A regulatory agency ( regulatory body , regulator ) or independent agency ( independent regulatory agency ) is a government authority that is responsible for exercising autonomous dominion over some area of human activity in a licensing and regulating capacity.
68-612: These are customarily set up to strengthen safety and standards, and/or to protect consumers in markets where there is a lack of effective competition . Examples of regulatory agencies that enforce standards include the Food and Drug Administration in the United States and the Medicines and Healthcare products Regulatory Agency in the United Kingdom ; and, in the case of economic regulation ,
136-411: A license to operate from the sector regulator. This license will set out the conditions by which the companies or organizations operating within the industry must abide. Regulatory regimes vary by country and industry. In the most light-touch forms of regulation, regulatory agencies are typically charged with overseeing a defined industry. Usually they will have two general tasks: In the event that
204-593: A downward sloping demand, and the industry is often characterized by extensive non-price competition. The oligopoly considers price cuts to be a dangerous strategy. Businesses depend on each other. Under this market structure, the differentiation of products may or may not exist. The product they sell may or may not be differentiated and there are barriers to entry: natural, cost, market size or dissuasive strategies. In an oligopoly, barriers to market entry and exit are high. The major barriers are: A special type of Oligopoly, where two firms have exclusive power and control in
272-497: A downward-sloping demand curve and as a result, price increases lead to a lower quantity demanded. The decrease in supply creates an economic deadweight loss (DWL) and a decline in consumer surplus. This is viewed as socially undesirable and has implications for welfare and resource allocation as larger firms with high markups negatively effect labour markets by providing lower wages. Perfectly competitive markets do not exhibit such issues as firms set prices that reflect costs, which
340-466: A firm can raise its price above marginal cost depends on the shape of the demand curve at a firm's profit maximising level of output. Consequently, the relationship between market power and the price elasticity of demand (PED) can be summarised by the equation: The ratio P / M C {\displaystyle P/MC} is always greater than 1 and the higher the P / M C {\displaystyle P/MC} ratio,
408-427: A firm has unfairly manipulated the market in their favour, or to the detriment of entrants. The Sherman Antitrust Act of 1890 under section 2 restricts firms from engaging in anticompetitive conduct by utilising an individual firm's power to manipulate the market or partake in anticompetitive acts. A firm can be found in breach of the act if they have leveraged their market power to unfairly gain further market power in
476-459: A higher price (P) above its marginal cost (C), commonly referred to as a firm's mark-up or margin. The higher a firm's mark-up, the larger the magnitude of power. This said, markups are complicated to measure as they are reliant on a firm's marginal costs and as a result, concentration ratios are the more common measures as they require only publicly accessible revenue data. Market concentration , also referred to as industry concentration, refers to
544-420: A large production scale and capture a significant market share, the high average costs will make it impossible for them to compete with the existing firms. Generally, when a firm operating in an oligopolistic market adjusts prices, other firms in the industry will be directly impacted. The graph below depicts the kinked demand curve hypothesis which was proposed by Paul Sweezy who was an American economist. It
612-469: A manner that is detrimental to the market and consumers. The measurement of market power is key in determining a breach of the act and can be determined from multiple measurements as discussed in measurements of market power above. In Australia, consumer law allows for firms to have significant market power and utilise it, as long as it is determined to not have “the purpose, effect or likely effect of substantially lessening competition” The degree to which
680-422: A market, such that the level of competition between sellers is below the level of competition in perfectly competitive market conditions. The competitive structure of a market can significantly impact the financial performance and conduct of the firms competing within it. There is a causal relationship between competitive structure, behaviour and performance paradigm. Market structure can be determined by measuring
748-438: A market. Both companies produce the same type of product and no other company produces the same or alternative product. The goods produced are circulated in only one market, and no other company intends to enter the market. The two companies have a lot of control over market prices. It is a particular case of oligopoly, so it can be said that it is an intermediate situation between monopoly and perfect competition economy. Hence, it
