3.4 market structures Flashcards
1
Q
what are the key tests to a market structure?
A
-number of firms
-product differentiation
-barriers to entry
-information
2
Q
what is a monopoly?
A
where there is only one dominant firm
3
Q
what is an ogliopoly?
A
where there are a few dominant firms
4
Q
what is perfect competition?
A
many small firms, none of them able to dominate the market
5
Q
what is market concentration?
A
measuring the extent to which large firms dominate an industry is through concentration ratios
6
Q
how does the number of firms affect market structure?
A
the more firms there are in an industry, the more competitive it is reckoned to be (perfect competition)
7
Q
how does product differentiation affect market structure?
A
some industries , products are almost identical (homogenous), firms will have less discretion over setting price of products, price takers, when product is differentiated, they are price inelastic and price setters
8
Q
how do barriers to entry affect market structure?
A
firms behave differently in industry if new competitors could join compared to if it is difficult for new firms to set up
9
Q
what are examples of barriers to entry?
A
-capital costs
-sunk costs
-scale economies
-legal barriers
-marketing barriers
-limit pricing
10
Q
how is capital costs a barrier to entry?
A
costs of setting it up
11
Q
how is sunk costs a barrier to entry?
A
costs that are not recoverable when exiting an industry
12
Q
how is scale economies a barrier to entry?
A
larger and more established firms having an advantage over newer and smaller firms
13
Q
how is legal barriers a barrier to entry?
A
licenses and patents prevent others from producing in certain industries
14
Q
how are marketing barriers a barrier to entry?
A
if an existing firm spends a lot on advertising it may be ard for a new firm to compete
15
Q
how is limit pricing a barrier to entry?
A
existing firms undercutting the price that new firms would set at making entry difficult
16
Q
what is a concentration ratio?
A
measure of how much large firms dominate an industry, larger value means the market is more concentrated
17
Q
what is a 5-firm concentration ratio?
A
measures the market share of the leading 5 firms in the industry
18
Q
what are characteristics of a price taker?
A
-homogenous
- AR=MR
-shape of D curve= horizontal
-no incentive to raise price, or variation in price as if price is raised consumers will switch to another provider
19
Q
what are characteristics of a price maker?
A
-differentiated
-AR=MR
-incentive to raise of lower price in order to increase revenue
-shape of D curve = AR=D, downward sloping
20
Q
what are assumptions of perfect competition?
A
-many insignificant firms
-homogenous goods
-no barriers to entry or exit
-perfect information
-short run profit maximisation
21
Q
what is the implication of many insiginifcant firms?
A
firms cannot influence industry supply, low concentration ratio
22
Q
what is the implication of homogenous goods?
A
firms are unable to differentiate goods, strong substitutes to firms’ goods, firms are price takers
23
Q
what is the implications of no barriers to entry or exit?
A
firms can easily join or leave the industry, if abnormal profits made in the SR, new entrants can easily, cannot earn abnormal profits in the long run
24
Q
what is the implication of perfect information?
A
little or no patenting or copyrighting, no trade secrets
25
what is the implication of short run profit maximisation?
firms operate where MR=AC
26
what's the importance of perfect competition?
model of perfect competition is a reference point, in reality few industries will meet the criteria
27
shut down point in the short run?
least one factor input is fixed (normally capital)
28
shut down point in the long run?
all factor inputs are variable
29
what is the shut down point?
idea that firms may be better of leaving the industry in the short run if their losses from operating are greater than fixed costs
30
if AR>AVC?
firm will continue to produce in the short run as it is making a contribution o its fixed costs
31
if AR=AVC?
shut down point where the losses are equal to the fixed costs
32
if AR
firm will leave industry in the short run as its losses from production are greater than the fixed costs
33
what are the characteristics of monopolistic competition?
-many buyers/sellers
-low barriers to entry
-differentiated products
-imperfect information
-short run profit maximisation
34
what is monopolistic competition?
more realistic version of perfect competition, but imperfect competition, most significant difference between the two is some product differentiation
35
monopolistic characteristics- many sellers and buyers?
low concentration ratio, firms are insignificant and act independently
36
monopolistic characteristics- low barriers to entry?
short run abnormal profits are possible, but attract new firms to the industry, only normal profits can be earned in the LR
37
monopolistic characteristics- differentiated products?
firms produce differentiated products, but there are relatively strong substitutes, some price setting ability, downward sloping demand, elastic demand, allows firm to advertise and maybe some brand loyalty
38
monopolistic characteristics- imperfect information?
buyers and sellers do not have complete market information
39
monopolistic characteristics- short run profit maximisation?
firms operate where MR=MC
40
what's the behaviour of firms in monopolistic competition?
firms will attempt to gain brand loyalty through advertising, giving greater price setting power (demand for the product more inelastic)
41
whats the long run outcome of monopolistic competition?
supernormal profits attract new entrants to the industry, leading to demand curve shifting left, however firms may respond by advertising, pushing curve back out (raising AC at same time)
42
long run equilibrium in monopolistic competition?
can be reached if assume ceteris paribus, but markets are always evolving, companies have incentive to promote strong brand and innovate products, may never reach in LR
43
what are the characteristics of an ogliopoly?
