Effect of Perfect Information in the Market
a)
The assumption of perfect information is one vita assumption of perfectly competitive market stating that all producers and consumers have complete knowledge about price of the product and the associated utilities obtained from the product. In the presence of perfect information buyers and sellers can act best to maximize their individual gain which results in the efficient functioning of the market.
In real world however information are not readily available and significant amount of time has to be spent to get reliable information (Kreps, 2019). In reality, there are generally imperfect information between buyer and sellers leading to inefficient functioning of the market.
b)
In the long run, perfectly competitive firm can make only normal profit. Firms present in the perfectly competitive market in the short run though can make either supernormal profit or normal profit or economic loss however there is only normal profit in longer horizon. This happens as the firms can freely come in the business or leave without any barriers (Cowell, 2018). With supernormal profit, new business entity enters, increases supply, price moves downward and so is the profit. When firms make loss, existing businesses leave the industry, supply falls, price and profit increases.
Suppose competitive price in the short run is at P. With this price firms can make a supernormal profit. Attracted by profits, new businesses come in raising the supply. This depresses price from P to P* where only normal profit is earned.
c)
i)
The retail market in UK is highly competitive in nature. Market participants (buyers and sellers) are very large in perfectly competitive market. In some segments of UK retail market experiences growing concentration of market power. One such example is grocery retail market. Firms can freely come in or leave the market. Two of the big players in the retail market are Tesco and Sainsbury (Butler, 2019). As mentioned in the article recently many of the high street stores are closing down because of the increasing competition with online market. It satisfies some of the assumption of perfectly competitive market. These include presence of large size of market participants (buyers and sellers), identical product, free entry and exit in the market.
ii)
In the high street retail market is now facing an increasing challenge because of the expansion of online retail market. Challenges are also coming due to change in shopping habits, increasing cost of businesses and new technologies (Williams, 2019). Realizing loss from doing businesses many of the high street stores have closed down. This is similar to perfect competition model when firms freely come in or go out the market as per the state of the market.
Profit in the Long Run in Perfect Competition
d)
Normal profit is a situation where economic profit equals zero in the sense that total revenue equals to the total cost (both explicit and implicit cost). Breakeven point though also indicates a situation where profit is zero (total revenue = total cost) it is however different from normal profit as computation of break-even point does not include implicit cost which normal profit does.
a)
Monopolist is the single producer in the market and controls the overall market. In the monopoly market, sellers act like a price maker. Price is set in the market such that profit is maximized. Profit in the market is maximized following the two conditions – revenue from additional unit sold is same as the marginal cost of producing the additional unit and marginal cost curve intersects the marginal revenue line from below (Baumol & Blinder, 2015). Price in the market is determined by the point on the demand curve corresponding to the equilibrium point. Price in the monopoly market is always greater than the marginal revenue.
b)
Natural monopoly occurs in a market where average costs are falling over the increasing range of production which satisfies the market demand. In such a market fixed cost are very high relative to variable costs of production. Because of this, only a single firm is capable of supplying total market demand at a relatively cost compared to two or larger number of firms (Cowen & Tabarrok, 2015). The single firm producing a larger quantity enjoy economies of scale and therefore, can charge a smaller price relative to the situation when the market is split between two firms.
In the natural monopoly market, the firm experiences a continuously falling long run average cost. The single firm can though exploit benefits of economies of scale but is it is unlikely to extend production up to the lowest point of average total cost and achieves productive efficiency. The unregulated however charges a price higher than marginal cost which indicates allocative inefficiency causing deadweight loss.
c)
First degree price discrimination or perfect price discrimination occurs when a monopoly firm is able to charge separate prices for separate units consumed. Under perfect price discrimination, the monopolist firm can charge maximum possible price for every units sold which enable the firm to grab all the consumer surplus. Optimal output is reached where marginal revenue and marginal cost equalizes to each other. However, since here the firm charges maximum price that consumers are willing to pay, therefore MR equals the corresponding price on the demand curve (Stoneman & Bartoloni, 2018). Firm therefore operates the point where MC curve cuts the demand curve which entails allocative efficiency in the market which is same as competitive market.
In recent years, perfect price discrimination or personalized pricing has become more realistic because of easy availability of personalized data through internet. The trend has particularly been observed in e-commerce retailing. Availability of relevant customer information help firms to device perfect price discrimination.
d)
In a monopoly market, inefficiency occurs because of high price and less output. The monopoly market is considered as highly inefficient in relation to competitive market. The excessive market power of the monopolist allow them to exploit the consumers resulting in inefficient allocation of resources. The operation of Amazon and Google is similar to that of a monopolist. Amazon is one of the biggest online retailer. The large scale operation of Amazon gives it advantage of economies of scale. Unlike pure monopolist, Amazon contributes to deflationary pressure and make products available at a relatively lower price. Not only the online players charge a high price but in many cases they do not charge. Google provide people advantage of free mail, free cloud storage and free map apps (Moore & Tambini, 2018). For this, Google and Amazon entail greater efficiency than a pure monopoly.
Since, Amazon and Google operate efficiently and also take care of interest of its customers, government should not regulate. If government intervenes in the market, it can hamper efficiency of the market lowering surplus.
References
Baumol, W. J., & Blinder, A. S. (2015). Microeconomics: Principles and policy. Nelson Education.
Butler, S. (2019). Retailers call for action as high street store closures soar. the Guardian. Retrieved 31 October 2019, from https://www.theguardian.com/business/2019/sep/11/retailers-call-for-action-as-high-street-store-closures-soar
Cowell, F. (2018). Microeconomics: principles and analysis. Oxford University Press.
Cowen, T., & Tabarrok, A. (2015). Modern principles of microeconomics. Macmillan International Higher Education.
Kreps, D. M. (2019). Microeconomics for managers. Princeton University Press.
Moore, M., & Tambini, D. (Eds.). (2018). Digital dominance: the power of Google, Amazon, Facebook, and Apple. Oxford University Press.
Stoneman, P., & Bartoloni, E. (2018). The microeconomics of product innovation. Oxford University Press.
Williams, D. (2019). The current and future growth of UK online shopping. Verdict Retail. Retrieved 31 October 2019, from https://www.retail-insight-network.com/features/uk-online-shopping-growth/
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