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#1732899024237816-464: A measure of firm concentration within a market and is the sum of the squared market shares of all the firms in the market (Herfindahl Index = (S i ) , where S i = market share of firm i) . Large companies are given more weight in the index (unlike the N-concentration ratio). The value of the index ranges from 1/N to 1 (where N is the number of firms in the market). Thus, the more concentrated
884-483: A monopoly is 1 whilst for perfect competition, the HHI is zero. Unlike the N -firm concentration ratio, large firms are given more weight in the HHI and as a result, the HHI conveys more information. However the HHI has its own limitations as it is sensitive to the definition of a market, therefore meaning you cannot use it to cross-examine different industries, or do analysis over time as the industry changes. The Lerner index
952-483: A monopoly, the 4-firm concentration ratio is 100 per cent whilst for perfect competition, the ratio is zero. Moreover, studies indicate that a concentration ratio of between 40 and 70 percent suggests that the firm operates as an oligopoly. These figures are viable but should be used as a 'rule of thumb' as it is important to consider other market factors when analysing concentration ratios. An advantage of concentration ratios as an empirical tool for studying market power
1020-553: A perfectly competitive market, subsidies are harmful, and improvements to terms-of-trade are the first point of call for import protections. Conversely, imperfect competition assumptions promote intervention in the international trade market. Assuming imperfect competition allows for economic modelling of policies to contain imperfectly competitive firms' market power, or for enhancing monopoly power in situations of national interest. Thus, assumptions of perfect competition or imperfect competition have implications for policy choices and
1088-401: A small percentage of the total monopolistic market and hence, has limited control over the prevailing market price. Thus, each firms' demand curve (unlike perfect competition ) is downward sloping, rather than flat. The main difference between monopoly competition and perfect competition lies in the paradox of excess capacity and price exceeding marginal cost. In an oligopoly market structure,
1156-460: A very vital role in this market. As price increases, quantity demanded decreases for the given product. The demand curve in perfectly competitive and imperfectly competitive market has been illustrated in the image on the left. Economists primarily use these assumptions of perfect competition for developing economic policy, including economic welfare and efficiency analysis. If ANY of the above conditions of perfect competition are dissatisfied,
1224-553: Is Microsoft's market share in PC operating systems . The United States v. Microsoft case dealt with an allegation that Microsoft illegally exercised its market power by bundling its web browser with its operating system. In this respect, the notion of dominance and dominant position in EU Antitrust Law is a strictly related aspect. Another form of market power is that of an oligopoly or oligopsony . Within this market structure,
1292-463: Is a Monopsonist if it faces small levels, or no competition in ONE of its output markets. A natural monopoly occurs when it is cheaper for a single firm to provide all of the market's output. Governments often restrict monopolies through high taxes or anti-monopoly laws as high profits obtained by monopolies may harm the interests of consumers. However, restricting the profits of monopolists may also harm
1360-424: Is a widely accepted and applied method of estimating market power in a monopoly. It compares a firm's price of output with its associated marginal cost where marginal cost pricing is the "socially optimal level" achieved in market with perfect competition . Lerner (1934) believes that market power is the monopoly manufacturers' ability to raise prices above their marginal cost. This notion can be expressed by using
1428-494: Is considered an idealised framework by economists. Monopolistic competition can be described as the "middle ground" between perfect competition and a monopoly as it shares elements present in both market structures that are on different ends of the market structure spectrum. Monopolistic competition is a type of market structure defined by many producers that are competing against each other by selling similar goods which are differentiated, thus are not perfect substitutes. In
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#17328990242371496-497: Is controlled by multiple factors, including but not limited to, their size, the structure of the market they are involved in, and the barriers to entry for the particular market. A firm with market power has the ability to individually affect either the total quantity or price in the market. This said, market power has been seen to exert more upward pressure on prices due to effects relating to Nash equilibria and profitable deviations that can be made by raising prices. Price makers face
1564-435: Is equal to their marginal cost , therefore, no economic profits are present. The following criteria need to be satisfied in a perfectly competitive market: As all firms in the market are price takers, they essentially hold zero market power and must accept the price given by the market. A perfectly competitive market is logically impossible to achieve in a real world scenario as it embodies contradiction in itself and therefore
