3.4 - Market structures Flashcards
Allocative efficiency
3.4.1 - Effciency
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)
P=MC
Dynamic efficiency
3.4.1 - Effciency
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
Pareto efficiency
3.4.1 - Effciency
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
Productive efficiency
3.4.1 - Effciency
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 scarce resources and a high level of factor productivity
Lowest point on AC curve
Productivity
3.4.1 - Effciency
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
Research and development
3.4.1 - Effciency
R&D is spending by businesses towards the innovation, introduction, and improvement of products and processes. R&D leads to greater dynamic efficiency
Static efficiency
3.4.1 - Effciency
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
Technical efficiency
3.4.1 - Effciency
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
X-inefficiency
3.4.1 - Effciency
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
Homogeneous goods
3.4.2 - Perfect competition
Products that are standardised - they are more or less identical to each other
Perfect competition
3.4.2 - Perfect competition
Where prices reflect
- complete mobility of resources
- freedom of entry and exit
- full access to information by all participants,
- homogeneous products
- no one buyer or seller, or group of buyers or sellers, has any advantage over another
Price taker
3.4.2 - Perfect competition
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 price-setting power
Monopolistic competition
3.4.3 - Monopolistic competition
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
Non-price competition
3.4.3 - Monopolistic competition
Competing not on the basis of price but by other means, such as quality of the product, packaging, customer service or some other feature
Price maker
3.4.3 - Monopolistic competition
A business with price setting power - seen in imperfectly competitive markets
Product differentiation
3.4.3 - Monopolistic competition
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
Anti-competitive behaviour
3.4.4 - Oligopoly
Strategies such as predatory pricing that are designed to limit the degree of competition inside a market
Asymmetic information
3.4.4 - Oligopoly
Where parties have unequal access to information in a market
Barriers to entry
3.4.4 - Oligopoly
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
Bi-lateral monopoly
3.4.4 - Oligopoly
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
Brand extension
3.4.4 - Oligopoly
Adding a new product to an existing branded group of products
Brand loyalty
3.4.4 - Oligopoly
The degree to which people regularly buy a particular product and refuse to or are reluctant to change to competing brands
Cartel
3.4.4 - Oligopoly
An association of businesses or countries that collude to influence production levels and this the market price of a particular product
Collusion
3.4.4 - Oligopoly
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
Complex monopoly
3.4.4 - Oligopoly
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
Concentration ratio
3.4.4 - Oligopoly
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
Cooperative outcome
3.4.4 - Oligopoly
An equilibrium in a game where the players agree to cooperate for mutual benefit
Dominant market position
3.4.4 - Oligopoly
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
Dominant strategy
3.4.4 - Oligopoly
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
Economic risk
3.4.4 - Oligopoly
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
First mover advantage
3.4.4 - Oligopoly
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
Game Theory
3.4.4 - Oligopoly
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)
Herfindahl Index
3.4.4 - Oligopoly
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
Heterogeneous goods
3.4.4 - Oligopoly
Products that are differentiated by design, packaging,, functionality, performance
Innocent barriers to entry
3.4.4 - Oligopoly
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
Interdependance
3.4.4 - Oligopoly
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)
Joint profit maximisation
3.4.4 - Oligopoly
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
Kinked demand curve
3.4.4 - Oligopoly
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
Late mover advantage
3.4.4 - Oligopoly
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
Legal barriers to entry
3.4.4 - Oligopoly
Legal barriers include patent protection, legal franchises, trademarks and copyright
Limit pricing
3.4.4 - Oligopoly
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
Mutual interdependance
3.4.4 - Oligopoly
The relationship between oligopolists, in which the actions of each business affects the other business
Nash Equilibrium
3.4.4 - Oligopoly
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
Non-price competition
3.4.4 - Oligopoly
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
Oligopoly
3.4.4 - Oligopoly
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
Overt collusion
3.4.4 - Oligopoly
Formal and open agreements between firms to undertake actions that are likely to minimise a competitive response. This is illegal in most economies
Pay off matrix
3.4.4 - Oligopoly
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
Penetration pricing
3.4.4 - Oligopoly
A pricing policy used to enter a new market, usually by setting a very low price
Price leadership
3.4.4 - Oligopoly
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
Price war
3.4.4 - Oligopoly
Vigorous competition between businesses often in a short-term battle for market and increased cash-flow
Prisoners’ dilemma
3.4.4 - Oligopoly
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
Predatory pricing
3.4.4 - Oligopoly
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
Product differentiation
3.4.4 - Oligopoly
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
Strategic Interdependence
3.4.4 - Oligopoly
Means that one firms output and price decisions are influenced by the likely behavior of competitors/rivals
Rent seeking behaviour
3.4.4 - Oligopoly
Behaviour by producers in a market the improves the welfare of one by at the expense of another. A feature of monopoly and oligopoly
Strategic barriers to entry
3.4.4 - Oligopoly
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
Strategic behaviour
3.4.4 - Oligopoly
Decisions that take into account the market power and reactions of other firms
Structural barriers to entry
3.4.4 - Oligopoly
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
Tacit collusion
3.4.4 - Oligopoly
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
Zero-sum game
3.4.4 - Oligopoly
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
Bi-lateral monopoly
3.4.5 - Monopoly
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
Cross-subsidy
3.4.5 - Monopoly
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
Deadweight loss
3.4.5 - Monopoly
Loss in producer & consumer surplus due to an inefficient level of production
Limit pricing
3.4.5 - Monopoly
When a firm sets price low enough to discourage new entrants into the market
Natural monopoly
3.4.5 - Monopoly
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
Peak pricing
3.4.5 - Monopoly
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
Price discrimination
3.4.5 - Monopoly
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
Rent seeking behaviour
3.4.5 - Monopoly
Behaviour by producers in a market that improves the welfare of one but at the expense of another. A feature of monopoly and oligopoly
Second degree price discrimination
3.4.5 - Monopoly
Businesses selling off packages of a product at surplus capacity at lower prices than the previously published/advertised price - also volume discounts for consumers
Segmented markets
3.4.5 - Monopoly
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
Countervailing power
3.4.6 - Monopsony
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)
Monopsony
3.4.6 - Monopsony
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.
Contestable market
3.4.7 - Contestability
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
Hit-and-run competition
3.4.7 - Contestability
When a business enters an industry to take advantage of temporarily high (supernormal) market profits. Commonon in highly contestable markets
Innocent barriers to entry
3.4.7 - Contestability
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
Legal barriers to entry
3.4.7 - Contestability
Legal barriers include patent protection, legal franchises, trademarks and copyright
Strategic barriers to entry
3.4.7 - Contestability
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
Structural barriers to entry
3.4.7 - Contestability
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
Sunk costs
3.4.7 - Contestability
Sunks costs cannot be recovered if a business decides to leave an industry. The existence of sunk costs makes a market less contestable
