17 Other Market Structures

Question 1

When is there a monopsony? When is there a monopoly?

Answer 1

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

Question 2

What is the maximisation problem faced by a monopsonist?

Answer 2

Question 3

How do we solve the monopsonist maximisation problem? Implication?

Answer 3

Question 4

What is MRP?

Answer 4

Question 5

MC and price diagram for a monopsony

Answer 5

Question 6

How does the firm choose quantity in a monopsony?

Answer 6

Question 7

Lerner condition for monopsony

Answer 7

Question 8

Monoposny Lerner condition implication

Answer 8

Question 9

Define oligopoly

Answer 9

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.

Question 10

How do firms behave in an oligopoly?

Answer 10

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.

Question 11

Define horizontal mergers

Answer 11

Mergers between firms which compete to supply a particular market.

Question 12

Implication of horizontal mergers

Answer 12

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

Question 13

Define vertical mergers

Answer 13

Mergers between firms at different points in the supply chains.

Question 14

Vertical mergers and mark-up

Answer 14

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.

Question 15

Three main theories for why firms exist

Answer 15

1. Transaction cost
2. Asset specificity and market power
3. Contracts

Question 16

What basis does transaction cost theory build on?

Answer 16

Comparative and absolute advantage.

Firms represent a rational response to market imperfections in the real world.

Question 17

Why do firms exist under transaction cost theory?

Answer 17

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

Question 18

Transaction cost theory

What happens when external market costs are higher than internal ones?

Answer 18

A firm will come into being and grow.

Question 19

Transaction cost theory

What happens when external market costs are lower than internal ones?

Answer 19

• Firms will shrink from outsourcing production
• Firms will shrink by buying intermediate goods on the open market
• Firms may disappear

Question 20

What is meant by asset specificity?

Answer 20

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.

Question 21

Asset specificity and market power

Answer 21

Asset specificity gives rise to market power and to market failure through strategic bargaining and hold-up problems

Question 22

How do firms solve the strategic bargaining and hold-up problems?

Answer 22

• Two firms become one
• They pursue their joint interests

Question 23

What is meant by contract theory?

Answer 23

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.

Question 24

What do Coase and Williamson’s theories say about firms?

Answer 24

The main theories as to why firms exist emphasise market failures.

“Miniature, privately owned, centrally planned economy”