1632-492: Is far more common and can be seen in many industries even with more than one supplier in the market. Firms with monopoly power can charge a higher price for products (higher markup) as demand is relatively inelastic. They also see a falling rate of labour share as firms divest from expensive inputs such as labour. Often, firms with monopoly power exist in industries with high barriers to entry, which include, but are not limited to: A well-known example of monopolistic market power
1700-471: Is important to note that this graph is a simplistic example of a kinked demand curve. Oligopolistic firms are believed to operate within the confines of the kinked demand function. This means that when firms set prices above the prevailing price level (P*), prices are relatively elastic because individuals are likely to switch to a competitor's product as a substitute. Prices below P* are believed to be relatively inelastic as competitive firms are likely to mimic
1768-405: Is not effective as no market exists in purely perfectly competitive conditions. The argument for assuming perfect competition in economic decision making prevails on the widespread use of its logic, and the present lack of substantial and consistent imperfectly competitive economic models. Utilising the assumptions of perfect competition, foreign trade policies advocate for minimal intervention. In
1836-455: Is that it requires only data on revenues and is thus easy to compute. The corresponding disadvantage is that concentration is about relative revenue and includes no information about costs or profits. The Herfindahl-Hirschman index (HHI) is another measure of concentration and is the sum of the squared market shares of all firms in a market. The HHI is a more widely used indicator in economics and government regulation. The index reflects not only
1904-437: Is the most basic form of oligopoly . In a monopoly market, there is only one supplier and many buyers; it is a firm with no competitors in its industry. If there is competition, it is mainly some marginal companies in the market, generally accounting for 30-40% of the market share. The decisions of marginal companies will not materially affect the profits of monopolists. The monopolist has market power, that is, it can influence
1972-590: Is the requirement of only needing revenue data of firms which results in the corresponding disadvantage of the inconsideration of costs or profits. The N -firm concentration ratio gives the combined market share of the largest N firms in the market. For example, a 4-firm concentration ratio measures the total market share of the four largest firms in an industry. In order to calculate the N -firm concentration ratio, one usually uses sales revenue to calculate market share, however, concentration ratios based on other measures such as production capacity may also be used. For
2040-474: Is to the benefit of the customer. As a result, many countries have antitrust or other legislation intended to limit the ability of firms to accrue market power. Such legislation often regulates mergers and sometimes introduces a judicial power to compel divestiture . Market power provides firms with the ability to engage in unilateral anti-competitive behavior . As a result, legislation recognises that firms with market power can, in some circumstances, damage
2108-755: The Office of Gas and Electricity Markets and the Telecom Regulatory Authority in India . Regulatory agencies may be a part of the executive branch of the government and have statutory authority to perform their functions with oversight from the legislative branch. Their actions are often open to legal review . However, some regulatory bodies are industry-led initiatives rather than statutory agencies, and are called 'voluntary organisations'. They may be not-for-profit organisations or limited companies. They derive their authority from members' commitments to abide by
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2176-576: The behavior and financial performance of firms. Market structure depicts how different industries are characterized and differentiated based upon the types of goods the firms sell (homogenous/heterogenous) and the nature of competition within the industry. The degree of market power firms assert in different markets are relative to the market structure that the firms operate in. There are four main forms of market structures that are observed: perfect competition , monopolistic competition , oligopoly , and monopoly . Perfect competition and monopoly represent
2244-445: The benefit of the public at large). The existence of independent regulatory agencies is justified by the complexity of certain regulatory and directorial tasks, and the drawbacks of political interference. Some independent regulatory agencies perform investigations or audits , and other may fine the relevant parties and order certain measures. In a number of cases, in order for a company or organization to enter an industry, it must obtain
2312-409: The change in prices, meaning less gains are experienced by the firm. An oligopoly may engage in collusion , either tacit or overt to exercise market power and manipulate prices to control demand and revenue for a collection of firms. A group of firms that explicitly agree to affect market price or output is called a cartel , with the organization of petroleum-exporting countries ( OPEC ) being one of
