3. Perfect competition, imperfectly competitive markets and monopoly Flashcards
Market structure
The organisation al and other characteristics of a market
Entry barriers
Obstacles that make it difficult for a new firm to enter a market
Exit barriers
Obstacles that make it difficult for an established firm to leave a market
e.g. highly specialised assets that are difficult to sell
Natural barriers
Barriers that result from inherent features of the industry, such as economies of scale or high R and D costs; not barriers that have been artificially erected
Sunk costs
Costs that have already been incurred and cannot be recovered
Artificial barriers
Barriers erected by the firms themselves, such as high levels of advertising expenditure or predatory pricing
Limit prices
Prices set low enough to make it unprofitable for other firms to enter the market
Predatory prices
Prices set below average cost (or very cheaply) with the aim of forcing rival firms out of business
Product differentiation
The marketing of generally similar products with minor variations or the marketing of a range of different products
Divorce of ownership from control
The owners and those who manage the firm are different groups with different objectives
Satisficing
Achieving a satisfactory outcome rather than the best possible outcome
Monopoly
Only one firm in a market
Static efficiency
Efficiency (productive and allocative) at a particular point in time
Dynamic efficiency
Occurs in the long run, leading to development of new products and more efficient processes that improve productive efficiency
Productive efficiency
The level of output at which average costs of production are minimised
Allocative efficiency
Occurs when it is impossible to improve overall economic welfare by reallocating resources between markets. In the whole economy, price must equal marginal cost in every market
Private costs and benefits
Private costs are costs incurred solely by an individual or firm as a result of their own activities; private benefits are benefits enjoyed solely by an individual or firm as a result of their own activities
Social costs and benefits
Social costs are costs which fall on the whole of society: social cost = private cost + external cost; social benefits are benefits enjoyed by the whole of society: social benefit = private benefit + external benefit
Monopoly power
Firms in market structures other than pure monopoly usually possess significant monopoly power, defined as power over price setting and other aspects of the market such as product differentiation
Concentration ratio
Measures the market share (percentage of the total market) of the biggest firms in the market. For example, a 5 firm concentration measures the aggregate market share of the largest 5 firms
Market conduct
The price and other market policies pursued by firms. This is also known as market behaviour, but is not to be confused with market performance, which refers to the end results of these policies
Cartel
A collusive agreement by firms, usually to fix prices. Sometimes there is an agreement to restrict output and to deter the entry of new firms
Price leadership
The setting of prices in a market, usually by a dominant firm, which is then followed by other firms in the same market. In barometric price leadership, one firm acts as a ‘barometer’ or benchmark, whose prices other firms follow
Price agreement
An agreement between a firm, similar firms, suppliers or customers regarding the pricing of a good or service
