3.5.1 - Market Structures

Question 1

What is market structure?

Answer 1

The organisational and other characteristics of a market.

Question 2

What are the important features of market structure?

Answer 2

Number of firms in the market.
Market share of the largest firms.
Nature of the cost incurred by firms.
Nature of the sales revenue earned by firms.
Extent of barriers of entry / exit to the market.
Ease of access to market information.
How firms are affected by buyer’s behaviour.
Extent to which firms in the market undertake product differentiation.

Question 3

What are the features of a perfectly competitive market?

Answer 3

Large numbers of buyers and sellers.
Perfect market information.
Able to buy/sell as much as desired at the ruling market price.
Firms cannot influence ruling market price.
Many small firms.
Homogeneous product.
No barriers to entry/exit in the long run.

Question 4

What is the main consideration for an oligopoly?

Answer 4

A few mutually independent firms that need to take the rivals’ actions into account when deciding on its own market strategy.

Question 5

What is the main consideration for a (theoretical) monopoly?

Answer 5

1 firm that produces 100% of market output.

Question 6

Perfect competition is evident in real world examples. T/F?

Answer 6

False, it is a theoretical extreme.

No market can simultaneously display all the conditions.

Question 7

Why is a pure monopoly market possible in the real world?

Answer 7

It is possible, but it may be more accurate to say a market structure is dominated by one firm.

Often this is due to high entry costs.

Question 8

Where is a monopoly evident in the UK?

Answer 8

People living in Central London having to buy water from Thames Water.

Question 9

Why can a firms monopoly power be weakened?

Answer 9

Substitute products.
Foreign competition.

Question 10

What is the most accurate description of most real world firms?

Answer 10

Imperfectly Competitive.

Question 11

What is monopolistic competition?

Answer 11

Imperfect competition among the many.

Large number of firms in markets, but there are many characteristics of monopolistic competition.

Question 12

How can one describe an oligopoly?

Answer 12

Imperfect competition among the few.

Question 13

What are entry barriers?

Answer 13

Obstacles that make it more difficult for a new firm to enter a market.

Question 14

Why can firms not leave the market in the short-run?

Answer 14

If one factor of production is fixed (as it is in the short run), it becomes impossible for a firm to leave the market as they still have fixed costs.

Question 15

Why is it difficult for new firms to enter a pure monopoly market?

Answer 15

There are many entry barriers in the long run and short run.

Question 16

Why are entry barriers permanent in a pure monopoly?

Answer 16

If the entry barriers are removed, firms will be attracted to the market due to the firms abnormal profits. Immediately meaning the monopoly is destroyed.

Question 17

Are other firms attracted to an efficient monopolistic firm making normal profit?

Answer 17

No.

Question 18

What is an exit barrier?

Answer 18

Obstacles that make it difficult for a firm to leave a market.

Question 19

What is limit pricing?

Answer 19

Reducing the price of the good which sacrifices short-run profits in an effort to maintain long-run profits as firms are deterred from entering the market.

Question 20

What is predatory pricing?

Answer 20

An incumbent firm will set prices below costs to force new entrants out of the market. Once the new firm leaves the market, the incumbent firm will restore prices to their original level.

Question 21

What can predatory pricing lead to?

Answer 21

Better prices for consumers in the short-run, but it’s massively anti-competitive and hugely against consumers’ interests which can stifle innovation and invention.

Question 22

What is product differentiation?

Answer 22

The marketing of generally similar products with minor variations or the marketing of a range of different products.

Question 23

What is common amongst almost all firms in the UK economy today?

Answer 23

All of them engage in some form of product differentiation.

Question 24

Why do firms engage in some form of product differentiation?

Answer 24

Aiming different products at different market segments allow a firm to increase profits as there are more consumers.

Question 25

How does Apple engage in product differentiation?

Answer 25

Multiple new models will be released with varying prices and capabilities. When the new model is released, they continue to manufacture the previous model.

Question 26

What do market structures provide?

Answer 26

The framework in which businesses exist.

Question 27

What are the two types of entry barriers?

Answer 27

Artificial and man-made.

Question 28

What is assumed about sunk costs?

Answer 28

They cannot be recovered.

Question 29

Perfect competition is evident in real world examples. T/F?

Answer 29

False, it is a theoretical extreme.

No real world market can simultaneously display all the conditions.