3.4 Market structures Flashcards
list characteristics of perfect competition
-all firms are price takers
-high number of insignificant firms
-homogenous products
-low barriers to entry
-perfect info between firms
where is the shut down point
where price = avc
what do perfect competition firms achieve in the short run
super normal profits
list the characteristics of monopolistic competition
-many buyers and sellers
-differentiated goods
-profit maximisation incentive
-low barriers to entry
-firms are price makers
why will monopolistic competition firms earn normal profits in the long run
-S.N.P attracts new entrants to the market
-lots of new firms enter due to low barriers to entry
-new entrants lead to demands shifting left
what is meant by concentration ratio
-the proportion of the market supplied by the largest firms in the industry
what are the characteristics of an oligopoly
-high barriers to entry and exit
-high concentration ratio
-interdependence of firms
-product differentiation
explain the reason for collusion
-to increase profits by agreeing to raise prices and reduce output
what is tacit collusion
firms act individually and follow what the larger firms do to increase market share (accidental/unplanned collusion)
what is overt collusion
formal secret agreement between firms to fix prices or rig bids for contracts
how does a kinked demand curve show the concert of interdependence
-if a firm increases price they will face elastic demand
-if they decrease price they won’t gain enough customers to make up the difference
what factors make collusion more likely
-high market concentration
-less market regulation
-product homogeneity
what are the three pricing strategies
-price wars
-limit pricing
-predatory pricing
explain the pricing strategy price wars
-when price cutting leads to retaliation and other firms also cut prices
explain the pricing strategy limit pricing
-cutting prices to where you are just above the shut down point
-deters new entrants and existing firms from expanding
explain the pricing strategy predatory pricing
-cutting prices below ac and sometimes avc for a short period of time
-done to force other firms out the market before raising prices again
-illegal
what are the 4 main non-pricing strategies
-increase in advertising/branding
-increase in quality
-reliability
-loyalty gards/deals
list characteristics of a monopoly
-high barriers to entry
-supernormal profits in the long run
-downward sloping demand curve
-company with at least 25% market share
where do monopolies get their power
barriers to entry- no new entrants
location- no alternatives locally
product differentiation- no other firm produces a certain niche good
economies of scale- lowering production costs allows them to lower prices
what are the features of a natural monopoly
-there are continuous economies of scale
-able to achieve lower costs than a situation with 2 firms
-one firm in the market
-consumers can’t pay monopoly price so gov forces them to sell at a loss and the gov. makes up the difference
explainthe costs and benefits of a monopoly firm
pros: economies of scale (lower prices)
pricing power (larger profit margins)
fewer competitors (lower costs)
cons: lots of regulation (often investigated so they don’t exploit customers)
threats from foreign industry (lack of incentive to innovate)
explain costs and benefits of a monopoly for consumers
pros: economies of scale (lower prices)
reinvestment of S.N.P (better quality, lower prices, increased output)
price stability for consumers
cons: high prices -> low output
consumers are ‘priced out’
are x-inefficient
explain costs and benefits of a monopoly for employees
pros: better pay
better career progression
better job security
cons: lack of alternate employees
weak bargaining power
large firms can replace employees with machinery
explain costs and benefits of a monopoly to a supplier
pros: regular order will be a big part of revenue
cons:weak bargaining power (forces to accept lower prices
explain the conditions for price discrimination
-must be a price setter
-ability to separate markets
-PED must be different in different markets
-cost of keeping markets separate is less than the increased profits gained
-sufficient info