-market with a few sellers
-barriers to entry exist
-differentiated products
-imperfect information
-firms are interdependant
44
oligopoly characteristics- high barriers to entry?
new firms find it difficult to enter industry, supernormal profits can be earned in the long run
45
oligopoly characteristics- high market concentration?
market with a few sellers, leading firms have significant market power
46
oligopoly characteristics- firms are interdependant?
actions of one firm affect the others in the industry, firms have to act strategically, react to rival firms decision and try to anticipate future actions
47
oligopoly characteristic- differentiated products?
firms have price setting power, able to compete on non-price factors as well as on price
48
rivalry vs cooperation in oligopoly markets?
some firms may adopt rivalrous behaviour or may choose to cooperate, rival behaviour leads to more competitive
49
what is collusion?
cooperation by fixing prices and output in a industry is called collusion, anti-competitive leading to oligopoly markets becoming more like monopolies
50
what does the kinked demand curve illustrate?
interdependent nature of oligopoly (elasticity of demand faced is different depending on whether a firm raises or lowers the price), price rigidity in oligopoly
51
oligopoly pricing strategies- price rigidity?
if a firm raises the price it faces elastic demand, if it lowers the price it faces inelastic demand, little incentive to more away from its existing price, changes to marginal cost do not lead to a change in the equilibrium price (firm can absorb fluctuations in its costs due to the profit margin on product)
52
oligopoly pricing strategies- predatory pricing?
pricing at a level below own cost with the aim of forcing a competitor out of business, potential of success depends on having greater ability to withstand SR losses than the competitor, success leads to potential for great profits in LR due to less competition
53
oligopoly pricing strategies- predatory pricing evaluation?
illegal in the uk so firms may be put of conducting this, however it is difficult to prove and regulators may lack the resources to effectively police industries, depends on the relative risk/reward of the policy, incur losses- need substantial cash reserves or access to credit
54
oligopoly pricing strategies- limit pricing?
designed to prevent firms entering a market, firms setting their prices below the AC of potential competitors, possible to still make high profit if incumbent has significant economies of scale, if successful no obvious end to this pricing policy
55
oligopoly pricing strategies- limit pricing evaluation?
firms forgo significant profits in SR to pursue limit pricing, may not have clear information on AC of new entrants, struggle to determine necessary price to be effective (firms for short run profit maximisation less likely to use)
56
oligopoly pricing strategies- price leadership?
prices and price changes established by a dominant firm are accepted , can be form of tacit collusion if all go for a higher price
57
oligopoly pricing strategies- price leadership evaulation?
regulators may intervene if pricing actions of firms in a industry are against consumer interest. however tacit collusion is hard to prove
58
oligopoly pricing strategies- price wars?
industries where non-price competition is weak, result of price based competition or predatory pricing, industries where there is weak branding
59
oligopoly pricing strategies- price wars evaluation?
avoid price wars due to impact on revenue. kinked demand curve suggests price rigidity as firms lack incentive to change price
60
oligopoly pricing strategies- what are non price competition strategies?
marketing, innovation, loyalty card, after sales, opening hours, delivery, customer service, contractual arrangements, trade associations
61
oligopoly pricing strategies- marketing?
successful marketing increases demand, strong brands make product more inelastic
62
oligopoly pricing strategies- quality?
innovation, creation of new and better products, accompanied by patenting may reinforce market power, longer term strategy, first mover advantage
63
oligopoly pricing strategies- mergers and acquisations?
horizontal merger with other firms in the industry can be an effective way of increasing market power, useful way to counter a dominant firm in industry
64
oligopoly pricing strategies- customer service?
good customer service increases demand, opening hours, customer experience, after sales
65
price and non-price strategies (oligopoly)?
can mix both, may change overtime, may not be clear to the outside world
66
what types of collusion can there be?
overt or tacit
67
what can collusion include?
price fixing, which customers firms supply, which regions firms supply, who wins a contract (bid rigging)
68
what is overt collusion?
spoken, open or traceable, desire to achieve joint-profit maximisation, attempt by suppliers to control supply and fix price at a level close to monopoly level
69
what is tacit collusion?
unspoken actions between oligopolistic firms that are likely to minimise a competitive response
70
what is a cartel?
agreement between 2 or more firms not to compete with each other, e.g fix prices or reduce production levels
71
what conditions are cartels more likely to occur in?
smaller number of firms- agreement can be held, stable secure industries, high barriers to entry, higher level of trust between colluding firms
72
collusion and game theory?
shows how collusion arises, without collusion firms would set a low price, incentive to collude and raise prices, unstable equilibrium
73
what are characteristics of a monopoly?
one firm, high barriers to entry, differentiated product, imperfect information, short run profit maximisation
74
monopoly characteristics- one firm?
level of industry supply is determined by the monopoly firm only (price setter)
75
monopoly characteristics- high barriers to entry?
difficult for new firms to join the industry, abnormal profits can be made in the LR
76
monopoly characteristics- differentiated product?
price sette, alternative products are weak subtitutes
77
monopoly characteristics- imperfect information?
new firms may lack know-how to compete effectively, greater potential for the firm to price discriminate
78
monopoly characteristics- short run profit maximisation?
firm pursues profit maximisation rather than any other short run objectives,operates where MR=MC
79
what is monopoly power?
describes factors that enable firms to be price setters
80
sources to monopoly power- barriers to entry?
