3.4 Market structures Flashcards
Name the 6 characteristics of perfect competition
Large numbers of buyers and sellers
Homogenous products
No/low barriers to entry
Perfect knowledge among buyers and sellers
No externalities
Profit maximising
Name 3 examples of barriers to entry for firms
Patents
High sunk costs
High economies of scale
Which of the following is the closest to a model of perfect competition: car manufacturing, foreign exchange market, supermarkets?
Foreign exchange market
Name the point of allocative efficiency and define it
P = MC
Whether resources are used to maximise consumer welfare
Define productive efficiency
When firms produce at lowest average total cost
Define dynamic efficiencyp
When efficiency increases over time due to innovation
Define X-inefficiency
when a firm is not producing on its lowest ATC curve possibly due to organisational slack
In what type of efficiency are firms in oligopoly and monopoly efficient?
Dynamic efficiency - can reinvest supernormal profit
Under what market structures are firms X-efficient, and in what time frame
Perfect and monopolistic- both long run only
Which market structure is allocatively efficient in the short run and long run?
Perfect competition
Which market structure is productively efficient in the long run?
Perfect competition
When is a firm under monopolistic competition efficient?
X-efficiency in the long run
Name 4 characteristic of firms in monopolistic competition
Lots of sellers
Differentiated product
No barriers to entry
Near perfect knowledge
Name 2 industries that could be seen as monopolistic
Bars
Hairdressers
Name 2 advantages and disadvantages of monopolistic
Adv: Choice for consumers, producers don’t exploit consumers
Disadv: Branding is inefficient, allocatively and productively inefficient in SR and LR
Name 4 characteristics of oligopoly
High barriers to entry
High concentration ratio
Interdependence of firms
Product differentiation
Define oligopoly
where a few large firms dominate a market
Define interdependence
when the action of one firm have an impact on all the firms in the market.
What market structure to use kinked demand curve
Oligopoly
Why do firms use non-price competition in Oligopoly?
Interdependent so prices are ‘sticky’, firms don’t compete on this
Define price leadership
Setting of price in market by a dominant company that others then follow
Define marginal cost pricing
Firms set price equal to the extra cost of producing an extra unit of output
Define predatory pricing
Anti-competitive strategy where firms set prices below AVC in attempt to force rivals out the market. It is illegal
Define price wars
Where competing firms keep cutting prices in short run
Define limit pricing
Less extreme strategy using highest price firm can set without enabling a new firm to enter the market and make profit.
Define cost plus/ mark up pricing
Policy where firms set their price by adding a mark-up to average costs.
Name 3 non-price strategies
- Buy one get one free (BOGOF) and other ‘offers’
- Advertising
- Loyalty card
Define tacit collusion
when firms behave as if they have an agreement on price, but in fact they don’t
Define overt collusion
when firms actually get together to agree prices
Name a reason why firms may collude
Increase joint prices
Name 3 conditions favouring collusion
Small number of firms
Produce similar goods
Some secrecy about market conditions
Name 2 reasons cartels break down
Exposure by authorities
Free riders
define cartel
an agreement between firms on price and output with the intentin of maximising their joint profits
define game theory
the study of strategies used to make decisions
Name 2 criticisms on the kinked demand curve
How to determine equilibrium price
Prices not always sticky in reality
Name 5 characteristics of monopoly
One seller
High barrier to entry
Unique products
Imperfect information
Super normal profit in LR
Name an advantages and 2 disadvantages of monopoly
For: dynamic efficiency
Against: Lower consumer surplus, deadweight loss
Define dynamic efficiency
Increase in efficiency over time
Define creative destruction
The process whereby established monopoly businesses see their profits destroyed by new entrants into the market attracted by abnormal profits
Define natural monopoly and give an example
Where economies of scale are so great that no single firm can fully exploit them - e.g London Underground
Define price discrimination
When a producer charges different prices to different markets for the same product
Name 4 conditions necessary for price discrimination
- Different elasticities in each market
- Can distinguish between consumers
- Can’t buy in cheap market and sell in expensive (arbitrage)
- Firm must have market power
What is the difference between third degree and first degree price discrimination?
First: different price for each customer (very rare)
Third: different price for different groups of consumer
Name 2 benefits to producers and 2 benefits to consumers from price discrimination
Producers: more profit, turn consumer surplus into producer surplus
Consumers: pay lower price in elastic market, can provide loss making service e.g off peak trains
Name a drawback of price discrimination
Loss of consumer surplus, those in inelastic market pay higher price
Define monopsony
A single buyer
Name 2 advantages and 2 disadvantages to monopsony
Adv: Consumers may benefit in terms of lower prices, Monopsonist benefits in terms of higher profits
Disadv: Quality reduced, suppliers go out of business
How can suppliers combat monopsonist power? (2 ways)
Merge to compete
Make themselves indispensable to supplier
Name 2 ways governments can intervene to reduce monopsony power
Encourage fair trade
Regulate monopsony profit
Regulation
Name 5 characteristics of a contestable market
• Absence of sunk costs
• Freedom of entry to the industry
• Costs of exit are low
• Low consumer loyalty
• Perfect knowledge
Are the number of firms relevant in assessing whether a market is contestable?
No
Name 3 ways to make a market less contestable
Integration
Marketing
Legal barriers/patents
Name 3 ways to make a market more contestable
• Monitor price behaviour
• Monitor mergers and acquisitions
• Deregulation (lower barriers to entry)
If an industry has supernormal profit what does that mean for its contestability?
Low as firms are not entering the market to benefit from it
Define contestability
Low/no barriers to entry and low/no sunk costs
