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Economics > 3.4 Market Structures > Flashcards

3.4 Market Structures Flashcards

1
Q

What are the characteristics of perfect competition

A

Homogeneous Products
Many buyers and sellers
Perfect information
No barriers to entry or exit

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2
Q

Draw Perfect Competition for Supernormal profits, Long run equilibrium, Loss making and shutdown point on separate diagrams

A

Refer to 3.4 booklet

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3
Q

What are the characteristics of Monopolistic competition

A

Differentiated Goods but strong substitutes giving firms price setting ability
Many buyers and sellers
Low barriers to entry or exit
Imperfect Information
Short run profit maximisation
Firms may develop some brand loyalty

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4
Q

Draw a short run monopolistic competition diagram

A

Monopoly ar mr sloping down SNP

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5
Q

Draw a long run, loss making and shut down point monopolistic competition diagram

A

3.4 powerpoint

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6
Q

Explain how monopolistic competition firms will earn normal profits in the long run

A

Supernormal profits (SR) attract new entrants to the industry, firms can enter due to low barriers to entry lowering AR and MR

Firms respond by greater marketing to attract new customers causing AR and MR to push back out nut increases AC out

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7
Q

What are the characteristics of Oligopoly

A

High barriers to entry/exit - LR Supernormal profits

High concentration ratio - Few sellers and less choice

DIfferentiated products - Firms are price setters and compete on non-price and price factors

Firms are independant - Firms have to act strategically due to actions affecting other firms, firms anticipate future decisions

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8
Q

What is collusion and what does it lead to in an oligopoly

A

Cooperation by fixing prices and output within an industry

Can lead to an oligopoly acting like a monopoly

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9
Q

What does rivalrous behaviour in a oligopoly lead to

A

A more competitive market

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10
Q

Draw a kinked demand curve

A

3.4 powerpoint

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11
Q

How does the kinked demand curve represent independence nature of oligopoly

A

The elasticity of a firm changes whether they raise or lower the price, this is due to possible reactions of other firms

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12
Q

How does the kinked demand curve represent price rigidity

A

Changes to marginal cost do not lead to a change in the equilibrium price

The different elasticities that firms face when changing price means there is no incentive to depart from the status quo price

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13
Q

What are the reasons for collusive behaviour

A

FIrms have the incentive to collude as it helps them to maximise profit

Firms act like one decision maker like a monopoly

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14
Q

What is Tacit Collusion

A

Unspoken actions between oligopolistic firms that are likely to minimise a competitive response

Eg, two firms decide to avoid price cutting or not attacking each others market share

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15
Q

What is Overt Collusion

A

Collusion that is spoken, open or traceable acted on by firms as a desire to achieve joint-profit maximisation

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16
Q

What are Cartels

A

An agreement between 2 or more firms not to compete with each other

Can be an agreement to fix prices or to reduce production levels

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17
Q

What are the 4 Price Strategies

A

Predatory Pricing
Limit Pricing
Price Wars
Price Leadership

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18
Q

Explain and Evaluate predatory pricing

A

Pricing at a level below own cost with the aim of forcing a competitor out of business

Success depends on having greater ability to withstand SR losses than competitor

Evaluation - Illegal but difficult to prove, Depends on the risk/reward for firms and firms need substantial cash in order to soak up losses

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19
Q

Explain and Evaluate Limit Pricing

A

Designed to prevent firms entering the market, FIrms set their price below the AC of potential competitors

Maybe possible to make high profit if incumbent has significant economies of scale

Evaluation - Firms lose significant short run profits, Firms may lack information on AC of new entrants so may struggle to determine necessary price

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20
Q

Explain and Evaluate Price Wars

A

Tends to occur where non-price competition is weak and could arise as a result of price based competition or predatory pricing

Evaluation - Generally avoided due to impact on revenue, Kinked demand shows price rigidity so firms are likely to not change price and compete on non-price factors

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21
Q

Explain and Evaluate Price Leadership

A

Where prices and price changes established by a dominant firm are accepted by others and which other firms in the industry adopt and follow

This could be Tacit Collusion if all industry prices rise

Evaluation - Regulators may intervene if the pricing action of firms are against the consumer interest, but by nature its difficult to prove

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22
Q

Give 3 Non-Price strategies

A

Marketing
Quality
Mergers and Acquisitions

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23
Q

Explain Marketing

A

Advertising, branding & wider marketing

Successful marketing increases demand

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24
Q

Explain Quality

A

Innovation - creation of new and better products

Innovation accompanied by patenting may reinforce market power - Long term strategy as patent needed

25
Q

Explain Mergers and Acquisitions

A

Horizontal mergers with other firms in the industry can be an effective way of increasing market power

Can be useful way to counter a dominant firm in the industry

26
Q

What are the characteristic of a monopoly

A

One firm
High barriers to entry
Differentiated products
Imperfect information
Short-run profit maximisation

27
Q

Define monopoly power

A

Factors that enable firms to be price setters

28
Q

Explain the two sources of monopoly power

A

Barriers to entry - Marketing barriers, Scale economies, International trade restrictions, Legal barriers (patents, licences), Sunk costs, Anti-competitive practices

Product DIfferentiation - If the product has no close substitutes then monopoly power is greater

Eg, Electricity - batteries gas oil are all poor substitutes

29
Q

Draw a monopoly diagram showing profit max, revenue max, sales max

A

3.4 Powerpoint

30
Q

What is a natural monopoly

A

Where economies of scale are so large that one producer will always achieve lower costs than an a situation with two or more firms

