3C

Question 1

Barriers to entry

Answer 1

Factors that prevent new firms from joining a market

Question 2

Examples of barriers to entry

Answer 2

Pricing-Charging of lower prices to keep new entrants out of the market.
Economies of scale-LRAC likely to be lower for existing larger firms
Regulation-Legal barriers eg health and safety/licenses.
Information- On a market gained over time by established firms.
Loyalty- to established brands
Set-up costs are high

Question 3

N-firm concentration ratio

Answer 3

A measure of the market share of the largest n firms in an industry.
A fall in concentration- more competition.
A rise in concentration= less competition

Question 4

Advantages of a fall in concentration

Answer 4

Rise in competition
-Increased PE may occur as firms want to produce at lowest AC in order to lower their prices and be more comp
-Increased AE as firms want to be more price comp and sell at a price closer to MC or firms want to sell exactly those goods that consumers demand in order to remain in business.
-Reduced x-inefficiency as firms have to reduce actual costs closer to lowest potential costs to enable them to sell their products at lower prices.
-Increased consumer surplus as consumers benefit from lower prices due to increased supply (no of firms increased+ S shifts right) increasing consumer welfare/AE.

Question 5

Disadvantages of fall in concentration

Answer 5

Rise in comp
-Loss of EOS as smaller firms unable to exploit the benefits of these and hence less PE with higher AC
-Loss of natural monopoly resulting in loss of AE or PE due to breaking up large scale production and fixed costs plus benefits of EOS.
-Increased -Ve externalities if firms try to cut costs in order to compete, may result in harmful effects on third parties. eg less AE
-Possible loss of de as smaller, less profit, lower r and d, there may be greater inefficiency in LR.

Question 6

Perfect competition

Answer 6

A market structure with infinite firms and consumers, producing an identical product with no barriers to entry or exit.

Question 7

Characteristics of Perfect competition

Answer 7

N of firms-infinite consumers
Barriers-None
Type-Homogenous
Price maker or taker-Takers

Question 8

Monopolistic competition

Answer 8

A market structure with many firms producing a differentiated product and few barriers to entry and exit

Question 9

Product differentiated

Answer 9

A strategy used by firms so that their good or service can be distinguished from those of their competitors.

Question 10

Characteristics of monopolistic competition

Answer 10

N of firms- Many small firms/similar sized firms
Barriers- low
Type- Similar but differentiated products-advertising to increased brand loyalty
Price maker or taker- Some influence on price, more in SR.

eg coffee shops, hairdressers
restaurants

Question 11

Advantages of monopolistic competition

Answer 11

Relatively more AE
-Increased choice and variety due to many different suppliers-consumer satisfaction increased.
-Better quality of service due to incentive to gain consumers- consumer satis increased.
-Lower pirce due to price comp and threat of new firms in LR-P closer to MC.
Relatively more DE-motivated by existence of many firms to differentiate product more to retain consumers, so may invest NP in r and d so have more innovative product in LR that fits consumer preferences more closely AE increased.
-Less x inefficiency motivated by existence of many firms to be price comp so driven for lower AC closer to potential AC

Question 12

Disadvantages of monopolistic competition

Answer 12

Allocatively inefficient:
-in Sr and LR, P>MC-there is a welfare loss to society.
-Duplication of services and lots of spare capacity with multiple firms.
-Too many firms possibly leading to more -ve externalities.
Productively inefficient:
-in SR and LR, operating on the downward-sloping part of the AC curve, not the minimum point.
-saturation of market-too many firms and output split between them, EoS may not be achievable with lower quantity so AC may be higher.
-Spending on advertising= increased AC.
Dynamic efficiency unlikely
-no SNP in R, so no easily available funds to invest, so may not see LR improvement in AE.

Question 13

Oligopoly

Answer 13

A market structure dominated by a few firms, where each firm must take account of the likely behaviour of rival firms, and there are high barriers to entry.

Question 14

Characteristics of Oligopoly

Answer 14

N of firms= 3+
barrier= high
type of product= similar but differentiated products
Price maker or price take= some influence on price, more if there is collusion.

Question 15

Interdependence and examples

Answer 15

Where the actions of one firm result in counteractions by others.

supermarkets

Question 16

Collusion

Answer 16

Where firms tacitly or overtly, agree to not compete, eg on price for their mutual benefit.

