3.4 - Market structures

Question 1

Define monopoly

Answer 1

A “pure monopoly” is a market structure in which there is a single seller. The monopoly is the industry as they have 100% market share.

A “legal monopoly” is where a firm has a monopoly power, they have > 50% market share. (likely to relate to oligopoly NOT monopoly)

Question 2

State the characteristics of a monopoly

Answer 2

• Artificially high prices
• Restricted output
• High barriers to entry/exit
• Imperfect information
• Profit maximiser
• No close substitutes
• Long run snp

Question 3

Define barriers to entry

Answer 3

Aspects of a market which are designed to block potential entrants from entering a market profitably. They seek to protect the power of incumbent (existing) firms and therefore maintain snp in the long run.​

Question 4

Define barriers to exit

Answer 4

Barriers to exit are obstacles which prevent a business from leaving a market.

Question 5

State the two barriers to exit

Answer 5

• Highly specialised assets, which may be difficult to sell or relocate.
• High sunk costs = costs that can’t be recovered. For e.g. loss of customer goodwill, research and development, advertising.​

Question 6

State the natural barriers to entry

Answer 6

= occur within the industry due to the structure of it

• High sunk costs
• High fixed costs (causes initial outlay to be prohibited)
• Significant eos (causing cost advantages for more established firms)
• Vertical integration

Question 7

State the artificial barriers to entry

Answer 7

= created by the firm

• Strong brand images/customer loyalty (reduces the incentives and potential gains of new entrants)
• Legal/regulatory restrictions such as intellectual property law (patents, trade marks, copyright), tariff barriers on imports, production licenses, public franchises.
• Collusion
• Pricing strategies: predatory and limit pricing