3.4 Market Structures Flashcards
What is allocative efficiency?
When AR=MC, where resources are allocated so that consumers get the maximum benefit
What is productive efficiency?
When MC=AC, Where average costs are minimised
What is dynamic efficiency?
Long-term efficiency as a result of innovation and reinvested profits
What is X-inefficiency?
Occurs when the firm lacks the incentive to control production costs. AC is higher than it should be
Perfect competition?
A market structure where individual firms have no market power due to the amount of competition and can’t influence price
Imperfect competition?
Market structures where firms do have some market power and can influence prices
What does imperfect competition include?
- Monopolistic competition
- Oligopoly
- Monopoly
Characteristics of perfect competition?
- Many buyers and sellers
- There are no barriers to entry and exit
- Buyers and seller possess perfect knowledge of prices
- The products are homogeneous
What is monopolistic competition?
A market structure in which there are many firms offering a similar product but with some product differentiation
What are the characteristics of monopolistic markets?
- Large number of small firms
- Low barriers to entry/ exit
- Products are slightly differentiated
- Low degree of market power & some price setting power
What happens to profit in the long run for monopolistic competition?
In the long run profits will return to equilibrium where they make normal profit because they can’t defend against new competitors who enter the market
What is an oligopoly?
A market structure in which a few large firms dominate the industry with each firm having significant power
What are the characteristics of an oligopoly?
- High barriers to entry/exit
- High concentration ratio
- Interdependence of firms
- Product differentiation
What are the reasons for collusion?
- Few competitiors
- Similar costs
- Similar revenue
- High barriers to entry
- Ineffective regulation
- Brand loyalty
What is overt collusion?
Overt collusion occurs when firms explicitly agree to limit competition or raise prices
What is tacit collusion?
Tacit collusion occurs when firms avoid formal agreements but closely monitor each others behaviour usually following the lead of the largest firm in the industry
What is game theory?
Game theory is a mathematical framework which is used by firms to ensure optimal decisions are made in a strategic setting where there is a high level of interdependence
What are price wars?
Price wars occur when competitors repeatedly lower prices to undercut each other in an attempt to increase market share
What are some examples of price competition?
- Price wars
- Predatory pricing
- Limit pricing
What is predatory pricing?
Predatory pricing is the practice of lowering prices when a new competitor joins the industry in order to drive them out
What is limit pricing?
Limit pricing is when firms set a limit on how high the price will go in the industry
What are some examples of non price competition?
- Loyalty cards
- Branding
- Packaging
- Celebrity endorsement
Etc
What is a monopoly?
A monopoly is a market structure in which there is a single seller
What are the characteristics of a monopoly?
- No substitute products
- Firm has complete market power
- High barriers to entry exist
