3.4 - Market structures

Question 1

Allocative efficiency

3.4.1 - Effciency

Answer 1

A state when the market equilibrium is at a price that represents consumer preferences; in particular, every good or service is produced up to the point where the last unit provides marginal benefit to consumers equal to the marginal cost of supply. Happens in a perfectly competitive market (MPB = MPC)

Question 2

Dynamic efficiency

3.4.1 - Effciency

Answer 2

Dynamic efficiency focuses on changes in the choice available in a market together with the qualiity/performance of products that we buy. We usally identify a close link dynamic efficiency with the pace of innovation in a market

Question 3

Pareto efficiency

3.4.1 - Effciency

Answer 3

Where it is not possible for individuals, housholds, or firms to bargain or trade in such a way that everyone is at least as well off as they were before and at least one person is better off. See alo allocative efficiency

Question 4

Productive efficiency

3.4.1 - Effciency

Answer 4

THe output of productive efficiency occurs when a business in a given market or industry reaches the lowest point of its average cost curve implying an efficient use of scarece resources and a high level of factor productivity

Question 5

Productivity

3.4.1 - Effciency

Answer 5

How much is produced per unit of input. Labour productivity, for instance, can be calculated per worker, per hour worked, etc. Capital productivity is similar to claculating a return from an investment

Question 6

Research and development

3.4.1 - Effciency

Answer 6

R&D is spending by businesses towards the innovation, introduction, and improvement of products and processes. R&D leads to greater dynamic efficiency

Question 7

Static efficiency

3.4.1 - Effciency

Answer 7

Measures how much output can be produced from given resources, and whether producers charge a price that reflects fairly the cost of the factors used to produce a product

Question 8

Technical efficiency

3.4.1 - Effciency

Answer 8

How well and quickly a machine produces high quality goods. When measuring the technical efficiency of a machine, the production costs are not considered important

Question 9

X-inefficiency

3.4.1 - Effciency

Answer 9

A lack of competition may give a monopolist less of an incetive to invest in new ideas or consider consumer welfare. With X-inefficiency, the actual unit cost of production is higher than cost that we might see in a competitive market. This is partly because firms with market power may allow their fixed costs to drift higher

Question 10

Homogeneous goods

3.4.2 - Perfect competition

Answer 10

Products that are standardised - they are more or less identical to each other

Question 11

Perfect competition

3.4.2 - Perfect competition

Answer 11

Where prices reflect complete mobility of resources and freedom of entry and exit, full access to information by all participants, homogeneous products, and the fact that no one buyer or seller, or group of buyers or sellers, has any advantage over another

Question 12

Price taker

3.4.2 - Perfect competition

Answer 12

When a firm in a perfectly competitive market takes the ruling market price as its demand curve - this constrasts imperfect competition (such as monopoly or monopolistic competition) where businesses have pirce-setting power

Question 13

Monopolistic competition

3.4.3 - Monopolistic competition

Answer 13

Competition between companies whose products are similar but sufficiently differentiated to allow each other to benefit from monopoly pricing. A market structure characterized by many buyers and sellers of slightly different products and easy entry to, and ext from, the industry. Firms have differentiated products and therefore the demand (average return) is not perfectly elastic

Question 14

Non-price competition

3.4.3 - Monopolistic competition

Answer 14

Competing not on the basis of price but by other means, such as quality of the product, packaging, customer service or some other feature

Question 15

Price maker

3.4.3 - Monopolistic competition

Answer 15

A business with price setting power - seen in imperfectly competitive markets

Question 16

Product differentiation

3.4.3 - Monopolistic competition

Answer 16

When a business seeks to distinguish what are essentially the same products from one another by real or illusory means. The assumption of homogenous products under conditions or perfect competition no longer applies

Question 17

Anti-competitive behaviour

3.4.4 - Oligopoly

Answer 17

Strategies such as predatory pricing that are designed to limit the degree of competition inside a market

Question 18

Asymmetic information

3.4.4 - Oligopoly

Answer 18

Where parties have unequal access to information in a market

Question 19

Barriers to entry

3.4.4 - Oligopoly

Answer 19

Factors which make it difficult or expensive for new firms to enter a market to compete with existing suppliers. Examples include patents; brand loyalty among consumers; the high costs of buying capital equipment and the need to win licences/franchises

