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Economics > 3.4 - Market Structures > Flashcards

3.4 - Market Structures Flashcards

1
Q

What are the 4 types of efficiency?

A
  • Allocative efficiency (MC=AR)
  • Productive efficiency (MC=AC)
  • X-efficiency/inefficiency
  • Dynamic efficiency
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2
Q

What is the difference between allocative and productive efficiency? What type of efficiency are they?

A
  • Static efficiency - efficiency at one point in time
  • Productive efficiency: producing G&S with the optimal combination of inputs to produce maximum output for minimum cost-> when AC is at its lowest - firm produces where MC=AC
  • Allocative efficiency: when resources are used to produce G&S which consumers want/value highly -> welfare is maximised - produce where MC=AR
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3
Q

What is the difference between x-inefficiency and dynamic efficiency?

A
  • X-inefficiency: when for a given level of output, costs are above the AC curve
  • Dynamic efficiency: how changing technology improves a firm’s output potential over time e.g. phones - firms must invest in R&D -> can only be done if making SNP
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4
Q

What are the characteristics of perfect competition?

A
  1. Many buyers and sellers - no one firm/customer is able to influence the market + no monopolies
  2. No barriers to entry/exit - no economies of scale, no sunk costs, no patents, etc - firms make normal profits in the LR
  3. Perfect knowledge - enables firms to know when other firms are making profits - attracts them to the market
    4 Homogenous goods - identical
  4. Firms are price-takers
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5
Q

Which 2 characterstics lead to normal profits

A
  • No barriers to entry/exit
  • Perfect knowledge
  • New firms enter the market -> supply increases -> price pushes down -> normal profits
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6
Q

Describe the efficiency of firms in a perfect competitive market in the short-run and long-run

A
  • In SR and LR perfect competition, firms are allocative efficient
  • In SR perfect competition -> not productive efficient
  • In LR perfect competition -> productive efficient - producing enough to take advantage of economies
  • Perfect competitive firms are always X-efficient -> firms are price takers - cost minimisation is the only way to make money
  • Dynamic efficiency: in SR - fixed capital, homogenous products, perfect knowledge -> no incentive due to copying (eval: time lag); in LR - normal profits -> nothing to reinvest in R&D
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7
Q

What are the characteristics of monopolistic competition? Give some real world examples.

A
  • Many small buyers and sellers
  • Low barriers to entry/exit
  • Slightly differentiated market
  • Examples: takeaway market - 10,000 takeaway companies in London
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8
Q

Explain the SR and LR monopolistic competition diagrams.

A
  • SR: MR & AR are elastic
  • SNP incentivises firms to join the market -> low barriers makes it easier -> customers are lost to competitors -> AR & MR of incumbent firms fall -> normal profits in the LR (AR tangent to AC)
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9
Q

What are the characteristics of oligopolies?

A
  • High concentration ratio -> few large sellers
  • High barriers to entry/exit e.g. brand loyalty to Coca Cola, R&D -> increased risk
  • Differentiated goods - similar but different
  • Interdependence - one firm’s actions will directly affect another firm
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10
Q

What is the formula for the n-concentration ratio?

A

Add up the market shares of the n largest firms

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11
Q

What is collusion?

A

When two firms agree to limit competition

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12
Q

What is the distinction between overt and tacit collusion?

A
  • Overt collusion: a formal agreement between firms to limit competition e.g. contract
  • Tacit collusion: an unspoken agreement between firms
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13
Q

What are the consequences of overt collusion?

A
  • Higher prices for consumers
  • Less output in the market
  • Poor quality products or customer service
  • Less investment in innovation
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14
Q

How does overt collusion occur?

A
  • Price fixing
  • Setting output quotas which limit supply & naturally -> price increases
  • Agreements to block new firms from entering the industry
  • Agreements to pay suppliers the same price thereby driving down prices in the supply chain (monopsony power)
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15
Q

What is a real world example of overt collusion?

A
  • OECD - oil cartel of 13 countries e.g. Saudi Arabia, Columbia
  • Fix oil prices high -> publicly
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16
Q

What is price leadership?

A
  • Most common form of tacit collusion
  • Occurs when firms monitor the price of the largest firm in the industry then adjust their prices to match
  • Difficult for regulators to prove collusion occurred
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17
Q

What are the reasons for collusive behaviour?

A
  • Few firms/competitor - easier for each firm to understand each others’ actions and responses, or to collaborate on prices/output
  • Similar costs: firms face almost identical costs as any remaining competitors have all experienced EoS
  • Similar revenue: competitors’ G&S sell for similar prices as there is little incentive to lower them - other firms respond by keeping their market share the same but decreasing the profits
  • High barriers to entry
  • Ineffective regulation: empowers firms to collude - little consequence for their actions
  • Brand loyalty: decreases benefits of competition
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18
Q

What is game theory?

A
  • Game theory is a mathematical framework used by firms to ensure optimal decisions are made in a strategic setting where there is a high level of interdependence (oligopoly markets)
  • Three elements: players (firms); strategies available to the players; payoffs
19
Q

What are price wars?

A

Firms try to undercut each other with low prices to steal consumers

20
Q

What is predatory pricing?

A

Firms cut prices below AVC to force out competitors e.g. takeaway market (below shutdown point)

21
Q

What is limit pricing?

A

Incumbent firms set prices low enough to prevent new firms entering - use its economies of scale

22
Q

What are the different types of non-price competition?

