4-Competitive And Concentrated Markets

Question 1

What is a market structure?

Answer 1

A market structure describes the characteristics of the market which affect the ways in which firms compete and also welfare of consumers within that market

Question 2

What are the four market structures?

Answer 2

-perfect competition 
(Most competition, less concentration)
-monopolistic competition
-oligopoly
-monopoly
(Less competition,more concentrated)

Concentrated refers to market shares eg more concentrated means market share is concentrated in the hands of a few

Question 3

What are the factors used to determine market structure?

Answer 3

• Number of firms
• product differentiation
• ease of entry/ barriers to entry
• extent to which information/knowledge is perfect
• influence of individual firms/suppliers on price

Question 4

Features of a perfectly competitive market?

Answer 4

• it has many small firms
• large number of buyers
• no product differentiation, homogenous goods
• no barriers to entry, easy to enter market leads to factors of production completely mobile
• perfect knowledge
• no influence on price
• the ability to buy or sell as much as is desired at the ruling market price

Question 5

Note about competitive market?

Answer 5

These characteristics prevent any one individual (supplier or consumer) from influencing the market price

Therefore the market price and quantity are determined purely by the interaction of demand and supply

Question 6

The objectives of firms?

Answer 6

- profit maximisation
> there is short run and long run profit maximisation
>most obj. Just conflict with SR
> SR and LR conflict too
- sales maximisation
- growth maximisation
- market share maximisation
- survival
- quality
- corporate social responsibility

Question 7

Define consumer sovereignty?

Answer 7

Consumer sovereignty

- through exercising their spending power, consumers collectively determine what is produced in a market

Question 8

Define producer sovereignty?

Answer 8

Producer sovereignty

- producers or firms in a market determine what is produced and what prices are charged

Question 9

Define what a pure monopoly is?

Answer 9

Pure monopoly exists when there is a single supplier in a market.
One firm, sole supplier, no competition
Eg national grid, TFL, Thames water

Question 10

Define monopoly power?

Answer 10

Monopoly power
- arises when a firm exerts considerable influence in a market such as price because of its large size

Eg Apple, Windows,

Question 11

Features of a monopoly power?

Answer 11

• it has one big firm
• large number of buyers
• unique product
• High barriers to entry
• restricted knowledge
• very high influence of firm on price
• advertising
• market share of the largest firm
• concentration ratio- the higher the more power

Question 12

Barriers to entry
There are:
-natural barriers
-artificial barriers

Answer 12

Natural:
- economies of scale

Artificial Barriers:

• Patents
• Predatory pricing- temporarily reducing the price of a good to below average cost to drive smaller firms or new market entrants out of the market (goes after those in the market)
• Limit Pricing- reducing the price of a good to just about average cost to deter the entry of new firms into the market (deters entrants)

Question 13

Define concentration ratio?

Answer 13

A ration which indicates the total market share of a number of leading firms in a market, or the output of these firms as a percentage of total market output

Question 14

Monopolies are an undesirable market structure and leads to failure of markets and so forces government intervention.
Why are the problem with monopolies?

Answer 14

• poor quality
• restrict supply which leads to
  > higher prices due to cut in production
  > reduction in consumer welfare (consumer surplus)
  > productive and allocatively inefficient
• lack of choice
• misallocation of resources

Question 15

Do industries where there is monopoly power also have these problems?

Answer 15

It depends

• how much power
• how many firms in the power
• concentration ratio
• market share
• government intervention

Question 16

What are some benefits to monopolies?

Answer 16

• benefit from economies of scale (could pass savings on to consumers)
• have the ability to R&D (invention and innovation) eg pharmaceuticals from GSK
• internationally competitive

Question 17

Why is competition good?

Answer 17

(For consumers)

• more choice
• better quality
• lower price
• Greater efficiency
• greater consumer welfare/consumer surplus
• invention and innovation( when firms have an incentive to hve a comp. adv but not means (money)

Question 18

Which is better:

Monopoly or competition?

Answer 18

Depends

• on the industry
• on the good
• if it’s a natural monopoly or has monopoly power
• if monopoly is owned publicly or privately
• if monopoly abuses their power
• level of collision
• on contest ability/ extent to barrier to entry
• if innovation is necessary
• on objectives of firms