3.4 - Market Structures Flashcards
What are the 4 types of efficiencies?
- Allocative (when resources used to produce goods consumers value the most, therefore social welfare is maximised)
- Productive (least amount of resources to produce maximum output)
- Dynamic (resources allocated efficiently overtime)
- X-inefficiency (when firms fails to minimise average cost at a given level of output)
What is perfect competition?
Market with high degree of competition
What are the 4 features of perfect competiton?
- Many buyers and Sellers
- Freedom of entry and exit from the industry
- Perfect Knowledge
- Homogenous goods
What is monopolistic competition? What are its 3 characteristic’s?
A form of imperfect competition where products are differentiated
- Many buyers and sellers
- No barriers to entry or exit
- Non-homogenous goods
What is an Oligopoly?
An industry dominated by a few large firms (and have a majority of the market share)
What is collusion?
When firms make collective agreements that reduce competion
What are the 2 main types of collusion?
- Overt (formal agreement)
- Tacit (no formal agreement)
What is a cartel?
A group of firms entering a formal collusive agreement to mutually set prices
What is price leadership?
Where one firm had advantages due to its size and becomes the dominant firm
What is barometric firm price leadership?
Where a firm develops a reputation for being good at predicting the next move in the industry (an other firms decide to follow)
What is game theory?
Theory exploring the reactions of one player to changes in strategy by another player
What is the maximin policy?
Firms working out the strategy where the worst possible outcome is the least bad
What is the maximax policy?
Firms working out the policy with the best possible outcome
What is the dominant strategy?
When the maximin and maximax strategies end up with the same solution
What are 3 types of price competition?
- Price wars (when two or more rival companies lower prices to steal customers)
- Predatory Pricing (driving competitors out of the market by setting very low prices)
- Limit pricing (setting price low enough to discourage new competitors, but high enough to make at least normal profit)
What are the 6 types of non-price competition?
- Advertising
- Loyalty Cards
- branding
- Quality
- Customer Service
- Product development
What is a monopoly?
A sole seller of a product in the market
- Rarely exist but firm can be considered a monopoly if it had more than 25% of market share
What is third degree price discrimination?
When monopolists charge different prices to different people for the same good
(e.g. elderly get the train cheaper)
What is a natural monopoly?
When it is more efficient for a single firm to produce a good/service to the entire market
What is a monopsony?
One one buyer in the market
What is a contestable market?
When there is freedom of entry and exit into the market (keeps firms competitive)
What are the 5 characteristics of contestable markets?
- Perfect Knowledge
- Freedom of entry and exit
- Low sunk costs (irretrievable costs)
- Low product loyalty
- Firms are SR profit Maximisers and do not collude
What are the 6 types of barriers to entry and exit?
- Legal barriers
- Marketing barriers
- Price decisions of incumbent firms
- Capital Start up costs and sunk costs
- Economies of scale (new firms unable to produce on same AC as large, incumbent firms)
- Costs to write off assets, pay leases and make workers redundant
What is a sunk cost?
Fixed cost that a business cannot recover if it leaves the industry
