2. Market Structure and Performance Flashcards
What are the two dimensions of any market?
Product market definition
Geographic market definition
Describe the SSNIP test
Small but significant non- transitory increase in price. Start with a narrow market definition, would a hypothetical monopolist benefit from a small price increase? If no include the closest substitute and repeat. If yes this collection of products in the area is the market
What is the most commonly used characteristic of market structure?
Seller concentration
Seller concentration
It reflects the implications of structure on nature of competition in a relatively simple numericsl indicator. It illustrates both nunber of firms and size distribution
Concentration curve
Plots the cumulative market share of an industry starting with the largest
CRm
A figure allowing for comparison of the market share of the largest m number of firms in a market
Advantages of CRm
It only uses the data of the largest firns so this may be practical
Disadvantages of CRm
- it only uses data of large firms
- a merger doesnt necessarily increase CRm
- doesnt take into account size distribution
- result might depend on m chosen
Herfindahl- Hirschman index
H is the value of the sum of the squares of each firms market share
What does H=1 mean?
There is a monopoly
Limitations to concentration measures
- market definitions might be questionable
- vertical relationships not reflected
- seller concentration is only one characteristic of structure, doesnt consider entry and exit
Lerner index
L=(P-MC)/P
The larger the index the greater the market power
What does a lerner index of 0 mean?
There is perfect competition
What is the inverse elasticity rule?
1/elasticity= (P-MC)/P
Limitations to lerner index
- in reality firms dont have the same cost structure
- requires an estimate of firms MC
- despite this lerner index remains important to measure market power
Most important characteristics of structure
- number of firms
- barriers to entry
- degree of product differentiation
Assumptions of perfect competition
- lots of firms
- no barriers to entry or exit
- homogenous product
- no informational problems
- firms are price takers
- firms can sell at any q
- firms market share is so small that varying it doesnt affect total output or price
- firms produce where P=MC
Characteristics of monopoly
- one seller
- strong barriers
- unique product
- maybe information problems and transportation costs
Why does a monopolist produce on the elastic part of the demand curve?
If they were producing on the inelastic part then increasing price would increase revenue so they wouldnt produce here
When does allocative efficiency occur?
When P=MC
What is productive efficiency?
Given factors of input, the max output level is produced and costs are minimised
Characteristics of monopolistic competition
- lots of buyers and sellers
- no barriers
- similar products
- maybe info problems, transportation costs
What is the demand function for a monopolistic firm like?
Downward sloping but more elastic than a monopolist’s
Why cant monopolistic firms make LR profit?
In SR they make abnormal profits. New firms enter which shifts each firm’s individual demand curve left, reducing their AR until AR=AC when MC=MR so firms make zero profits
Characteristics of dominant firm and competitive fringe
- a dominant price setter
- a fringe of small price taking firms
- dominance usually justified through cost advantage
Coase conjecture
Durability might greatly reduce, if not eliminate, the ability of the monopolist to set prices above the efficient level.