Question 20

Bi-lateral monopoly

3.4.4 - Oligopoly

Answer 20

A bilateral monopoly/oligopoly is a situation where there is a single (or a few) buyer(s) and seller(s) of a given product in a market

Question 21

Brand extension

3.4.4 - Oligopoly

Answer 21

Adding a new product to an existing branded group of products

Question 22

Brand loyalty

3.4.4 - Oligopoly

Answer 22

The degree to which people regularly buy a particular product and refuse to or are reluctant to change to competing brands

Question 23

Cartel

3.4.4 - Oligopoly

Answer 23

An association of businesses or countries that collude to influence production levels and this the market price of a particular product

Question 24

Collusion

3.4.4 - Oligopoly

Answer 24

Collusion takes place when rival companie cooperate for their mutual benefit. When two or more parties act together to influence production and/or price levels, thus preventing fair competition. Common in an oligopoly/duopoly

Question 25

Complex monopoly

3.4.4 - Oligopoly

Answer 25

A complex monopoly exists if at least one quarter (25%) of the market is in the hands of one or a group of suppliers who, deliberately or not, act in a way designed to reduce competitive pressures within a market

Question 26

Concentration ratio

3.4.4 - Oligopoly

Answer 26

Measures the proportion of an industry’s output or employment accounted for by the largest firms. When the concentration ratio is high, an industry has moved towards monopolu, duopoly or oligopoly. Share can be by sales, employment or any other relevent indicator

Question 27

Cooperative outcome

3.4.4 - Oligopoly

Answer 27

An equilibrium in a game where the players agree to cooperate for mutual benefit

Question 28

Dominant market position

3.4.4 - Oligopoly

Answer 28

A firm holds a dominant position if it can operate within the market without taking full account of the reaction of its competitors or final consumers

Question 29

Dominant strategy

3.4.4 - Oligopoly

Answer 29

A dominant strategy in game theory is one where a single strategy is best for a player regardless of what strategy the other players in the game decide to use

Question 30

Economic risk

3.4.4 - Oligopoly

Answer 30

The risk that a multi-national company (MNC) may be disadvantaged by exchange rate movements or regulatory cahnges in the country in which it is operating

Question 31

First mover advantage

3.4.4 - Oligopoly

Answer 31

The idea that a business that creates a new product and which is first into the market can develop a competitive advantage perhaos through learning by doing - making it more diffuclt and costly for new firms to acheive profitable entry

Question 32

Game Theory

3.4.4 - Oligopoly

Answer 32

A “game” happens when there are two or more interacting decision-takers (players) and each decision or combination of decisions involves a particular outcome (this is known as a pay-off)

Question 33

Herfindahl Index

3.4.4 - Oligopoly

Answer 33

A measure of market/industry concentration. The index is calculated by squaring the % market share of each firm in the market and summing these numbers

Question 34

Heterogeneous goods

3.4.4 - Oligopoly

Answer 34

Products that are differentiated by design, packaging,, functionality, performance

Question 35

Innocent barriers to entry

3.4.4 - Oligopoly

Answer 35

Also known as structural entry barriers - arise when established firm have lower unit costs that potential rival firms. Might come about from first move advantage

Question 36

Interdependance

3.4.4 - Oligopoly

Answer 36

When the actions of one firm has an affect on competitors. A feature of oligopoly. When two or more things depend on each other (i.e. business and society)

Question 37

Joint profit maximisation

3.4.4 - Oligopoly

Answer 37

Where members of a cartel, dupoly, oligopoly or similar market condition engage in pricing- ouput decisions designed to maximise the groups’ profits as a whole - i.e. acting as if they were a pure monopoly supplie

Question 38

Kinked demand curve

3.4.4 - Oligopoly

Answer 38

The kinked demand curve model assums that a business might face a dual demadn curve for its products based on the likely reactions of other firms in the market to a change in its price or another variable

