4. Market Structure Flashcards
What is efficiency
Used to judge how well a market allocated resources, and the relationship between scarce inputs and outputs
What are the types of efficiency
Allocative, productive, x and dynamic
What is allocative efficiency
When resources are used to produce what consumers want and value most highly, social welfare is maximised. P=MC
What is productive efficiency
Products are produced at the lowest average cost so the fewest resources are used to produce each product.
Production at lowest point of AC
Dynamic efficiency
Resources are allocated efficiently over time. Investment and bringing new products and production techniques into the firm. Supernormal profit is required.
What is X-inefficiency
Failing to minimise average cost at a given level of output.not producing on the ac curve. (very similar to productive efficiency)
What is an example of perfect completion
Agriculture
What are the characteristics of perfect comp
1)many buyers and sellers
2)freedom of entry + exit
3)perfect knowledge
4)products are homogenous
5)no price setting power
Why do firms only make normal profit in the long run of perfect comp
When snp is being made in the sr, firms will join the market which increases supply and lowers price for normal profit
Perfect comp efficiency
-productively efficient
-allocatively efficient
-static efficiency (not dynamic due to not enough research or development)
-no economies of scale
What is monopolistic completion
It is between the two extremes of perfect comp and monopoly
Examples of monopolistic comp
Hair dressers, estate agents, restaurants
Monopolistic comp characteristics
-large number of buyers and sellers
-no barriers to entry or exit
-normal profit in the lr
-non-homogenous goods (some price setting power)
Why does monopolistic comp have snp in the sr
Due to the differentiated products allowing them to make snp
Monopolistic comp efficiency
-non allocatively efficient
-non productively efficient
-likely dynamically efficient (different products let’s then have advantage)
What is an oligopoly
When a few firms dominate the industry and hold majority market share
What are the characteristics of an oligopoly
-a few firms dominate
-products are differentiated
-high concentration ratio
-firms are interdependent
-barriers to entry
What does the kinked demand curve show
If a firm rises prices, they lose their competitiveness. If they drop prices, other firms will follow to stay competitive. This is why I’m oligopolies price usually stays stable
What is collusive and non collusive behaviour
-working together to maximise profits
-collusion reduces uncertainty firms face and increases security
-however it is illegal and risky
-firms with strong business models won’t collude
Where does collusion work best
-when firms are well know with eachother
-where costs and production methods are not secret
-where products are similar
-when there is a dominant firm for others to follow
-where there are high barriers
-fewer firms
How may firms collude
Prices, market share or advertising expenditure
What is overt collusion
Firms come to a formal agreement
What is tacit collusion
No formal agreement to collude
What is a cartel
A formal collusive agreement where a group of firms who enter an agreement mutually set prices
What two ways can cartels operate
1) Agree on a price and compete with non-price factors
2) agree to divide up the market
Cons of cartels
-no firm wants their price/output at a level they would not initially choose
-constant temptation to break the cartel
-the kore successful cartels are more likely to be broken as no firm wants to be the last one left
What is game theory
An insight into interdependent decision making. It explore the reactions of one player to the changes in strategy by another player
Maximin policy
Firms working out the strategy where the worst possible outcome is least bad
Maximax strategy
Firms working out the policy with the best possible outcome
What is the dominant strategy
If the maximax and maximin strategies have the same solution. (This is very rare)
What is the best strategy for a firm
It depends on what the other firm does
How does game theory demonstrate why firms in oligopoly have stable prices
Raising prices is a maximax strategy however may lead to losing money depending on the other firm. The safest thing to do is go with the maximin strategy and keep prices the same as money won’t be lost.
Types of price competition
Price wars, predatory pricing and limit pricing
What is price wars
Lowering prices lower than competition
What is predatory pricing
Setting prices low enough to drive firms out of the market (illegal)
What is limit pricing
Setting prices low enough to discourage new entrants. Firm must be able to make normal profit
Types of non-price competition
Advertising
Loyalty cards
Branding
Quality
Customer service
Product development
What is a monopoly
A market with one dominant firm. >25% marker share
What are monopoly characteristics
Profit maximise
Perfect market knowledge
High barriers to entry
Economies of scale
Third degree price discrimination
Monopolists charge different prices to different people for the same good or service
Where does price discrimination occur
Different times of day (peak and off peak)
Different places (city vs town)
Different incomes (elderly discounts)
What are the conditions for price discrimination
-Firm must be able to clearly separate the market into groups of buyers
-those buyers must have different elasticities of demand
-must be able to control supply
Pros of price discrimination
-Firms can increase profit
-Those in the elastic market pay lower prices
-economies of scale
-dynamic efficiency
Cons of price discrimination
-Increased inequality
-Loss of consumer surplus
-anti-competitive pricing
What is a natural monopoly
A monopoly which occurs naturally. There is almost no competition as fixed costs and barriers are so high it is pointless to compete and will only raise AC.
Pros of natural monopolies
Large profits
Dynamically efficient
Build up profit reserves
Compete with abroad companies
Higher wages due to inefficiencies
Large range of goods
Cons of natural monopolies
Firms can become complacent
Few workers due to less LR output
Possible higher prices
Possible low quality
what is a monopsony
Where there is only one buyer in the market
What is an example of a natural monopoly
Rail industry, Royal Mail
What are the characteristics of a monopsony
Same as a monoploy
What is an example of a monopsony
The NHS
What is an example of a contestable market
Hotels, fast food
Characteristics of contestable markets
Perfect knowledge
Freedom of entry
Relatively low sunk costs
Best available tech
Low product loyalty
SR profit maximisation
Should be productively and allocatively efficient
Types of barriers to entry
Legal barriers
Marketing barriers
Pricing decisions
Startup costs
Why should a Natural monopoly have one firm
-huge fixed costs
-enormous potential for economies of scale
-rational for one form to supply the market (competition is undesirable)
-competition would result in wasteful duplication of resources and non exploitation of full economies of scale
why should natural monopolies be heavily regulated
they often provide the good or service for a necessity. this means that without regulation, the firm will profit maximise and consumers will be paying huge prices at an allocatively inefficient level. regulation at AR=MC will mean the firm is allocatively efficient with a low price and can be subsidised to make normal profit
why are natural monopolies likely state run
as there is limited profit potential due to high levels of regulation
