3.4- market structures Flashcards
allocative efficiency
-when resources are used to produce goods and services which consumers want and value most highly
-social welfare maximised
-where value to society from consumption is equal to marginal cost of production
-where P=MC
productive efficiency
-when products are produced at lowest avg cost
-min resources to produce max output
-only exists at bottom of AC curve
-where MC=AC in sr
-only possible if firm is technically efficient
dynamic efficiency
-when resources are allocated efficiently over time
-alternative is static efficiency which only occurs at a set point in time
-achieved where competition encourages innovation
-supernormal profits required to give firms incentive to invest and ability to do so
X-inefficiency
-firm fails to minimise avg costs at a given level of output
-organisational slack
-often occurs in lack of competition where firms have no incentive to cut costs
characteristics of perfect competition
-many buyers and sellers so no one person can massively influence market
-freedom of entry and exit so only normal profits in the LR
-perfect knowledge
-homogeneous products
-price takers
perfect comp- profit max equilibrium in the sr
-firms short run profit maximise and so produce where MC=MR
-they can also make a loss or normal profits
perfect comp- profit max equilibrium in the LR
-firms can only make normal prof in the long run
-as there is perfect knowledge and no barriers so new entrants
perfect competition- efficiency
-they are productively efficient as they produce where MC=AC
-allocative efficient as they prod where P=MC, static efficient
-not dynamic efficient as perfect info means one firms invention is adopted by another
-unable to benefit from EoS
characteristics of monopolistic competition
-large number of buyers and sellers
-no barriers to entry or exit
-firms produce differentiated non-homogeneous products meaning individual firms have some price setting power, so curve is downward sloping
monopolistic comp- profit maximising equilibrium in SR
-supernormal or normal profits or losses can be mad in SR
-produce where MC=MR
monopolistic comp- profit maximising equilibrium in LR
-due to lack of barriers firms can only make normal profits in the LR
-new entrants common
monopolistic competition- efficiency
-not allocatively or productively efficient as MR does not equal AR so AC cannot equal MC and AC cannot equal AR
-dynamically efficient as there are differentiated products so innovation will give edge over competitors to make SR supernormal prof
-less is sold at higher price compared to perf, however there is greater variety to some EoS can be enjoyed
characteristics of oligopoly
-few firms dominate and have majority of market share
-differentiated products
-concentrated supply in hands of relatively few firms meaning high conc ratio
-firms are interdependent
-barriers to entry
oligopoly- N-firm concentration ratios
-measures percentage of total market that a particular number of firms have
-total sales of n firms\total market size multiplied by 100
what is collusive behaviour?
-firms make collective agreements to reduce competition, when firms don’t collude they are in a competitive oligopoly
reasons for collusive behaviour
-maximise industry profits
-reduces uncertainty
-works best when there are few firms all well known to each other
reasons for non-collusive behaviour
-it is illegal
-risks such as one firm breaking cartel or price being set where they do not want it
-may have a strong business model or something that sets them apart meaning they can already charge higher prices
what happens in a collusive oligopoly?
-may agree on prices, market share or advertising expenditure
-overt is formal agreement whilst tactic is non formal
-formal is called a cartel, laid out in document may be fines for firms who break rules
types of collusion
1.price leadership- one firm has advantages due to size or costs and becomes the dominant firm others will tend to follow so dominant firm decides price
2.barometric firm price leadership- firm develops a reputation for being good at predicting next moves, so others follow
3.- unwritten rules about advertising and trying not to take each others customers
game theory
-used to examine best strategy a firm can adopt for each assumption about its rivals
-explores reaction of one player to changes in strategy by another
types of price competition- price wars
-where non price competition is weak
-when it is difficult to collude
-drives prices down to levels where firms are frequently making losses
-lowers industry profits
types of price competition-predatory pricing
-occurs when established firm is threatened by new entrant
-established firm sets low price to drive new firms out of market, then put prices back up
-this is illegal
types of price competition-limit pricing
-used to prevent new entrants
-firms set low prices to at least make normal profits
-mainly used in contestable markets
types of non price competition
-advertising
-loyalty cards
-branding
-quality
-customer service
-product development
efficiency of oligopolistic firms
-firms are statically efficient but not productively or allocatively efficient
-dynamically efficient
-can exploit Eos
characteristics of monopoly
pure=one sole seller of good in a market
-more than 25% market share
-short run profit max
-high entry barriers
-
monopoly profit max equilibrium SR and LR
monopoly- third degree price discrimination
-charge diff prices to diff people for same goods and services
-e.g. diff times of day, diff areas or diff people such as students
-firm must be able to clearly separate market into groups with diff elasticities of demand
cost and benefits of price discrimination
-firms able to increase profits
-those in elastic market gain as they get lower prices, increased equality
-consumers may lose some con surplus as they have to pay higher prices
natural monooly
-EoS are so large that a single firm cannot exploit them all
-e.g. national grid and royal mail
-found in industries with very high fixed costs such as railways
costs and benefits of monopolies to firms
-huge profits
-investment
-compete against large overseas organisations
-lack of comp means they may not be making max profits
costs and benefits of monopolies to employees
-fewer workers
-inefficiency means they likely receive higher wages
costs and benefits of monopolies to suppliers
-may reduce their profits if all supply is bought as monopoly will reduce prices
costs and benefits of monopolies to consumers
-better if there is competition
-firms that enjot Eos will be more efficient giving consumers high surplus
-inc range of goods
-higher prices for worse service due to lack of comp
-less choice
characteristics of monopsony
-one single buyer
-e.g. NHS
-pay suppliers the lowest possible price
costs and benefits of monopsony to firms
-higher profits as they can buy at lower prices
-purchasing economies of scale
costs and benefits of monopsony to consumers
-may gain from lower prices as reduced costs passed down
-could cause a fall in supply
-fall in quality as prices are driven down
costs and benefits of monopsony to employees
costs and benefits of monopsony to suppliers
receive lower prices
characteristics of a contestable market
-perfect knowledge
-freedom of entry and exit
-relative absence of sunken costs
-Firms will be able to and have the
legal right to use the best available technology,
-low product loyalty
-SR profit maximisers do not collude
implications of a contestable market
-firms enter if they see others making profit until competition prevents them from making a profit, this may be prevented by limit pricing
-firms only make norm profits
-likely to have productive and allocative efficiency
types of barriers to entry and exit-
-legal barriers
-marketing barriers, new firms unlikely to have funds for this
-pricing decisions of existing firms e.g. limit pricing
-EoS
-sunken costs such as writing off assets and redundancies
sunken costs
- a fixed costs the business cannot recover if it leaves the industry
-all businesses have sunk costs as things re sell for lower prices
degree of contestability
-measured by the extent to which the gains from market entry for a firm exceed the costs of entering the market
-no market in reality is perfectly contestable
-more contestable the market is, the more unstable