Question 39

Late mover advantage

3.4.4 - Oligopoly

Answer 39

The advantage a company gains by being one of the later entrants to sell a product or provide a service, when technology has improved and can be copied easily

Question 40

Legal barriers to entry

3.4.4 - Oligopoly

Answer 40

Legal barriers include patent protection, legal franchises, trademarks and copyright

Question 41

Limit pricing

3.4.4 - Oligopoly

Answer 41

This is a pricing strategy, where products are sold by a supplier at a price low enough to make it unprofitable for other players to enter the market. It is used by monopolists to discourage entry into a market, and is illegal in many countries

Question 42

Mutual interdependance

3.4.4 - Oligopoly

Answer 42

The relationship between oligopolists, in which the actions of each business affects the other business

Question 43

Nash Equilibrium

3.4.4 - Oligopoly

Answer 43

In a Nash Equilibrium, the outcome of a game that occurs is when Player A takes the best possible action given the action of Player B, and Player B takes the best possible action given the action of Player A

Question 44

Non-price competition

3.4.4 - Oligopoly

Answer 44

Competing not on the basis of price but by other means, such as the quality of the product, packaging, customer service or some other feature

Question 45

Oligopoly

3.4.4 - Oligopoly

Answer 45

A market dominated by a few producers, each of which has control over the market. However, oligopoly is best defined by the actual conduct (or behaviour) of firms within a market rather than its market structure

Question 46

Overt collusion

3.4.4 - Oligopoly

Answer 46

Formal and open agreements between firms to undertake actions that are likely to minimise a competitive response. This is illegal in most economies

Question 47

Pay off matrix

3.4.4 - Oligopoly

Answer 47

Used in game theory (for example, the Prisoners Dilemma) - A payoff metrix is a table used to simplify all of the possible outcomes of a strategic decision

Question 48

Penetration pricing

3.4.4 - Oligopoly

Answer 48

A pricing policy used to enter a new market, usually by setting a very low price

Question 49

Price leadership

3.4.4 - Oligopoly

Answer 49

When one firm has a clear dominant position in the market and the firms with lower market shares follow the pricing changes prompted by the dominant firm

Question 50

Price war

3.4.4 - Oligopoly

Answer 50

Vigorous competition between businesses often in a short-term battle for market and increased cash-flow

Question 51

Prisoners’ dilemma

3.4.4 - Oligopoly

Answer 51

A problem in game theory that demonstrates why two people might not cooperate even if it is in both their best interests to do so. In the classic game, cooperating is strictly dominated by defecting, so that the only possible equilibrium for the game is for all players to defect. No matter what the other player does, one player will always gain a greater payoff by playing defec

Question 52

Predatory pricing

3.4.4 - Oligopoly

Answer 52

The pricing of goods and services at such a low level that other firms cannot compete and are forced to leave the market. This activity is illegal in mnay economies

Question 53

Product differentiation

3.4.4 - Oligopoly

Answer 53

When a business seeks to distinguish what are essentially the same products from one another by real or illusory means. The assumption of homogeneous products under conditions of perfect competition no longer applies

Question 54

Rent seeking behaviour

3.4.4 - Oligopoly

Answer 54

Behaviour by producers in a market the improves the welfare of one by at the expense of another. A feature of monopoly and oligopoly

Question 55

Strategic barriers to entry

3.4.4 - Oligopoly

Answer 55

Strategic actions by an existing business in a market that discourages potential entrants from coming into the industry, may involve price wars, advertising and use of patents

Question 56

Strategic behaviour

3.4.4 - Oligopoly

Answer 56

Decisions that take into account the market power and reactions of other firms

Question 57

Structural barriers to entry

3.4.4 - Oligopoly

Answer 57

Cost advantages of existing, established firms in a market - they might have benefitted from economies of scale, vertical integration and built up high levels of customer loyalty. This makes it more expensive for a new firm to enter successfully

Question 58

Tacit collusion

3.4.4 - Oligopoly

Answer 58

Where firms undertake actions that are likely to minimize a competitive response, e.g. avoiding price cutting or not attacking each other’s market. When firms co-operate but not formally, e.g. price leadership, or quiet or implied co-operation, secret, unspoken cooperation

