 1.1.2 What is the relationship between MC Curve and AC curve? (1 x 2) (2)

1.2 Study the graph below and answer the questions that follow. 1.2.1 Which curve represents the average revenue (AR) curve? (1) 1.2.2 How many firms dominate this type of market? (1) 1.2.3 Why does the marginal revenue (MR) curve lie below the demand curve? (2) 1.2.4 Why will the monopolist not be able to charge excessively high prices for his/her product? (2) 1.2.5 Redraw the graph above into the ANSWER BOOK. Indicate economic profit on your graph by inserting the average cost (AC) curve and marginal cost (MC) curve on the same set of axes. (4)

1.3 Read the extract below and answer the questions that follow. ESKOM 20% HIKE REQUEST LIKE PUSHING WATER UPHILL Eskom says its liquidity was drastically affected by the below inflation tariff increase of 2,2% for the 2018 financial year. The tariff increase of 5,23% for this year, as proposed by Nersa, will further affect the liquidity of the company. According to the chairperson, Eskom was pushing water uphill in asking for a 20% tariff hike. Tariffs are not necessarily the panacea wonder drug for all Eskom’s problems, however it’s not right to have an acrimonious relentless relationship with the energy regulator. [Source New Age, 31 January 2018] 1.3.1 Why is ESKOM regarded as a price maker? (1) 1.3.2 Who is the regulator for energy in South Africa? (1) 1.3.3 Briefly describe the term imperfect market. (2) 1.3.4 Briefly discuss the nature of the product offered by Eskom. (2) 1.3.5 Why, in contrast to a typical monopoly, does Eskom not realise a profit over the long run? (2 x 2) (4)

1.4 Distinguish between natural and artificial monopolies. (2 x 4) (8) Answer: 1.5 Evaluate the effects of monopolies on an economy. (8) Answer:

‘A market structure where An oligopoly the market is with only two dominated by a sellers is a few sellers duopoly Definition of an Producers small group of oligopoly: companies are that can team interdepend up to ent dominate the Identical price and level Differentiated of production products such products such in the market as: Steel, as: bread and airlines,Com cement mercial industries banks,

Oligopoly FEATURES: • A small number of large firms dominate the industry e.g. the bread industry • Products can be very similar like steel, but also differentiated like cars and newspapers • Businesses know their actions are being watched and reactions from competitors can follow their actions. • Products have near substitutes. • New producers can enter the market but there are barriers to entry. • Product differentiation exists - use methods to emphasize uniqueness. • Price competition can lead to price wars therefore oligopolists turn to non-price competition e.g. - advertising, internet sales, longer shopping hours, sponsorships.

Collusion in an oligopoly ● Under oligopolistic conditions, no business can be sure of the policy and actions of their competitors. ● To reduce this uncertainty, conspiracy on the next two ways between businesses: CARTEL PRICE LEADERSHIP • Open and formal together = • Formal collusion (cartel formation) is tensions between businesses with the normally prohibited. specific purpose of forming a collective monopoly. • This often leads to tacit cooperation. • Uncertainty between them is reduced • Price signals by market leaders by agreeing on the prices they will often form the core of price charge and the quantities to be produced. leadership. • The benefits of cartel formation are • Price followers often follow by higher profits, decisions about increasing their prices as well. production levels and it is more difficult for competitors to enter the market. • Occurs in e.g. steel and transport • • Most famous cartel is OPEC (Oil industry. Producing Exporting Countries)

Question 2 2.1 Answer the following questions. 2.1.1 Name TWO examples of collusion. (2 x 1) (2) 2.1.2 Why do businesses in an oligopolistic market collude with one another? (1 x 2) (2)

2.2 Study the information below and answer the questions that follow. 2.2.1 What is the nature of the service offered by the firms above? (1) 2.2.2 How is the shape of the demand curve of the oligopoly? (1) 2.2.3 Briefly describe the term oligopoly. (2) 2.2.4 What does it mean for Vodacom to be a dominant firm? (2) 2.2.5 How do oligopoly competitors benefit from collusion? (4)

The kinked curve of an oligopoly The story of two halves 1. Businesses always want to maximize profits and retain P Elastic portion of their market share. Price demand curve (D=AR) 2. Firms can lower or increase their prices. d D 3. Competitors can follow them or not respond. P2 4. A slight increase price can P1 B shrink their market share. d 5. Reduction in price may lead Inelastic to a price war. portion of 6. Firms prefer price stability demand curve 7. The kinked demand curve P3 (D=AR) does not explain how prices and production levels of D oligopolies are determined. AR=D 8. The kinked curve indicates the interdependence and uncertainty in oligopolistic markets. O q1 q2 q3 Q Quantity