2380-454: The competitive process. In particular, firms with market power are accused of limit pricing, predatory pricing , holding excess capacity and strategic bundling. A firm usually has market power by having a high market share although this alone is not sufficient to establish the possession of significant market power. This is because highly concentrated markets may be contestable if there are no barriers to entry or exit . Invariably, this limits
2448-516: The degree of suppliers' market concentration, which in turn reveals the nature of market competition. The degree of market power refers to firms' ability to affect the price of a good and thus, raise the market price of the good or service above marginal cost (MC). The greater extent to which price is raised above marginal cost, the greater the market inefficiency. Competition in markets ranges from perfect competition to pure monopoly , where monopolies are imperfectly competitive markets with
2516-452: The efficacy of their effect, domestically and internationally. There are FOUR broad market structures that result in imperfect competition . The table below provides an overview of the characteristics of each of these market structures. A situation in which many firms with slightly different products compete. Moreover, firms compete by selling differentiated products that are highly substitutable, but are not perfect substitutes. Therefore,
2584-530: The extent of which market shares of the largest firms in the market account for a significant portion of the economic activities quantifiable by various metrics such as sales, employment, active users. Recent macroeconomic market power literature indicates that concentration ratios are the most frequently used measure of market power. Measures of concentration summarise the share of market or industry activity accounted for by large firms. An advantage of using concentration as an empirical tool to quantify market power
2652-547: The formula: Where P represents the price of the good set by the firm and MC representing the firm's marginal cost.The formula focuses on the nature of monopoly and emphasising welfare economic implications of the Pareto optimal principle. Although Lerner is usually credited for the price/cost margin index, the generalized version was fully derived prior to WWII by Italian neoclassical economist, Luigi Amaroso . Market power within competition law can be used to determine whether or not
2720-608: The gap, which encapsulates the firm's level of market dominance, is determined by the residual demand curve's form. A steeper reverse demand indicates higher earnings and more dominance in the market. Such propensities contradict perfectly competitive markets, where market participants have no market power, P = MC and firms earn zero economic profit. Market participants in perfectly competitive markets are consequently referred to as 'price takers', whereas market participants that exhibit market power are referred to as 'price makers' or 'price setters'. The market power of any individual firm
2788-417: The greatest ability to raise price above marginal cost. The imperfect market faces a down-ward sloping demand curve in contrast to a perfectly elastic demand curve in the perfectly competitive market. This is because product differentiation and substitution occurs in the market. It is very easy for a consumer to change their seller which makes the consumer sensitive to price. The Law of demand also plays
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2856-580: The greatest revenue, by setting P > MC, at the cost of macroeconomic market efficiency. In the most extreme case of a monopoly, producers overcharge for their good or service, and underproduce. Thus, imperfectly competitive pricing strategies impact consumer preferences and purchases, business operation and revenue, and economic policy. Economists are in dispute over whether economic policy should be based on assumptions of perfect competition or imperfect competition. The imperfect theorists' perspective argues that policy based on assumptions of perfect competition
2924-553: The incumbent firm's ability to raise its price above competitive levels. If no individual participant in the market has significant market power, anti-competitive conduct can only take place through collusion , or the exercise of a group of participants' collective market power. An example of which was seen in 2007, when British Airways was found to have colluded with Virgin Atlantic between 2004 and 2006, increasing their surcharges per ticket from £5 to £60. Regulators are able to assess
2992-417: The industry through laws and regulations and at the same time imposes certain controls on it to improve efficiency. The main characteristics of an oligopoly are: It is salient to note that only a few firms make up the market share. Hence, their market power is large as a collective and each firm has little or no market power independently. For firms trying to enter these industries, unless they can start with
3060-436: The industry until above normal profits are diminished until the industry experiences perfect competition There are several sources of market power including: Measuring market power is inherently complex because the most widely used measures are sensitive to the definition of a market and the range of analysis. Magnitude of a firm's market power is shown by a firm's ability to deviate from an elastic demand curve and charge