Question 17

Cartel

Answer 17

A group of firms linked by an anti-competitive agreement on price and output with the intention of maximising their joint profits

Question 18

Price leadership

Answer 18

Where one firm is dominant in an industry, so other firms follow the direction of change when the firm changes prices.

Question 19

Game theory

Answer 19

a method of modelling the behaviour and interaction between firms.

Question 20

Game theory explanation

Answer 20

If firm Y sets price high, firm X would set low, for $5m more.
If firm Y sets price low, Firm X would set price low for $3m more.
So firms X dominant strategy is to price low.
If firm Y followed the same reasoning, their dominant strategy would be to price low.

Collusion- SR profit incentive of extra $6 million if both agree to set price high.

Cheat- however SR profit incentive of extra $5 million for firm Y to price low, after agreeing to price high.

There is interdependence as each firm must consider the impact of their rivals pricing decision, so they can counteract it and decide which price gives them the greatest reward.

Question 21

Cost-plus pricing

Answer 21

Where firms set their price by adding a mark-up to average cost.

Question 22

Price war

Answer 22

When price cutting leads to retaliation and other firms cut prices, leading to a downward spiral.

Question 23

Predatory pricing

Answer 23

anti-competitive strategy where a firm sets price below AVC in an attempt to force other existing firms out of the market.

If a firm prices below shut down point eg below AVC, the firm is making a loss.

Question 24

Limit pricing

Answer 24

Lowering price to stop new firms from entering the market because its unprofitable

Question 25

Advantage’s of oligopoly market

Answer 25

-small number of firms dominate the market
-competition between firms can drive them to constantly innovate and offer better option for consumers.

Question 26

Disadvantages of oligopoly market

Answer 26

-fewer competition, less choice for consumers
-high prices
-barriers to entry for new firms , mainly smaller firms.

Question 27

Monopoly

Answer 27

A market structure with a single firm producing a highly differentiated product and high barriers to entry and exit.

Question 28

Characteristics of a monopoly

Answer 28

n of firms= a single seller of a good
barriers- very high
-type of product-unique, no close subs, no comp
price maker, still affected by law of demand.

Question 29

Third degree price discrimination

Answer 29

Where a monopoly is able to charge groups of consumers a different price for the same product

Question 30

examples of TDPD

Answer 30

rail fares, off peak and peak times

Question 31

Learn TDPD diagram

Question 32

Advantages of TDPD

Answer 32

-Increased SNP
-Some consumers benefit from cheaper prices.
-Reduces congestion in transport.
-Lower income groups and those with greater pressure on finances will beneift.

Question 33

Disadvantages of TDPD

Answer 33

-Some groups pay a higher price so have lower consumer surplus

Question 34

Natural monopoly

Answer 34

Where a single firm in an industry has an overwhelming cost advantage- so LRAC in the market are the lowest if only one firm

Question 35

Examples of natural monopoly

Answer 35

Water supply, railway

Question 36

Advantages of natural monopoly

Answer 36

-Lower price for consumer
-High snp, can invest into DE
-higher EOS
More internationally comp
-Reduces pollution and duplication

Question 37

Disadvantages of natural monopoly

Answer 37

-Firm could set very high price
-May create Opp cost for govt if govt has to subsidise firm to produce AE quantity.
-Greater XI

Question 38

Monopsony

Answer 38

A single buyer in a market

Question 39

Advantages of a monopsony

Answer 39

Suppliers to the monopsonist-When the supplier has market power as a monopolist it can counteract the monopsonist.
Consumers of end good- lower prices as monopsonist pays minimum it can.
Employees of monopsonist- minimising costs of raw materials so more funds to pay workers.
firms- lower AC

Question 40

Disadvantages of monopsony

Answer 40

Suppliers- The buyer minimises costs leading to a reduced price paid to the supplier. The monopsonist may exploit its market power by paying less later. Supplier may have to shut down if it makes a loss in the LR
Consumers of the good- The suppliers may have to cut corners or lower quality, affecting final good for consumers.
Firms-The relationship with the suppliers may worsen, the monopsonist may drive their supplier out of business.