3.1.4 - Competitive And Concentrated Markets

Question 1

In terms of market structure, name the 5 types of markets ranging from 1 (price takers, no barriers to entry) to 5 (price makers, impossible barrier to entry)

Answer 1

1. Perfect competition
   Many competing firms which sell identical products
2. Monopolistic competition
   Competing firms with differentiated, but similar products
3. Oligopoly
   Small number of firms with identical OR differentiated products
4. Duopoly
   Two firms which dominate the market
5. Monopoly
   Only one firm in the market

Question 2

Define market structure

Answer 2

The organisation of a market in terms of number of firms within them (and the way in which they behave)

Question 3

Define price taker

Answer 3

Firm which passively accepts the ruling market price set by market conditions outside of its control

Question 4

Define a price maker

Answer 4

The firm possessing the power to set the price within the market

Question 5

Objectives of firms: What is profit maximisation?

Answer 5

Occurs when a firms total sales revenue is furthest above total cost of
production

Economists assume this is firms number one adjective

Question 6

Objectives of firms: what is growth maximisation?

Answer 6

Occurs when the decision makers within a firm try to make the firm grow as fast as possible

Question 7

Objectives of firms: what is sales maximisation?

Answer 7

The aim of maximising sales volume without making a loss

Question 8

Objectives of firms: what is market share maximisation

Answer 8

Tends to accompany growth maximisation, involves increasing percentage of market output which the firm produces

Question 9

Objectives of firms: what is survival

Answer 9

Where markets are threatened by the entry of new firms which may steal their customers, poor economic climate etc

Question 10

What are the 6 conditions for perfect competition’s structure?

Answer 10

1. Large number of buyers and sellers
2. Perfect market information available to buyers and sellers
3. Ability to buy and sell as much quantity as is desired at the ruling market price
4. Market price is determined by all of buyers and sellers in a market
5. Only one good or service (homogenous product) being sold
6. No barriers to entry or exit in the long run

*real world markets can’t contain all 6 of these conditions simultaneously

Question 11

Define imperfect competition

Answer 11

Any market structure lying between the extremes of perfect competition and pure monopoly

Question 12

Define pure monopoly

Answer 12

Single firms produces the whole of the output within an industry

Monopolies have power to act as a price maker rather than a price taker

Question 13

Define concentrated market

Answer 13

Market containing very few firms

Question 14

Why are profits likely to be lower in competitive markets rather than monopoly markets?

Answer 14

Provided markets are competitive, there are few entry and exit barriers.
If firms in a competitive markets are highly profitable, these large profits act as a ‘magnet’ and attract new firms into the market

Question 15

Define entry and exit barrier

Answer 15

Entry barriers:
Makes it difficult or impossible for new firms to enter a market

Exit barriers:
Makes it difficult or impossible for firms to leave a market

Question 16

Define consumer sovereignty

Answer 16

Consumers collectively determine what is produced in a market
Strongest in a perfectly competitive market

“Consumer is king”

Question 17

Define producer sovereignty

Answer 17

Producers or firms in a market determine what is produced / what prices are charged

Monopolies can exploit producer sovereignty using marketing devices etc

Question 18

What is a natural monopoly?

Answer 18

• where country or firm has complete control of natural resources
• when there is only room in a market for one firm benefitting from economies of scale to the fullest

Question 19

Sources of monopoly / monopoly power: what is a geographical monopoly

Answer 19

A pure monopoly can occur if, for climate or geographical reasons, a country is the only supply of a raw materials or foodstuff

Question 20

Sources of monopoly / monopoly power: what is a government-created monopoly

Answer 20

Governments can create monopolies in markets they regard as being too important to leave to competition.

They can be state owned or private monopolies

Question 21

Define patent

Answer 21

Strategic man made barrier to market entry caused by government legislation protecting the right of a firm to be the sole producer of a patented good

Question 22

What 4 factors influence monopoly power?

Answer 22

1. Barriers to entry:

• natural (innocent) barrier; isn’t manmade
• artificial barrier; manmade, deliberate action made by firms to prevent others entering the market

2. Number of competitors in market:

More competitors there are, the less the scope for exercising monopoly power

3. Advertising:

a- informative advertising
Provides consumers with useful info

b- persuasive advertising
Presents desirable characteristics that make the good worth buying

c- saturation advertising
Flooding the market with info and persuasion

4. Product differentiation:

Making a product different from others via product design, method of production or functionality

Question 23

Define quantity setter

Answer 23

Firms choose quantity of goods to sell rather than the price

Question 24

What is a concentration ratio?

Answer 24

Ratio which indicates total market share or a number of leading firms in a market

Calculated by:

1. Ranking in descending order the market shares of leading firms in the market
2. Market shares then added up in descending order again

Question 25

What could be cases against monopolies?

Answer 25

1. Exploitation of consumers by restricting output and raising price (to increase profits)

• this exploitation has the greatest impacts with inelastic priced goods

2. Productive inefficiency

If less pressure to reduce costs of production and there are no threats of new entrants to the market monopolies may become productively inefficient

If collusion occurs between firms, this may lead to inefficiency

In the absence of economies of scale, average costs may be higher than competitors

Question 26

Define resource misallocation

Answer 26

When resources are allocated in a way which doesn’t maximise economic welfare

Question 27

What could be benefits from monopolies?

Answer 27

1. Economies of scale
2. Invention & innovation
   Monopoly may benefit from patent that prevents competitors from free riding on its success

Question 28

What is a dynamic efficiency?

Answer 28

Efficiencies occurring in long run, leading to development of new products

Question 29

What are some categories within real world competition? (Think types of pricing)

Answer 29

1. Price competition:
   Occurs when firm reduces prices in order to sell more

Types include:

A- ‘special offer’ pricing

B- limit pricing; reducing price of a good to just above average to deter entry of new firms into the market

C- predatory pricing: temporarily reducing the goods price to below average cost to drive smaller firms out of the market

Question 30

What basis could firms compete on?

Answer 30

• price
• strive to improve products
• reduce costs
• improve quality of service provided

Question 31

What are some ways that barriers to entry influence monopoly power

Answer 31

1. economies of scale:
   As firms grow larger the average cost of production falls
2. Limit pricing:
   Involves existing firms setting the price of their good below the production costs of new entrants (firms can’t enter profitably)
3. Owning a resource:
   Early market entrants to a market can establish their monopoly power by gaining control of a resource
4. Sunk costs:
   If unrecoverable costs I.e advertising are high in an industry, new firms will be deterred from entering
5. Brand loyalty:
   Difficult for new firms to gain market share
6. Set up costs:
   If it’s expensive to establish the firm, then new firms will be unlikely to enter the market

Question 32

What is a geographical monopoly?

Answer 32

Where there is only one company that offers a particular good or service in an area

Question 33

What is static efficiency?

Answer 33

Efficiency at a point in time

Question 34

What is productive efficiency

Answer 34

Less / no pressure to reduce costs of production and little / no threats of new entrants

Question 35

What is allocative efficiency?

Answer 35

The monopolists profit maximising price is above marginal cost therefore output is too low and price is too high

Question 36

What is X-inefficiency?

Answer 36

Actual average costs are higher than potential average costs