3128-451: The interests of consumers, because companies may create unsatisfied products that are not available in new markets. These products will bring positive benefits to consumers and create huge economic value for enterprises. Tax and antitrust laws can discourage companies from innovating. The intensity of price competition is another good measure of how much control a firm within a market structure has over price. The Herfindahl Index provides
3196-566: The level of market power and dominance a firm has and measure competition through the use of several tools and indicators. Although market power is extremely difficult to measure, through the use of widely used analytical techniques such as concentration ratios , the Herfindahl-Hirschman index and the Lerner index , regulators are able to oversee and attempt to restore market competitiveness. In economics, market structure can profoundly affect
3264-425: The level of market power under monopolistic competition is contingent on the degree of product differentiation. Monopolistic competition indicates that enterprises will participate in non-price competition. Monopolistic competition is defined to describe two main characteristics of a market: 1. There are many sellers in the market. Each vendor assumes that a slight change in the price of his product will not affect
3332-418: The market is highly concentrated and several firms control a significant share of market sales. The emergence of oligopoly market forms is mainly attributed to the monopoly of market competition, i.e., the market monopoly acquired by enterprises through their competitive advantages, and the administrative monopoly due to government regulations, such as when the government grants monopoly power to an enterprise in
3400-468: The market is imperfectly competitive. Moreover; If ONE of the following conditions are satisfied within an economic market, the market is considered "imperfect": Imperfect conditions theorists believe that in the aggregate economy no market has ever, or will ever, exhibit the conditions of perfect competition. Imperfect competition is inherent in capitalist economies. Firms are incentivised by profit, and hence undertake competitive strategies which reap
3468-569: The market is supplied by a small number of firms (more than 2). Moreover, there are so few firms that the actions of one firm can influence the actions of the other firms. Due to the small number of sellers in the market, any adjustment of product quantity and pricing by an enterprise will affect its competitors and thus affect the supply and pricing of the whole market. Oligopolies generally rely on non-price weapons, such as advertising or changes in product characteristics. Several large companies hold large market shares in industrial production, each facing
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#17328990242373536-462: The market is, the larger the value of the Herfindahl Index will be. The table below provides an overview of price competition and intensity in the four main classes of market structure. Markets that face a downward sloping demand curve are said to have market power. This terms means that the markets have a certain power to decide their own price. This does not mean that the firm can decide
3604-425: The market share of large firms within the market, but also the market structure outside of large firms, and therefore, more accurately reflects the degree of influence of large firms on the market. For example, in a market with two firms, each with 50% market share, the HHI is ∑ ( S i ) 2 {\displaystyle \sum (S_{i})^{2}} = 0.50 + 0.50 = 0.50. The HHI for
3672-448: The monopolist raises its price, it sells fewer units. This suggests that when prices rise, even monopolists can drive away customers and sell fewer products. The difference between monopoly and other models is that monopolists can price their products without considering the reactions of other firms' strategic decisions. Hence, a monopolist's profit maximising quantity is where marginal cost equals marginal revenue. At this point: A firm
3740-477: The monopolistic competition market may realize profit increase or loss in the short term, but will realize normal profit in the long run. If the price of the enterprise is high enough to offset the fixed cost above the marginal cost, it will attract the enterprise to enter the market to obtain more profits. Once the enterprise enters the market, it will occupy more market share by lowering the product price until economic profit reaches 0. Furthermore, each firm shares
3808-547: The most well known example of an international cartel. By remaining consistent with the strict definition of market power as any firm with a positive Lerner index , the sources of market power is derived from distinctiveness of the good and or seller. For a monopolist, distinctiveness is a necessary condition that needs to be satisfied but this is just the starting point. Without barriers to entries, above normal profits experienced by monopolists would not persist as other sellers of homogenous or similar goods would continue to enter
3876-408: The optimal condition of market competition. The concept of perfect competition represents a theoretical market structure where the market reaches an equilibrium that is Pareto optimal . This occurs when the quantity supplied by sellers in the market equals the quantity demanded by buyers in the market at the current price. Firms competing in a perfectly competitive market faces a market price that