If there were more firms, the average cost of each individual firm would be greater than the natural monopoly so it is more efficient for a natural monopoly industry to operate with one firm

31
Q

Why might a natural monopoly break down

A

Competition has been created in utility industries through government intervention

An industry that is a natural monopoly may become competitive over time

32
Q

Draw a natural monopoly diagram

A

3.4 Powerpoint

33
Q

What are the benefits of being a monopoly to the firm

A

Economies of scale
Pricing power
Fewer competitors

34
Q

What are the costs of being a monopoly to the firm

A

Regulatory Scrutiny
Threats from outside the industry - if monopolies fail to innovate over time they may lose out to more dynamic firms in other industries

35
Q

What are the benefits of a monopoly to the consumer

A

Economies of scale - lower costs passed down
Innovation from abnormal profit - dynamic efficiency and higher quality products

36
Q

What are the costs of a monopoly to the consumer

A

Higher prices and lower output - consumer pay a higher price than competitive equilibrium
Lack of incentive to be efficient - Allocatively Inefficient, X-Inefficient and Dynamically Inefficient

37
Q

What are the costs and benefits of a monopoly on employees

A

Might offer better rates of pay than smaller firms
MIght be better job security
Large firms offer career progression and international opportunities

Workers may lack alternative employers so lack bargaining power
If large firms can replace workers with machinery jobs are not secure

38
Q

What are the costs and benefits of being a supplier to a monopoly firm

A

Regular orders may provide stable revenue flows
Supplying to major firms provides a good image for the business

Suppliers have a weak bargaining position
Suppliers may become over dependant on the demand from a monopoly firm

39
Q

What is Price Discrimination

A

Charging different groups of consumers different prices for the same good or service

40
Q

What are the conditions for price discrimination

A

Price-setting power
Consumer groups with different price elasticities of demand
Information about consumer preferences
Consumers do not sell to each other

41
Q

Draw on elastic and inelastic price discrimination on separate diagrams

A

3.4 Powerpoint

42
Q

What are the advantages of price discrimination

A
  • Profits may finance research and development projects
  • Some consumers are ‘priced-in’ to the market who might have not been able to afford the product
  • Higher output than under single monopoly price
  • Profits may help to cross-subsidise other activites
43
Q

What are the disadvantages of price discrimination

A
  • Some consumers pay higher prices than under normal market equilibrium
  • Fairness issues (Discrimination!), why should certain groups pay more or less
  • No gurantee that increased profits will lead to investment and innovation
  • Producers could lose revenue if their information is imperfect
44
Q

What are the characteristics of a monopsony

A

One buyer in the market
Sellers do not have alternative buyers to sell to
Firms are profit maximisers and have buying power (monopsony power) which can be used to exploit suppliers

45
Q

What are the advantages of a monopsony

A
  • Lower buying costs mean that consumers may benefit through lower prices
  • Lowering of costs allows greater profits for dynamic efficiency
  • Could be a useful counterweight to a dominant seller
46
Q

What are the disadvantages of monopsony

A
  • Suppliers might be squeezed out of business
  • A monopsonies supply relationship may act as a barrier to entry to new firms as they cannot easily access suppliers of materials
  • Lower costs from a monopsonist may reinforce monopoly position
47
Q

What are the characteristics of a contestable market

A
  • Any number of firms
  • Low barriers to entry
  • Homogenous/Differentiated goods
  • Imperfect/perfect information
  • Competition rather than collusion
  • Not always Short Run profit max
48
Q

What is the key characteristic for a market to be constestable

A
  • Low barriers to entry, specifically sunk costs which are costs that cannot be recovered when a business leaves the industry
49
Q

Why cant firms make long run supernormal profit in a constestable market

A

Firms will make short run abnormal profits attracting new firms into the market, which makes firms lower their prices to AR=AC which generates a normal profit

Some firms will do a “hit and run” where they will enter the industry, benefit from short term supernormal profits and leave the market when prices start to lower

50
Q

What price to most constestable markets operate at

A

AR=AC to prevent hit and run firms or to prevent losing market share

51
Q

Draw a diagram showing a contestable market

A

Monopoly at AR=AC

52
Q

What are the types of barrier to entry in a constestable market

A
  • Illegal anti-competitive practices
  • Capital costs, sunk costs, scale economies
  • Legal barriers, patents, licences etc
53
Q

What is the difference between dynamic efficiency and static efficiency

A

Dynamic - efficiency of a industry over a period of time
Static - efficiecny of an industry at a point in time

54
Q

What is allocative efficiency and what price is it

A
  • How efficiently resources are allocated
  • AR = MC
55
Q

What is productive efficiency and what price is it

A
  • Is the product being produced as cheaply as it possibly can be?
  • Lowest AC or AC=MC
56
Q

What is dynamic efficiency and what are the two requirements for it

A
  • When resources are used efficiently over time
  • Means (Funds for R&D and innovation)
  • Competitive Incentive (To improve products or production processes)
57
Q

What is X-Inefficiency

A
  • Occurs when a firm is not producing at the lowest possible cost for a given output
58
Q

Give 3 examples of X-Inefficiency

A
  • More workers than needed, supplier costs higher than what could be
  • Excessive pay bonuses for management
  • Trade unions raising workers wages above market rate
59
Q

Draw an X-Inefficiency diagram

A

3.4 Powerpoint

Economics (18 decks)

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