3.4 Market structures

Question 1

Eval on perfect comp

Answer 1

most firms have some degree of price setting power
there is dominance in real world markets through branded/differentiated products
highly complex products mean there are always info gaps for consumers
impossible to avoid transactional costs despite advanced tech
patents, control of intellectual property ignored by perfect comp model
unlikely for entry and exit to industry to be costless

Question 2

what happens in the LR with monopolistic comp?

Answer 2

More firms enter the market due to low barriers to entry. Demand curve for firm shifts to left as consumers opt to buy products offered by new companies.
AR curve becomes tangential to AC curve as only normal profits are made.

Question 3

examples of non-price comp in oligopoly

Answer 3

quality of product
design/look/feel of goods
environmental impact
after sales service / availability and cost of replacement parts
other marketing factors
exclusivity / loyalty schemes
sales promotions

Question 4

conditions when price fixing cartels likely to occur

Answer 4

industry regulators are ineffective
penalties for collusion are low relative to potential profits
inelastic demand
high market share
similar strategic objectives
standardised products so cartel easily measurable
strong brands so consumers do not switch when prices increase

Question 5

Dominant strategy

Answer 5

single strategy which is best for a player regardless of what strategy other players in the game decide to use

Question 6

nash equilibrium

Answer 6

any situation where all participants in a game are pursuing their best possible strategy given the strategies of all other participants

Question 7

game theory relevance?

Answer 7

when there are relatively few firms
assumptions of rational agents maximising their own self interest - people could develop collaborative behaviours
can over simplify complex decisions.

Question 8

price war pros and cons

Answer 8

pros: consumers who see increase in consumer surplus, increased revenue if demand is elastic

cons: shareholders if lower profits, smaller firms not able to absorb lower prices and exit market, government if lower profits lead to lower tax revenue

Question 9

cost-plus pricing

Answer 9

where a firm fixes the price by adding a fixed percentage profit margin to the average cost of production

Question 10

limit pricing

Answer 10

pricing by a firm to deter entry or the expansion of fringe firms
the limit price is below the short run profit maximising price but above the competitive level

Question 11

peak pricing

Answer 11

when a business raises its prices at a time when demand has reached a peak might be justified due to higher marginal costs of supply at peak times

Question 12

penetration pricing

Answer 12

pricing policy used to enter a new market, usually by setting a low price

Question 13

predatory pricing

Answer 13

deliberate strategy of driving competitors out of the market by setting low prices or selling below average variable cost

Question 14

price leadership

Answer 14

ituation where prices and price changes established by a dominant firm, or a firm are usually accepted by others and which other firms in the industry typically adopt and then follow

Question 15

natural monopoly

Answer 15

high fixed costs, lrac falls completely, increasing returns to scale at all levels of output, cannot be more than one productively efficient provider of a good, low marginal costs

Question 16

conditions for price discrimination

Answer 16

firms must have sufficient market power
identifying different market segments (with differing PEDs)
ability to separate different groups (requires market intelligence)
ability to prevent re-sale (no secondary markets)

Question 17

degrees of price discrimination

Answer 17

1st: different prices for each individual unit purchased (haggling)
2nd: prices based on quantity sold (bulk buy), and time of purchase (peak times)
3rd: different prices to groups with varying PED

Question 18

cons of monopoly

Answer 18

prices higher than under competitive conditions (lack of allocative efficiency, regressive impact on low income household)
production inefficiency due to lack of comp
fewer EOS exploited
less drive to innovate (less dynamic efficiency)
DEOS due to too large monopoly hard to manage

Question 19

pros of monopoly

Answer 19

profits can be used to fund R+D, dynamic efficiency
natural monopoly allows for large EOS
price discrimination can help some consumers if they are charged a lower price

Question 20

cross subsidy

Answer 20

where one group of consumers pays a higher amount so that the price paid by another group can be reduced

Question 21

pros of price disc

Answer 21

cross subsidy of activities that bring social benefits
pharmaceutical companies charging lower prices for drugs in lower & middle-income countries
less waste
new consumers into market who otherwise would not be able to afford high price

Question 22

monopsony

Answer 22

single buyer of a good or service

Question 23

effects of monopsony

Answer 23

firms: purchasing EOS, increased profits and returns for shareholders, extra profit used for R+D
consumers: lower prices (supermarkets negotiate lower prices from supplier and pass on to consumers)
improved value for money
less choice and higher prices in LR if suppliers leave market
suppliers profits fall, wages of workers fall or they lose job completely

Question 24

why do firms in contestable markets price close to AC=AR?

Answer 24

if they choose to profit max, hit and run competition will undercut the incumbent firm and lower prices and lower the firm’s profits.

price likely to be between profit max and ac=ar, the more contestable the closer to normal profits they are

Question 25

strategic barriers to entry

Answer 25

erected by existing firms

Question 26

regulatory capture

Answer 26

When industries under the control of a regulatory body appear to operate in favour of the vested interest of monopoly producers rather than consumers