3.4 Market Structures Flashcards
perfect competition, monopolistic competition, oligopolies, monopolies and monopsonies
What is an industry?
A group of firms that produce similar primary products
What are the characteristics of market structures?
- number of firms and consumers within a market
- barriers to entry and exit
- similarity of goods
- extent of knowledge
- dependency of firms
What is market concentration?
- the degree to which large firms dominate an industry
- this is measured using the concentration ratio - which considers the market shares of leading firms in an industry
What are barriers to entry? And what are some examples of this?
- refers to the ease or difficulty with which new firms and competitors may join the market
- they allow incumbent firms to make supernormal profits, before new entrants come into the market to compete for these profits
Examples:
- high capital and sunk costs
- legal barriers/regulation
- marketing/brand barriers
- predatory pricing
What are sunk costs?
- non-recoverable costs like that of marketing, staff training and r&d
- high sunk costs will discourage firms from joining since they have more to lose from failure
What is predatory pricing?
- incumbent firms may lower their prices to a level that new entrants cannot match to drive them out of business
- it is better to accept low profits in the long run to preserve profits in the long run
What are the different types of goods in a market?
- homogenous: products that are directly identical
- heterogenous: goods that are product differentiated - different from those of their competitors
What are the two possible relationships between firms in an industry?
- independent of each other - where the actions of any one firm will have no significant impact on any other single firm in the industry
- interdependence - the actions of one firm will have an impact on the others
- firms are more likely to be interdependent if there are fewer firms in the industry
What are the different types of market structures?
- perfect competition
- monopolistic competition
- oligopoly
- monopoly
- monopsony - a monopoly of a supplier
What is perfect competition?
- a market where there is a high degree of competition
- a theoretical market where prices reflect a complete mobility of resources and freedom of entry and exit, full access to information by all information by all participants, homogenous products and where no buyer or seller has any advantage over one another
What are the key assumptions of perfect competition?
- many buyers and sellers with none large enough to influence the prices
- free entry and exit out of the market
- homogenous goods that are all perfect substitutes of one another - hence a perfectly elastic demand curve for each individual firm
- perfect knowledge for buyers and sellers about the price and quality of what is being sold
- sellers must act independently - no collusion
- profit maximisation is the objective - where MC = MR
What are some examples of perfect competition?
- fruit sellers
- flower sellers
What are the features of the firms in perfect competition?
- each firm is a passive price taker
- AR = MR = perfectly elastic demand for each firm
- profit/loss depends on the ruling market prices and the SR costs of the seller
- no. Of firms in the market in the LR will adjust to the kind of profits being made
- firms are assumed to be profit maximisers
In the long run, why can a perfectly competitive firm only make normal profit?
- they produce at the point where AR = AC
- since they are profit maximisers, they also produce where MC = MR
- they are also price takers, so AR = MR
Therefore, they will produce output where: MC = MR = AC = AR
What is monopolistic competition?
- there are a large number of relatively small buyers and sellers, no barriers to entry or exit, and firms sell non-homogeneous goods but their market power is weak
- there is also imperfect competition because firms sell products which are not identical to rival firms
What are the basic assumption of monopolistic competition?
- firms sell differentiated products that have some unique characteristics but can still act as substitutes for each other
- there are many firms in the market
- still relatively easy for firms to enter and exit the market
- firms act independently
- imperfect knowledge
How are products differentiated?
- quality of the product such as the quality of ingredients, functionality and value for money
- product performance like processing speed and reliability
- perceived branding and packaging
- functionality of the product
- provenance of the product - where have the resources come from? What is the environmental footprint?
- quality of after sales services to consumers and availability of replacement parts
What are some examples of close monopolistic competitions?
- restaurants
- salons
- bars and clubs
What are the short run dynamics in monopolistic competition?
- many producers and consumers - the industry concentration ratio is low
- non-price competition is strong and lots of consumers switching
- barriers to entry and exit are pretty low - allows producers to respond to profit signals
What happens when a firm is making a supernormal profit in the short run?
- if they are making supernormal profit in the long run, then firms will be attracted by the high levels of profit
- this will increase supply in the market
- as a result, each firm will see a fall in demand for its product, shifting the AR curve downwards to the point where AC = AR
What happens when a firm is making losses in the short run?
- if the firm in the industry are making losses in the short run, then firms will leave the industry
- this will reduce supply
- each remaining firm will see an increase in demand for their product, shifting the average revenue curve upwards to the point where AR = AC
- MC = MR - the firm is a profit maximiser
What is an oligopoly?
- an imperfectly competitive industry with a high level of market concentration
- the market is dominated by a few large firms even though there may be many firms in that industry overall
- the actions of one firm will have an effect on other firms in the market so firms are interdependent
What are the key characteristics of an oligopoly?
- dominated by a small number of a large firms
- firms are interdependent - their actions affect one another - so firms closely monitor and react to other’s actions
- they have significant barriers to entry, which make it hard for new firms to enter and compete -> can include high capital requirements, economies of scale and established brand loyalty
- most competition is non-price competition
What is non-price competition?
- competition regarding advertising, product quality improvement, customer service etc
What are the effects of interdependent behaviour?
- the decisions of one firm impact the decisions of other firms in the market and vice versa
- the interdependence creates a competitive environment in an oligopoly, and can make the market more volatile than other structures
- creates a lot of uncertainty
What is product differentiation?
- if each firm sells slightly different products
What are some examples of barriers to entry in oligopolistic markets?
- EoS
- vertical integration
- brand loyalty
- control of important platforms
- expertise, goodwill and reputation
- patent protection
What are some examples of oligopolistic markets?
- airlines
- broadband providers
- vehicle manufacturers
- pharmaceutical companies
- fizzy drink makers
What is market concentration? And how is it measured?
- the level of domination is measured using a concentration ratio - it measures the combined market share of a leading group of businesses in a clearly defined market
- the sum of the market share of the leading 3 or 5 firms
- used to assess the degree of market concentration within a particular industry