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Productive efficiency can be demonstrated by the firm's price relative to the Short Run Average Total Costs curve. By selling output at P1, (where MR=MC), it is selling at the minimum point on the SRATC curve therefore minimising costs of prodution and so the firm is productively efficient.
Allocative efficiency is shown by the interception of the Price with the Marginal Cost curve, demonstrating that P=MC and so the price of each good reflects the cost of producing such good.
X-efficiency is also shown in the diagram as the price for which the good is sold lies on the SRATC rather than above it, showing that there is no organisational slack in the firm.see more
Monopolistic firms often experience Economies of Scale which makes their average total costs lower than competitors. This can create significant abnormal profit and can create barriers through:
Predatory pricing: The firm may take advantage of their low costs of production by temporarily adjusting their price of output to be lower than their competitors, forcing them out of the market as they will lose their customers.
Research & Development: A firm with significant profits can invest in researching newer, better quality goods before patenting them. This makes their output more attractive than the competition which will reduce the incentive for new firms to compete.
Marketing and Advertising: The profts may also be used for large-scale advertising to capture a significant market share, forcing smaller firms to collapse in some cases whilst also disincentivising entry in the market from new firms.see more
Oligopolies are interdependant as the success of their price strategy relies on the reaction of other oligopoly firms in the market. If an oligopoly decided to increase the price of it's output, they would only experience increased revenue if the other firms also increased their price, making the firm dependant on the others.
The aspect of uncertainty follows a similar theory; oligopolies are never certain of how rivals will react - even in the case of collusion. It would be in all firms' best interest to increase their prices as this will also increase everyones revenue, however this is unlikely due to uncertainty. If all firms decided to increase their price but one firm changed their mind, that one firm would capture the market share of all the others as well as taking their revenue potential. This therefore means prices are likely to be stable in oligpolostic markets.see more