17 Other Market Structures Flashcards
When is there a monopsony? When is there a monopoly?
Monopoly = sole seller that exploits its position to influence the market price of its outputs
Monopsony = sole buyer that exploits its position to influence the market price of its inputs
What is the maximisation problem faced by a monopsonist?
How do we solve the monopsonist maximisation problem? Implication?
What is MRP?
MC and price diagram for a monopsony
How does the firm choose quantity in a monopsony?
Lerner condition for monopsony
Monoposny Lerner condition implication
Define oligopoly
When there are relatively few firms in an industry of a large enough size relative to the market that they can, by changing output, have an effect on the equilibrium price.
How do firms behave in an oligopoly?
Facing a downward-sloping demand curve, a firm can affect prices through their behaviour means that:
- they will view the market price as one of the things it can strategically manipulate in order to maximise its profits
- other firms can do the same
A game-theory situation arises.
Define horizontal mergers
Mergers between firms which compete to supply a particular market.
Implication of horizontal mergers
Generally considered bad for consumers. They push firms away from perfect competition to monopoly, increasing mark-ups.
Giving rise to unilateral anti-competitive effects and coordinated anti-competitive effects
Define vertical mergers
Mergers between firms at different points in the supply chains.
Vertical mergers and mark-up
As individual firms, there is a double mark-up problem.
The first firm reduces output and increases prices in the usual way for monopolies. Thus the marginal cost for the second firm is higher, so they produce at a lower quantity of final good.
Everyone could gain in they merged.
Three main theories for why firms exist
- Transaction cost
- Asset specificity and market power
- Contracts
What basis does transaction cost theory build on?
Comparative and absolute advantage.
Firms represent a rational response to market imperfections in the real world.
Why do firms exist under transaction cost theory?
Market trading is not costless:
- Prices need to be discovered
- Contracts need to be negotiated, written and enforced for every transaction
- Under uncertainty, contracts will inevitably be incomplete (unable to cover all possible eventualities) and so need frequent renegotiation
- Asymmetric information and bargaining power will increase the costs of negotiating the division of surplus
Transaction cost theory
What happens when external market costs are higher than internal ones?
A firm will come into being and grow.
Transaction cost theory
What happens when external market costs are lower than internal ones?
- Firms will shrink from outsourcing production
- Firms will shrink by buying intermediate goods on the open market
- Firms may disappear
What is meant by asset specificity?
This refers to situations in which items have only very limited uses, it follows that their opportunity cost (their value when employed in the next best alternative use) is low.
If the assets are owned by different firms because there may be only a small number of buyers and sells of the asset.
Asset specificity and market power
Asset specificity gives rise to market power and to market failure through strategic bargaining and hold-up problems
How do firms solve the strategic bargaining and hold-up problems?
- Two firms become one
- They pursue their joint interests
What is meant by contract theory?
Competitive markets depend on instant reactions and flexibility. But firms incorporate long term contracts, e.g. between owners and managers and between managers and workers. But we need contracts under imperfect information and facing volatility in demand for outputs, supply of inputs and in the wider world.
What do Coase and Williamson’s theories say about firms?
The main theories as to why firms exist emphasise market failures.
“Miniature, privately owned, centrally planned economy”
