3.8 Market structure

Question 1

What is a market structure

what are some of the characteristics

Answer 1

Characteristics of a market that influence the behavior of buyers and sellers and the market outcomes they achieve in term of product quantity, quality, and price.

Characteristics:
Number of firms
How much competition between firms
Ability of each firm or group of firms acting together to determine the market price
Ease at which new firms can enter the market to compete with existing firms

NPC B

Question 2

2 types of competition

Answer 2

Price competition - Competing to offer consumers the lowest possible prices for rival products to increase market share and sales.
non price competition - Competing on all other product features other than the price.

Question 3

2 main types of market structures

Answer 3

perfect competition

monopoly

Question 4

Characteristics of perfect competition

Answer 4

Large number of small firms competing to supply a market

All firms have perfect knowledge - same access to materials, technical knowledge, equipment and skills.

All firms are price takers that can only maximize their profit by selling more

New firms can enter the market freely

Each firm supplies homogenous products (identical)

Question 5

How is market price determined in a perfectly competitive market

Answer 5

By the market forces of supply and demand.

Question 6

Characteristics of a pure monopoly

Answer 6

Only one firm supplies to the entire market

Firm is a price maker - Determines the quantity it will supply to the market and can therefore determine market price. if they restrict supply, market price will go up.

New firms are prevented from entering the market

Firm will earn abnormal profits

Question 7

What is destruction pricing
who is it used by
when is it used

Answer 7

Used by large firms
When its market position is threatened by a smaller rival firm or new firm(s) trying to enter the market. 

Reduce the prices to lower than the competitors’ cost of production. This destroys their sales.

Question 8

What is a price war

when could it happen

Answer 8

Could happen after desctruction pricing when competitor’s respond and reduce their prices as well. Each firm tries to undercut the prices of its rivals.

Question 9

What is follow-the-leader pricing

what does it avoid
what market
who is the leader

Answer 9

Pricing strategy that helps avoiding price wars in competitive markets.
Each firm in the market sets its price(s) equal to those of its closest rivals.

The leader is the firm with the largest market-share. They make the prices and all other firms follow.

Question 10

What is product differentiation

Answer 10

Changing product features of the product (brand name, taste, smell, colour, durability, quality, warranty period, after sales care, etc) to attract and retain customers.

Question 11

What is ‘small numbers’ competition

Answer 11

When the market supply is dominated by a small number of large firms.

Question 12

What is collusion

Answer 12

The firms agree to act together to control market supply and set common prices. They agree to compete on product features other than price.

Question 13

When is market considered competitive (not perfectly, just competitive)

Answer 13

Vigorous price and non-price competition between firms.

Firms pursue different pricing, output and advertising strategies depending on the type and amount of competition they face.

Product features and brand images will be highly differentiated.

Market share and profits of competing businesses will vary over time through competition.

Question 14

Disadvantages of a pure monopoly

Answer 14

less consumer choice - only one firm supplying products

Lower output and higher prices - Can restrict market supply to create an ‘artificial’ shortage of supply which would increase the market price. Total employment and output of economies would be lowered

Lower product quality - no incentive to improve quality of product since there is no competiton

X-inefficiency - Since there is no competitions monopolies make less effort to make sure resources are organized and used in the most efficient manner.

Governments need to devote scarce resources to control and regulate monopolies.

Question 15

What is competition policy

another name

Answer 15

Antitrust policies - Laws or measures that are used by a govt. to control the behavior of firms that restrict competition and act against public interest.

Imposing fines on firms that abuse their market power to exploit consumers or suppliers to earn excessive profits.

Forcing monopolies to break up into smaller competing firms

Regulate profits, prices, output and service levels of monopolies.

Question 16

What are the 2 types of barriers of entry

Answer 16

Natural barriers to entry - New firms find it difficult to compete with larger established and usually more efficient firms due to differences in their size, costs, and scale of production

artificial barriers to entry - Intentionally created by larger and more powerful firms to restrict competition.

Question 17

What are the natural barriers to entry
list
explain

Answer 17

Economies of scale - Natural monopolies - A single firm is able to produce the entire market supply of a product at a lower average cost than a number of smaller competing firms .

Capital size - Supply of the product may require a vast amount of capital equipment that may be expensive to raise and hire on their own.

Legal considerations - Legal monopolies - sole right to supply a new and innovative good or service. Govts do this to encourage the development of new production methods and products that could be expensive to do. Provide patents, copyrights, etc.

Question 18

What are the artificial barriers to entry

Answer 18

Destruction or predatory pricing

Restricting supply to rival firms - force suppliers to not supply raw materials and services to rival or new firms.

Exclusive dealing - Monopolies prevent retailers from stocking products of competing firms.

Tying or bundling - An arrangement that involves a firm agreeing to sell one product to a costumer but only on the condition that the customer also purchases one or more tied products from the same firm even if the customer doesn’t want them.

Question 19

Benefits of monopolies to consumers

Answer 19

May be more efficient than smaller firms supplying the same market because of the scale of production.

Monopolies may offer competitive prices and continue to offer high quality products if the market is contestable.

Question 20

What is a contestable market

Answer 20

Market where barriers to entry are low