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Wednesday April 23rd 2014

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Marketing – Economic Definitions

Monopoly

  • A single company (or group) owns all (or nearly all) of the market for a given type of product or service
  • Anti-trust laws are designed to prevent anticompetitive practice & so they try to prevent monopolistic control (and price fixing…)
  • Sometimes a monopoly is “allowed” eg government control of an industry (utilities, state airlines)
  • Patents in effect create a monopoly by reserving the market for the patent holder for a time.

 

Why not have Monopoly?

  • Prices high – controlled by one company
  • Can increase prices and not reduce demand
  • Difficult to enter so lack of competition
  • Innovation stagnation
  • Inefficient production
  • Consumers suffer

Note: A “buyers monopoly” or “monopsony/oligopsony” is where major buyer(s) controls a large portion of the market and depress prices to detriment of seller (supermarket milk?)


Oligopoly

  • Where a particular market is controlled by a small number of companies
  • Must have at least 2 companies
  • Duopoly is a special case where exactly two companies control all the market

 

Perfect Competition

Is a market where:

  • All companies sell a near-identical product.
  • All firms are price takers.
  • All firms have a relatively small market share.
  • Buyers know the nature of the product being sold and the prices charged by each firm.
  • There is freedom of entry and exit into the market

 


Price Elasticity (of Demand)

Price Elasticity is how responsive Demand is to Price:

  • Elastic if: (% change in demand)/(% change in price) > 1
  • Inelastic if: (% change in demand)/(% change in price) < 1
  • Usually negative, but sign ignored
  • Usually not linear – so value is only true over a small range

 

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