3.4 Market structure Flashcards
what is economic efficiency?
efficiency = making optimal use of scarce resources
what is allocative efficiency?
the value customers give a product (the price they’re willing to pay) is equal to the cost of production
also where AR=MC
what is productive efficiency?
when a firm is operating at the lowest point on its average cost curve (unit costs have been minimised)
- lowest AC occurs when AC=MC
what is dynamic efficiency?
when a business meets the change in demands over time
definition of innovation?
the commercially successful exploitation of ideas
what is X inefficiency?
a lack of real competition may give a monopolist a weak incentive to invest in new ideas
characteristics of perfect competition?
- many sellers
- homogenous goods + costs (firms are price takers)
- no barriers to entry/exist
- perfect knowledge for all participants
- firms are profit maximises ➡️ normal profit in the long run (ST losses/supernormal profits possible)
what does it mean to be a price taking firm?
if there are many firms selling identical products and consumers can easily switch from one firm to another they will have to accept the prevailing price
how can you work out the economic profit from a perfectly competitive market?
area of a rectangle created from the length of quantity on X axis and then the gap from the ATC curve to the AR,D, and MR curve
what does a perfectly competitive market graph look like?
x axis; price/cost
y axis; output
perfectly elastic AR=MR=PE curve
straight supply curve
curved MC curve
characteristics of monopolistically competitive markets?
- many buyers and sellers
- perfect information
- very low barriers to entry/exit
- slightly differentiated products
- firms aim to maximise profits and consumers aim to maximise utility
- firms have little price-making ability
➡️ imperfect competition
does monopolistic competition lead to economically efficient?
- not allocative efficient as prices are above marginal costs
- saturation of market ➡️ cant fully exploit economies of scale
- associated with extensive consumer choice + innovation (good for dynamic efficiency)
what are the characteristics of an oligopoly?
- high level of market concentration
- when the top five firms of a market control 60% of market sales
- price rigidity
- non-price competition
➡️imperfect competition
what does it mean for a market to have imperfect competition?
- a market dominated by few large firms with a significant share
- high market concentration ratio
- each firm supplies branded products (may be differentiated)
- high barriers to entry and exit
- interdependent strategic decisions by firms
what does strategic interpendence?
- that one firm’s output and price decisions are influenced by the behaviour of competitors
- because there are few sellers each firm is likely to be aware of the actions of others
- causes to be at risk of tacit or explicit collusion which can lead to allegations of anti-competitive behaviour
what is non-collusive behaviour in an oligopoly?
firms do not work together and instead they compete with each others, either in terms of price competition and/or non-price competition
reasons for collusive behaviour in an oligopoly?
collusion is a form of anti-competitive behaviour
➡️ act together to maximise joint profits, lowers the cost of competition + reduces uncertainty
what are price fixing cartels?
they maintain or fix a minimum pricing strategy where members cannot sell products or services below the floor price
why do cartels in oligopolies often break down?
- unable to enforce
- falling market demands
- non-cartel firms entry into the industry
pros and cons of collusive behaviour?
cons
- damages consumer welfare
- absence of competition hits efficiency
- reinforces the cartel’s monopoly power
pros
- general industry benefits can bring social benefits
- fairer prices
- profits have value
characteristics of monopoly?
- pure monopolist = when a single supplier dominates the market
- price making firms
- high entry/exit barriers
- firms in a monopoly aim to maximise profits where MR = MC
- if the AR is falling the MR will be falling twice as AR
what is price discrimination?
when a business charges different consumers different prices eg parcels over a longer distance
aims of price discrimination?
- increase total revenue
- increase total profits
- generate cash flow, especially in a recession
- increase market share
- build customer loyalty
advantages of price discimination?
- lower prices for some consumers
- more profits for the business
- more profits for investment
- businesses can make better use of spare capacity
disadvantages of price discimination?
- higher prices for consumers
- can increase regional inequality
- may be an increase in transactional costs
- grouping of consumers is not perfect
it depends on for price discrimination?
➡️
- the extent to which price discrimination is used
- how businesses choose to use profits
- very difficult in practice to agree on a ‘fair price’ – it is a matter of perspective
characteristics of a monopsony?
- an industry with a single dominant buyer
- significant buying power ➡️ could abuse
- significant bargaining power
- profit maximise where MCL=MRP
- tends to be bad for workers and suppliers
- tends to be good for consumers
examples of monopsonys?
- NHS
- Education
- Amazon
- Food maufacturers
- increasingly supermarkets
how do monopsonys have so much power in the market?
- monopsony has buying/bargaining power
➡️ exploit this with suppliers to negotiate lower prices as they are purchasing in bulk
➡️ the reduced cost of purchasing inputs increases their profit margins
advantages of monopsony power?
- improved value for money eg NHS can drive down the price of routine drugs
- producer surplus has a value as well as consumer surplus, lower input costs ➡️increased investment
- useful counter-weight to the selling power of a monopolist
- in most supply chain relationships it is better if both benefit
- growth of fair trade label is evidence of how pressure from consumers cna lead to improved contracts
➡️ it is often difficult to assess the strength on a monopsony power
disadvantages of monopsony power?
- may squeeze lower prices out of suppliers
- suppliers become reliant on buyers, can make very little profit
- consumers may be face with less choice