Question 59

Zero-sum game

3.4.4 - Oligopoly

Answer 59

An economic transaction in which whatever is gained by one party must be lost by the other. In a zero-sum game, the gain of one player is exactly offset by the loss of the other players. If one business gains market share, it must be at the expense of the other firms in the market

Question 60

Bi-lateral monopoly

3.4.5 - Monopoly

Answer 60

A bilateral monopoly/oligopoly is a situation where there is a single (or a few) buyer(s) and seller(s) of a given product in a market

Question 61

Cross-subsidy

3.4.5 - Monopoly

Answer 61

A cross subsidy uses profits from one line of business to finance losses in another segment of a market e.g. Royal Mail and 2nd class letters

Question 62

Deadweight loss

3.4.5 - Monopoly

Answer 62

Loss in producer & consumer surplus due to an inefficient level of production

Question 63

Limit pricing

3.4.5 - Monopoly

Answer 63

When a firm sets price low enough to discourage new entrants into the market

Question 64

Natural monopoly

3.4.5 - Monopoly

Answer 64

For a natural monopoly the long-run average cost curve falls continuously over a large range of output. The result may be that there is only room in the market for one firm to fully exploit the economies of scale that are available

Question 65

Peak pricing

3.4.5 - Monopoly

Answer 65

When a business raises prices at a time when demand has reached a peak might be justified due to the higher marginal costs of supply at peak times

Question 66

Price discrimination

3.4.5 - Monopoly

Answer 66

When a firm separates the whole market into each individual consumer and charges them the price they are willing and able to pay, supplies extract all consumer surplus

Question 67

Rent seeking behaviour

3.4.5 - Monopoly

Answer 67

Behaviour by producers in a market that improves the welfare of one but at the expense of another. A feature of monopoly and oligopoly

Question 68

Second degree price discrimination

3.4.5 - Monopoly

Answer 68

Businesses selling off packages of a product at surplus capacity at lower prices than the previously published/advertised price - also volume discounts for consumers

Question 69

Segmented markets

3.4.5 - Monopoly

Answer 69

Segmentation invovles dividing a broad consumer or business market into sub-groups of consumers (known as segments) based on some type of shared characteristics such as gender, income, location or some other facotr. A key aspect of price discrimination

Question 70

Countervailing power

3.4.6 - Monopsony

Answer 70

When the market power of a monopolistic/oligopolistic seller is offset by powerful buyers who can prevent the price from being pushed up (see bi-lateral monopoly)

Question 71

Monopsony

3.4.6 - Monopsony

Answer 71

When a single buyer controls the market for a particular good or service, in essence setting price and quality levels, normally because without that buyer there would not be sufficient demand for the product to survive.

Question 72

Contestable market

3.4.7 - Contestability

Answer 72

Where an entrant has access to all production techniques available to the incumbents is not prohibited from wooing the incumbent’s customers, and entry decisions can be reveresed without cost. The key assumption for contestability is that businesses are free to enter and leave the market

Question 73

Hit-and-run competition

3.4.7 - Contestability

Answer 73

When a business enters an industry to take advantage of temporarily high (supernormal) market profits. Commonon in highly contestable markets

Question 74

Innocent barriers to entry

3.4.7 - Contestability

Answer 74

Also known as structural entry barriers - Arise when established firms have lower unit costs than potential rival firms. Might come about from first mover advantage

Question 75

Legal barriers to entry

3.4.7 - Contestability

Answer 75

Legal barriers include patent protection, legal franchises, trademarks and copyright

Question 76

Strategic barriers to entry

3.4.7 - Contestability

Answer 76

Strategic actions by an existing business in a market that discourages potential entrants from coming into the industry, may involve price wars, advertising and use of patents

Question 77

Structural barriers to entry

3.4.7 - Contestability

Answer 77

Cost advantages of existing, established firms in a market - they might have benefitted form economies of scale, vertical integration and built up high levels of customer loyalty. This makes it more expensive for a new firm to enter successfully

Question 78

Sunk costs

3.4.7 - Contestability

Answer 78

Sunks costs cannot be recovered if a business decides to leave an industry. The existence of sunk costs makes a market less contestable