-legal barriers (government created e.g licenses)
- sunk costs (e.g capital inputs specific to the industry that have little or no resale value)
-anti-competitive practises (e.g limit pricing)
-marketing barriers (e.g cars)
-scale economies (new firms may struggle to compete against a firm that is exploiting EOS)
-international trade restrictions (e.g tariffs)
81
sources to monopoly power- product differentiation & near competitors?
product clearly differentiated from rivals
82
what is a natural monopoly?
where EOS is so large that one producer will always achieve lower costs than a situation with two or more firms
83
natural monopoly evaluation?
government has created competition in utility industries through regulation, overtime can become a more competitive industry
84
pros of EOS on a monopoly firm?
helps to achieve lower costs due to their scale, should lead to greater profits
85
pros of pricing power on a monopoly firm?
strong pricing power and lack of substitutes means monopolies are likely to command large profit margins
86
pros of fewer competitors on a monopoly firm?
lack of competitors means monopoles do not have as significant competitive pressures
87
impact of regulatory scrutiny on a monopoly firm?
can be investigated by regulators if they are unfairly exploiting consumers
88
impact of threats from outside the industry on a monopoly firm?
if fail to innovate overtime they may lose out to more dynamic firms in other industries
89
monopoly- pros of EOS on consumers?
lower cost may be passed onto consumers as lower prices, particularly in industries with natural monopolies
90
monopoly- pros of innovation from abnormal profits on consumers?
profit from monopoly power could be reinvested leading to dynamic efficiency
91
monopoly- pros of creates stability for consumers and business?
monopolist can plan for long term industry development
92
monopoly- cons of higher prices and lower output on consumers?
consumers pay a higher price than a competitive equilibrium, some consumers are 'priced-out' of the market
93
monopoly- cons of lack of incentive to be efficient on consumers?
allocatively inefficient- price above marginal cost, X-inefficient- firm may operate above its average cost curve, dynamically inefficient- lack of competitive incentive to be innovative
94
monopoly- impact on employees?
offer better rates of pay than small firms, career progression, may lack alternative employees in industry, may get jobs replaced by machinery
95
monopoly- impact on suppliers?
regular order, may have weak bargaining position though
96
what is price discrimination?
charging different groups of consumers different prices for the same good or service
97
what conditions are needed for price discrimination?
-price setting power
-different price elasticity of demand
-have information about consumer preferences
- low or no market arbitrage or market seepage
98
3rd degree market seperation?
market separation, firms seek to segment the market into two or more groups, maximise profits in each sub-market, lower price groups with elastic demand, high price for groups with inelastic demand, requires inability to resell good
99
advantages of price discrimination?
some consumers are priced in to the market who may not be able to afford the product, higher output than single price monopoly, profits may finance research and development projects, may help cross subsidise other activities
100
disadvantages of price discrimination?
some customers pay higher price than under normal market equilibrium, fairness issues, no guarantee increased profits earned will actually lead to investment and innovation, producers could lose revenue if imperfect information
101
what is a contestable market?
implications for the behaviour of existing firms and then affects the performance of a market in terms of allocative, productive and dynamic efficiency
102
assumptions of a contestable market?
number of firms (one to many), barriers to entry (low), goods (homogeneous or differentiated), information (perfect or imperfect), short run profit maximisation not necessary, competition rather than collusion
103
barriers to entry in a competitive market?
illegal anti-competitive practises (limit pricing, predatory pricing), nature of industry (capital costs, sunk costs, scale economies), imposed by authorities (legal barriers)
104
organic contestability- entrepreneurial zeal?
entrepreneurs are risk-takers that are looking for ways to profit by breaking existing market structures
105
organic contestability- advances in technology?
internet, advances in technology may reduce the minimum efficient scale of production
106
organic contestability- economic cycle?
recession can open up markets to new businesses
107
policies for contestability- privatisation and deregulation?
when privatisation creates a profit motive for a company, which encourages greater efficiency, can open up the market to competition
108
policies for contestability- regulation?
firms can be forced to allow others to use their network
109
policies for contestability- improving access to selling platforms?
government could remove statutory licensing that prevents other firms from competing or force private companies to offer routes to more suppliers
110
policies for contestability- european integration?
membership of the EU includes being part of the free trade area, increasing size of markets
