2. How Does Market Structure Affect Business Flashcards
what is a market structure?
- it is the framework within which markets compete
* market structures describe the characteristics of a market which determine a firm’s behaviour
what is perfect competition? describe its characteristics and behaviour of firms in the market and give examples
describe the development of perfect competition
- this is a model market structure
- there is no exploitation by firms
- they can’t prevent firms from setting up in competition and they don’t exploit customers
CHARACTERISTICS
• freedom of entry and exit- firms can easily set up and leave
• price taker- each firm is a price taker, they don’t set their own prices they take the price that has been established in the market by supply and demand
• perfect knowledge- firms are aware of the market price and would also be aware of price changes
• perfect mobility- buyers can buy from any seller
• many buyers and sellers- no one buyer or seller is powerful enough to influence the market
• the goods are homogenous
EXAMPLES
• primary products with a global market
• price is determined in a global market by global supply and demand for example oil, cocoa beans, coffee, sugar, tin, gold, copper
BEHAVIOUR OF FIRMS
• all have the same price
• customer isn’t exploited
• no product differentiation as goods are homogeneous
• consumers therefore have no brand loyalty
• firms only a normal profits- so just enough to keep them in business (normal profit is R-C… a reward [payment] to the entrepreneur is included in the cost)
DEVELOPMENT
• because firms that have the power to influence price, many producers try to reduce the homogeneity of their products
• they try to develop some sort of differentiation of a brand creation
what is an oligopoly describe the characteristics
• competition between a few very large firms, a few small firms may exist alongside them but it’s very large firms that dominate the industry
•a pure oligopoly: few firms selling homogenous products e.g. petrol and cement
• abnormal profits are made
•a differentiated oligopoly: few firms selling differentiated products e.g. supermarkets, newspapers, chocolate, coffee
• a subsection of an oligopoly is a duopoly: only two firms in the industry e.g. pure duopoly: The British Sugar Corporation and Tate and Lyle
e.g. differentiated duopoly: Unilever and Procter & Gamble
BEHAVIOUR OF FIRMS IN THE MARKET
• price competition: need competitive prices in order to maintain market share
-don’t want to engage in a price war as this has a damaging impact on profits
-prices within an oligopolistic market structure tend to be relatively stable but they will change as a result of a change in the costs of production
-oligopoly is may use predatory pricing to undercut competitors that have higher costs and they do…charging prices at which the competitors cannot survive
• non-price competition
- promotion: competitions, BOGOF, discounts, price promise, advertising
- differentiation: quality, brand name, reputation
- product variety: meet the needs of different segments
• collusion
- this may be a tacit collusion- where firms do not enter formal agreements with each other-not choose to independently have similar prices
- formal agreements to fix prices do exist but they are illegal in the UK to prevent competitive price wars
what is a monopoly describe the characteristics and behaviour of in the firm
- A single producer or seller
- pure monopoly: a firm has 100% market share i.e. it’s the only firm e.g. network rail and National Grid
- A scale monopoly is a firm with a market share of 25%+…the government classifies these firms as monopolies as they are considered powerful enough to exploit the consumer
- A complex monopoly: firms work together i.e. they colluded by working together they operate as if they are just one firm
- monopolists and excessive profits (revenue>costs) they tend to restrict output to push up prices
THE POWER OF A MONOPOLIST DEPENDS ON:
• whether the product is a necessity or a luxury
• The availability of substitutes
• The PED: more powerful if PED
describe monopolistic competition
• this is different to a monopoly
• many firms in the market… Each offering a slightly different product and all competing with each other e.g. how dresses, Sandwich bars, plumbers
• many firms producing similar products there is no product differentiation
many producers and many consumers the concentration ratio (the extent to which and market or industry is dominated by a few needing firms) is low, and they act independently
• consumers are aware of both price and non-price differences I’m on the competitors products
• barriers to entry and exit are relatively low… Sometimes non-existent
• producers have some control over prices the firms may make some abnormal profit
what is market share?
The proportion of the market held by one firm