1. Description of market structure: Monopolistic competition is a market structure with many buyers and sellers where entry is easy and differentiated products are sold. It is called a hybrid structure as it has qualities of both the monopoly and perfect market. 2. Businesses trading as monopolistic competitors and products that are traded: Household cleaning Surf, Sunlight Liquid, Handy Andy, Jik, Omo, Mr Muscle products Clothing shops Jet, Pep Stores, Woolworths, Sales House, Foschini, Mr Price Food Tastic rys, Koo, Huletts, Iwisa, Parmalat, Rhodes Fast Foods KFC, Chicken Licken, Steers, Wimpy, Nando’s, Spur Toothpaste Colgate, Aquafresh, Mentadent P, Sensodyne, Oral B

FEATURES/CHARACTERISTICS OF MONOPOLISTIC COMPETITOR ➔ Nature of the product Even though products satisfy the same need, they are not identical ➔ Sometimes differences are imaginary as only the name or packaging differ. eg. sugar ➔ Entry into the market Entry into the market is free and there are no barriers. ➔ Control over price Businesses have little control over the price of the products. ➔ Market Information Buyers and sellers have incomplete information about the market. ➔ Large number of differentiated businesses ◆ Demand and supply cuvres cannot be derived as a result of product differentiation. ◆ An equilibrium price for a single product cannot be determined. A particular range would be looked at, eg. a type of cooldrink ◆ The term industry refers to all the sellers of a differentiated products. ➔ It is often local ● Monopolistic competition is common in the services and retail sectors.eg. clothing stores, pharmacies, filling stations. ● Firms sometimes have monopolistic power due to location, better service and uniqueness of their product or service. ● The power is not very strong. ➔ Collusion ❖ There are many producers and therefore collusion is not possible. ❖ There are no agreements regarding price and production quantities. ❖

Non-price competition • Competition is based on product differentiation by means of advertising and good service rather than price. • Product differentiation increases the demand of the product and decreases the price elasticity of the demand curve. • Applies product differentiation eg. same product with different trademark. • Trade mark preference. • Awarding loyalty points.

2.3 Study the information below and answer the questions that follow. 2.3.1 Give ONE example of monopolistic competition in the information above. (1) 2.3.2 Identify ONE method in the information above that is used in nonprice competition. (1) 2.3.3 Briefly describe the term monopolistic competition. (2) 2.3.4 How does a monopolistic competitor differ from a perfect competitor in terms of market information? (2) 2.3.1 Give ONE example of monopolistic competition in the information above. (1) 2.3.2 Identify ONE method in the information above that is used in nonprice competition. (1) 2.3.3 Briefly describe the term monopolistic competition. (2) 2.3.4 How does a monopolistic competitor differ from a perfect competitor in terms of market information? (2) 2.3.5 Why do monopolistic competitors achieve only normal profit in the long run? (2 x 2) (4)

2.4 Explain, with the aid of a well-labelled graph, why the oligopolist will not compete on price to increase his/her market share. (8) 2.5 How could oligopolistic firms increase their success rate in non-price competition? (8)

Summary of Perfect Imperfect competition Market Structures competition Characteristics/ Monopoly Oligopoly Monopolistic Features competition Number of firms Large number of Only one seller and Small number of Large number of buyers and sellers. No many buyers. sellers and many buyers and sellers. influence on price from buyers either group. Nature of the Products are Product is unique Products are Products are product homogeneous/identical. with no close homogeneous or differentiated. There are no trade substitutes. differentiated. marks. Entry to market Free entry and exit Entry is blocked Ranges from free to Free entry and exit limited Market Buyers and sellers Sellers and buyers Incomplete Information for information have perfect have full knowledge information exists buyers and sellers information regarding of market between buyers and is incomplete current market conditions sellers conditions Control over price Buyers and sellers are Monopolist is a Oligopolists have a Businesses have price takers - no control price maker - prices reasonable amount little control over over price not set by market of control price of products forces

CONTINUED Perfect market Monopoly Oligopoly Monopolistic competition Demand curve Horizontal - perfectly Negative gradient- Kinked demand Negative gradient- elastic relatively inelastic curve - elastic and relatively elastic inelastic Economic profit Only in the short run Both short and Short run Short run long run Pareto / Allocative Efficient Efficient Efficient Efficient efficiency (Resources used efficiently) Production/Technlo Efficient Inefficient Inefficient Inefficient gical efficiency Examples International Eskom, DStv Petrol companies Fastfoods Commodity Market Cellphone service Clothing stores eg. gold, oil, JE providers