2.11.10 Risks in markets dominated by one or a few very large firms Notes

When markets are dominated by one or a few large firms, concerns about the availability and efficiency of the following may arise:

1. Output
2. Price
3. Consumer Choice

Output

When the market is dominated by one firm or a few large firms, output in those industries is likely to decrease, as:

1. Such firms usually face a relatively inelastic demand curve, which allows them to limit their production, to keep their prices high, without facing a significant fall in the quantity demanded.
2. The high barriers to entry crates by such firms, limit the number of entrants, hence decreasing the potential increase in output
3. When the industry output depends on a small number of producers, the supply chain disruptions will have a higher impact on the total output in the market.

Price

When the market is dominated by one firm or a few large firms, prices in those industries are likely to be higher, because:

1. The inelastic demand in the industry allows the increase of prices, without a significant fall in the quantity demanded
2. The lack of competition allows firms to charge higher prices, as they don't have to engage in price competition anymore
3. In the case of oligopoly, collusion may lead to price increases

Consumer Choice

When the market is dominated by one firm or a few large firms, consumer choice in those industries is likely to be lower, because:

1. Dominant firms may have less incentive to innovate and introduce more products to the consumers
2. Consumers may have fewer options to choose from for niche products, due to to lack of competition
3. The small number of firms in the industry, does not give consumers the ability to switch to another producer if they are not satisfied