3944-449: The overall market price. The belief that competitors will not change their prices just because a vendor in the market changes the price of a product. 2. The sellers in the market all offer non-homogenous products. Companies have some control over the price of their products. Different types of consumers will buy the goods they like according to their subjective judgment. There are two types of product differentiation: Enterprises entering
4012-407: The price of the good. Moreover, a monopoly is the sole provider of a good or service and thus, faces no competition in the output market. Hence, there are significant barriers to market entry, such as, patents, market size, control of some raw material. Examples of monopolies include public utilities (water, electricity) and Australia Post . A monopolist faces a downward sloping demand curve. Thus, as
4080-429: The quantity they wish to sell. The firm can decide the price and the quantity is determined by the demand curve. The firm should expect a decrease in quantity demanded if they choose to increase the price. This market power emerges from factors such as: Market power In economics , market power refers to the ability of a firm to influence the price at which it sells a product or service by manipulating either
4148-770: The regulated company is not in compliance with its license obligations or the law, the regulatory agency may be empowered to: In some instances, it is deemed in the public interest (by the legislative branch of government) for regulatory agencies to be given powers in addition to the above. This more interventionist form of regulation is common in the provision of public utilities , which are subject to economic regulation . In this case, regulatory agencies have powers to: The functions of regulatory agencies in prolong "collaborative governance" provide for generally non-adversarial regulation. Ex post actions taken by regulatory agencies can be more adversarial and involve sanctions, influencing rulemaking , and creating quasi-common law. However,
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#17328990242374216-500: The roles of regulatory agencies as "regulatory monitors" provide a vital function in administering law and ensuring compliance. Imperfect competition In economics, imperfect competition refers to a situation where the characteristics of an economic market do not fulfil all the necessary conditions of a perfectly competitive market . Imperfect competition causes market inefficiencies, resulting in market failure . Imperfect competition usually describes behaviour of suppliers in
4284-463: The short term, firms are able to obtain economic profits as a result of differentiated goods providing sellers with some degree of market power; however, profits approaches zero as more competitive toughness increases in the industry. The main characteristics of monopolistic competition include: Firms within this market structure are not price takers and compete based on product price, quality and through marketing efforts, setting individual prices for
4352-509: The standards applied by the regulator, for instance as the UK's Advertising Standards Authority says "The self-regulation system works because it is powered and driven by a sense of corporate social responsibility amongst the advertising industry." Regulatory agencies deal in the areas of administrative law , regulatory law , secondary legislation , and rulemaking (codifying and enforcing rules and regulations, and imposing supervision or oversight for
4420-412: The supply of the good or service through its own production decisions. The most discussed form of market power is that of a monopoly , but other forms such as monopsony and more moderate versions of these extremes exist. A monopoly is considered a ' market failure ' and consists of one firm that produces a unique product or service without close substitutes. Whilst pure monopolies are rare, monopoly power
4488-400: The supply or demand of the product or service to increase economic profit. In other words, market power occurs if a firm does not face a perfectly elastic demand curve and can set its price (P) above marginal cost (MC) without losing revenue. This indicates that the magnitude of market power is associated with the gap between P and MC at a firm's profit maximising level of output. The size of
4556-416: The two extremes of market structure, respectively. Monopolistic competition and oligopoly exist in between these two extremes. "Perfect Competition" refers to a market structure that is devoid of any barriers or interference and describes those marketplaces where neither corporations nor consumers are powerful enough to affect pricing. In terms of economics, it is one of the many conventional market forms and
4624-423: The unique differentiated products. Examples of industries with monopolistic competition include restaurants, hairdressers and clothing. The word monopoly is used in various instances referring to a single seller of a product, a producer with an overwhelming level of market share, or refer to a large firm. All of these treatments have one unifying factor which is the ability to influence the market price by altering
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