A

1) Advertising e.g. Samsung’s ad campaign with olympic swimmers after apple was discovered to be non-waterproof -> creates an awareness of the company/product & can persuade a customer to purchase -> if successful, it can increase sales & market share -> long run increase in profits -> also make the demand more inelastic
2) Loyalty cards e.g. Tesco clubcard -> encourages repeat purchases by rewarding customers for their loyalty -> provides firms with lots of data on consumers’ buying habits, which the firm can use to increase sales
3) Branding e.g. Coco pops coco the monkey -> increase loyalty & repeat purchases -an established brand should find it easier to release new products
4) Quality - known for good quality -> charge higher prices, -> strong brand loyalty -> good reputation - competing in quality -> firms investing in R&D -> increased dynamic efficiency -> higher quality

23
Q

What is the Nash Equilibrium?

A
  • An idea in game theory - any situation where all of the participants in a game are pursuing their best possible strategy given the strategies of all of the other participants
  • A rational equilibrium that can last in the long-term
24
Q

What are the characteristics of a monopoly?

A
  • Only one firm dominating the market
  • Firms are profit maximisers
  • High barriers to entry/exit e.g. Microsoft filed patents on all of its technology
  • Differentiated goods -> firms are price makers
  • Imperfect information
25
Q

What is the distinction between a pure and legal monopoly?

A
  • Pure monopoly: only one firm in the market
  • Legal monopoly: a firm with more than 25% market share
26
Q

What is price discrimination?

A

When a firm charges different prices to different consumers for an identical G/S with no differences in cost of production

27
Q

What are the conditions for price discrimination?
(include real-world examples)

A
  1. Market power - price-making ability without losing all of its customers
  2. Information to separate the market - e.g. Amazon uses data on age, gender etc to identify elastic & inelastic consumers
  3. Limit reselling - firms lose out on profit and can’t effectively PD -> market seepage
28
Q

What is the difference between 1st degree and 2nd degree price discrimination?

A
  • 1st degree: when consumers are charged the exact price they are willing and able to pay (CS->PS)
  • 2nd degree: a firm with fixed capacity where it makes no sense to leave any capacity idle, lowers prices last minute to fill capacity + cover fixed costs
29
Q

What is third degree price discrimination?

A

Occurs when a firm charges different prices to different consumers for the same good/service & markets are sub-divided based on time, age, income, location -> rail fares are priced differently depending on the time of travel

30
Q

What are the advantages of price discrimination?

A
  • Dynamic efficiency
  • Economies of scale (2nd & 3rd) -> future lower prices
  • Some consumers benefit (price elastic)
  • Cross-subsidisation (profits -> loss-making g&s)
31
Q

What are the disadvantages of price discrimination?

A
  • Allocative inefficiency
  • Inequalities
  • Anti-competitive practices
32
Q

What is a natural monopoly? (give an example)

A
  • A natural monopoly is when it’s naturally most efficient if only one firm is in the market
  • E.g. TFL, Thames water, NHS
33
Q

What are the two reasons why a monopoly might be a natural monopoly?

A
  1. High sunk costs - e.g. TFL’s sunk costs worth £129bn : railway tracks, training etc
  2. Huge internal economies of scale - need to expand output to reach minimum efficient scale
34
Q

What are the 5 main barriers to entry?

A
  • Legal barriers
  • Economies of scale
  • Sunk costs
  • Anti-competitive practices
  • Brand loyalty
35
Q

What is contestability?

A
  • A market with low barriers to entry/exit and it doesn’t matter how many firms are in the market e.g. mango market
  • Long-run -> normal profits
  • Short-run -> normal profit, SNP, loss
36
Q

What is hit and run competition? How do firms get rid of new entrants?

A
  • Incumbent firms are making SNP -> new firms enter (hit) -> undercut -> steal SNP
  • Incumbent firm sets price = AC -> normal profit -> new firm leaves market (run)
37
Q

How is vertical integration an anti-competitive practice?

A

Control scarce resources (vertical-backwards) -> refuse to let new firms use them ->stops them entering

38
Q

What are the advantages of perfect competition?

A
  • Firms make SNP (short-run) -> welfare gain for firms
  • Static efficiency (long-run) -> productive & allocative
  • Allocative efficiency -> maximise consumer surplus
  • Consumers gain: greater choice, quality + low price
39
Q

What are the disadvantages of perfect competition?

A
  • Make normal profits in LR -> no money to re-invest or achieve dynamic efficiency -> higher prices over time
  • Can’t access economies of scale -> higher prices than if a monopoly controlled the market
  • Consumers lose out on quality (high competition) -less time spent on quality control
40
Q

What are the impacts of an oligopoly market on consumers?

A
  • If firms collude: market operates like a monopoly - higher prices, lower quality & choice -> consumer surplus isn’t maximised
  • If collusion breaks down: market operates like a competitive market -> low prices, increased quantity supplied, increased consumer surplus
41
Q

What are the advantages of monopolies for firms?

A
  • Price-makers - set prices at profit max point + exploit consumer welfare to make large SNP e.g. Amazon - value of $1tn -> $87.4bn profit (2019)
  • Dynamic efficiency strengthens a firm’s monopoly position - high barriers to entry (lower costs)
42
Q

What are the advantages of monopolies for consumers?

A
  • Monopolies make large SNP -> investment -> refine production process + invest in cost-saving technology
  • Large -> economies of scale -> can reduce AC & MC -> cheaper + high quality products compared to perfect competition (too small for EoS)
43
Q

What are the disadvantages of monopolies for firms?

A
  • Few competitors -> wastage/X-inefficiency e.g. South Western Railway strike in 2019 (natural) + NHS -> legal monopoly -> increased costs -> x-inefficiency
  • Monopolies exploit their position to drive competitors of the market -> complacency + wastage -> increased x-inefficiency -> increased costs -> increased prices + weaker monopoly position
44
Q

What are the disadvantages of monopolies for consumers?

A
  • Consumers lose out - don’t produce at allocatively efficient point (produce at profit max) -> consumers are better off in a perfectly competitive market

Economics (38 decks)

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