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Theme 3 > 4. Market Structure > Flashcards

4. Market Structure Flashcards

1
Q

What is efficiency

A

Used to judge how well a market allocated resources, and the relationship between scarce inputs and outputs

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2
Q

What are the types of efficiency

A

Allocative, productive, x and dynamic

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3
Q

What is allocative efficiency

A

When resources are used to produce what consumers want and value most highly, social welfare is maximised. P=MC

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4
Q

What is productive efficiency

A

Products are produced at the lowest average cost so the fewest resources are used to produce each product.
Production at lowest point of AC

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5
Q

Dynamic efficiency

A

Resources are allocated efficiently over time. Investment and bringing new products and production techniques into the firm. Supernormal profit is required.

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6
Q

What is X-inefficiency

A

Failing to minimise average cost at a given level of output.not producing on the ac curve. (very similar to productive efficiency)

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7
Q

What is an example of perfect completion

A

Agriculture

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8
Q

What are the characteristics of perfect comp

A

1)many buyers and sellers
2)freedom of entry + exit
3)perfect knowledge
4)products are homogenous
5)no price setting power

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9
Q

Why do firms only make normal profit in the long run of perfect comp

A

When snp is being made in the sr, firms will join the market which increases supply and lowers price for normal profit

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10
Q

Perfect comp efficiency

A

-productively efficient
-allocatively efficient
-static efficiency (not dynamic due to not enough research or development)
-no economies of scale

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11
Q

What is monopolistic completion

A

It is between the two extremes of perfect comp and monopoly

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12
Q

Examples of monopolistic comp

A

Hair dressers, estate agents, restaurants

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13
Q

Monopolistic comp characteristics

A

-large number of buyers and sellers
-no barriers to entry or exit
-normal profit in the lr
-non-homogenous goods (some price setting power)

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14
Q

Why does monopolistic comp have snp in the sr

A

Due to the differentiated products allowing them to make snp

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15
Q

Monopolistic comp efficiency

A

-non allocatively efficient
-non productively efficient
-likely dynamically efficient (different products let’s then have advantage)

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16
Q

What is an oligopoly

A

When a few firms dominate the industry and hold majority market share

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17
Q

What are the characteristics of an oligopoly

A

-a few firms dominate
-products are differentiated
-high concentration ratio
-firms are interdependent
-barriers to entry

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18
Q

What does the kinked demand curve show

A

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

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19
Q

What is collusive and non collusive behaviour

A

-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

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20
Q

Where does collusion work best

A

-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

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21
Q

How may firms collude

A

Prices, market share or advertising expenditure

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22
Q

What is overt collusion

A

Firms come to a formal agreement

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23
Q

What is tacit collusion

A

No formal agreement to collude

24
Q

What is a cartel

A

A formal collusive agreement where a group of firms who enter an agreement mutually set prices

25
Q

What two ways can cartels operate

A

1) Agree on a price and compete with non-price factors
2) agree to divide up the market

26
Q

Cons of cartels

A

-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

27
Q

What is game theory

A

An insight into interdependent decision making. It explore the reactions of one player to the changes in strategy by another player

28
Q

Maximin policy

A

Firms working out the strategy where the worst possible outcome is least bad

29
Q

Maximax strategy

A

Firms working out the policy with the best possible outcome

30
Q

What is the dominant strategy

A

If the maximax and maximin strategies have the same solution. (This is very rare)

31
Q

What is the best strategy for a firm

A

It depends on what the other firm does

32
Q

How does game theory demonstrate why firms in oligopoly have stable prices

A

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.

33
Q

Types of price competition

A

Price wars, predatory pricing and limit pricing

34
Q

What is price wars

A

Lowering prices lower than competition

35
Q

What is predatory pricing

A

Setting prices low enough to drive firms out of the market (illegal)

36
Q

What is limit pricing

A

Setting prices low enough to discourage new entrants. Firm must be able to make normal profit

37
Q

Types of non-price competition

A

Advertising
Loyalty cards
Branding
Quality
Customer service
Product development

38
Q

What is a monopoly

A

A market with one dominant firm. >25% marker share

39
Q

What are monopoly characteristics

A

Profit maximise
Perfect market knowledge
High barriers to entry
Economies of scale

40
Q

Third degree price discrimination

A

Monopolists charge different prices to different people for the same good or service

41
Q

Where does price discrimination occur

A

Different times of day (peak and off peak)
Different places (city vs town)
Different incomes (elderly discounts)

42
Q

What are the conditions for price discrimination

A

-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

43
Q

Pros of price discrimination

A

-Firms can increase profit
-Those in the elastic market pay lower prices
-economies of scale
-dynamic efficiency

44
Q

Cons of price discrimination

A

-Increased inequality
-Loss of consumer surplus
-anti-competitive pricing

45
Q

What is a natural monopoly

A

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.

46
Q

Pros of natural monopolies

A

Large profits
Dynamically efficient
Build up profit reserves
Compete with abroad companies
Higher wages due to inefficiencies
Large range of goods

47
Q

Cons of natural monopolies

A

Firms can become complacent
Few workers due to less LR output
Possible higher prices
Possible low quality

48
Q

what is a monopsony

A

Where there is only one buyer in the market

49
Q

What is an example of a natural monopoly

A

Rail industry, Royal Mail

50
Q

What are the characteristics of a monopsony

A

Same as a monoploy

51
Q

What is an example of a monopsony

A

The NHS

52
Q

What is an example of a contestable market

A

Hotels, fast food

53
Q

Characteristics of contestable markets

A

Perfect knowledge
Freedom of entry
Relatively low sunk costs
Best available tech
Low product loyalty
SR profit maximisation
Should be productively and allocatively efficient

54
Q

Types of barriers to entry

A

Legal barriers
Marketing barriers
Pricing decisions
Startup costs

55
Q

Why should a Natural monopoly have one firm

A

-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

56
Q

why should natural monopolies be heavily regulated

A

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

57
Q

why are natural monopolies likely state run

A

as there is limited profit potential due to high levels of regulation

Theme 3 (7 decks)

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