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✅👁️Y2 Economics Micro > 4.1.5 — Perfect Competition, Imperfectly Competitive Markets And Monopoly > Flashcards

4.1.5 — Perfect Competition, Imperfectly Competitive Markets And Monopoly Flashcards

1
Q

In what ways can market structures be characterised?

A
  1. Number of firms in the market
    The more firms, the more competition
  2. Degree of product differentiation
    The more homogenous the products, the higher the competition
  3. Ease of entry into the market
    The higher the entry barriers, the less the competition
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2
Q

What is the contestable market theory?

A

Theory that states that companies with few rivals (monopolies) behave in a competitive manner when the market they operate in has weak barriers to entry

I.e perfect competition end of spectrum is more contestable whereas monopoly has less efficiency

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3
Q

What is backwards vertical integration?

A

Firms can control the price they pay their suppliers which makes it harder for new firms to compete on price (entry barrier)

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4
Q

In what ways can barriers to entry be strategically formed by firms?

A

Where firms use different pricing policies like undercutting another firms price, or statutory, where patents protect a franchise

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5
Q

What two components are equal when profit maximisation occurs?

A

Marginal costs = marginal revenue

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6
Q

Why would firms aim to profit maximise?

A
  • provides greater wages and dividends for entrepreneurs
  • retained profits are cheap sources of finance
  • short run: keep shareholders happy
  • long run: consumers don’t like rapid price change
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7
Q

Why would PLC’s particularly aim to profit maximise?

A

Because they could lose their shareholders if they don’t receive a high dividend.

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8
Q

What is the principle-agent problem?

A

Linked to the theory of asymmetric information; when the agent makes decisions for the principal, but the agent is inclined to act in their own interests (causes conflict)

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9
Q

Define sales maximisation

A

When firms aim to sell as much of their goods and services as possible without making a loss

I.e Amazon’s kindle launch — they sold as many as possible to gain market share to earn more profits in the long run — deters competitors

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10
Q

What is the satisficing principle?

A

When a firm earns just enough profits to keep its shareholders happy

Can occur when there is a divorce of ownership and control

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11
Q

Advantages of a perfectly competitive market? (Think what efficiencies can be achieved)

A
  • in the long run there is a lower price: P=MC so there is allocative efficiency
  • since firms produce at the bottom of the AC curve, there is productive efficiency
  • supernormal profits produced in the short run might increase dynamic efficiency via investment
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12
Q

Disadvantages of a perfectly competitive market?

A
  • dynamic efficiency might be limited due to the lack of supernormal profits
  • since firms are small, there are few or no economies of scale
  • the assumptions of the model rarely apply in real life
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13
Q

Characteristics of firms in monopolistically competitive markets?

A
  • Short run profit maximisers
  • non-homogenous products due to branding
  • lots of substitutes
  • model based on assumption of there being a high level of buyers and sellers
  • non-price competition
  • no barriers to entry / exit
  • imperfect info
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14
Q

Advantages of monopolistically competitive markets?

A
  • firms allocatively inefficient in the short and long run
  • firms don’t fully exploit their factors: excess capacity in the market
  • consumers get a wide variety of choice
  • model is more realistic than perfect competition
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15
Q

Disadvantages of monopolistically competitive markets?

A
  • in the long run dynamic efficiency might be limited due to lack of supernormal profits
  • firms are not as efficient as those in perfectly competitive markets
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16
Q

What are the characteristics of an oligopoly market?

A
  • high barriers to entry / exit
  • high concentration ratio
  • interdependence of firms
  • product differentiation
  • 2-8 firms
  • supernormal profits
  • kinked demand curve
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17
Q

What is a concentration ratio?

A

Combined market share of the top few firms in a market

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18
Q

What is collusive behaviour?

A

When firms agree to work together on something I.e set a price or fix the quantity of output they produce which minimises competitive pressure

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19
Q

How does collusion allow oligopolists to act as monopolists?

A
  • set higher prices
  • lower consumer surplus
  • greater profits
  • maximisation of joint profits
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20
Q

Why do firms have a strong incentive to collude?

A

They can maximise their own benefits and restrict their output, causing the market prices to increase which deters new entrants and is anti-competitive

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21
Q

Under what conditions is collusion more likely to happen?

A
  • when there are only a few firms
  • when there are high entry barriers
  • when firms face similar costs
  • when there is an ineffective competition policy
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22
Q

At what point does non-collusive behaviour occur?

A

When firms are competing — this establishes a competitive oligopoly.

This is more likely when there are several firms, products are homogenous and the market is saturated.

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23
Q

Define overt collusion

A

When a formal agreement is made between firms — works best when there are only a few dominant firms so one doesn’t refuse.
I.e price fixing,

ILLEGAL IN THE EU, USA etc

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24
Q

Define tacit collusion

A

When there is no formal agreement, but collusion is implied
I.e UK supermarket industry; firms compete in a price war which is harmful to supermarkets and their suppliers

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25
Q

What is the difference between cooperation and collusion?

A

Cooperation is allowed whilst collusion is not

Cooperation is usually beneficial whereas collusion is not

Cooperation is typically: firms organisation, how production is managed
Collusion is typically: quantity produced, price per unit etc

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26
Q

What does the kinked demand curve demonstrate?

A

The features of price stability in an oligopoly.
It assumes other firms have an asymmetric reaction to price change by another firm.

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27
Q

Define a cartel

A

Group of 2+ firms who agree to control prices, limit output or prevent the entrance of new firms into a market i.e OPEC (control 70% global oil supply)

Leads to higher prices for consumers and restricted outputs

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28
Q

When does price leadership occur?

A

When one firm changes their prices, and other firms follow.
This firm is usually the dominant one in the market.
> Other firms are usually forced into changing their prices to maintain their market share

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29
Q

What is a price war?

A

Type of price competition, which involves firms constantly cutting their prices below that of its competitors.
> Competitors then lower their prices to match
I.e UK supermarket industry

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30
Q

What is non-price competition?

A

Aims to increase brand loyalty which makes demand for goods more price inelastic.
I.e firms might improve the quality of their consumer service or have special offers to attract consumers

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31
Q

What is a barrier to entry?

A

Designed to prevent new firms from entering the market profitably, which increases consumer surplus

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32
Q

What is game theory?

A

Related to the concept of interdependence between firms in an oligopoly — used to predict outcome of a decision made by one firm when it has incomplete info about another firm

33
Q

What are the advantages of oligopoly?

A
  • significant supernormal profits so can invest in more research and development which could yield positive externalities
  • Gov revenue
  • industry standards may improve
  • EOS
  • consumer sovereignty
34
Q

What are the disadvantages of oligopoly?

A
  • basic model suggests higher prices and profits and inefficiency may result in misallocation of resources compared to outcome in a competitive market
  • if firms collude there is a loss of consumer welfare since prices are raised but supply is reduced
  • collusion could reinforce the monopoly power of existing firms and make it harder for new firms to enter
  • high sticky prices
35
Q

At what percentage of market share is a firm said to have monopoly power?

A

25%

36
Q

Year 2 disadvantages of a monopoly?

A
  • basic model of monopoly suggests that higher prices and profits and inefficiency may result in a misallocation of resources
  • monopolies can exploit the consumer by charging them higher prices meaning the good is under consumed
  • monopolies have no incentive to be efficient
  • loss of consumer surplus and a gain of producer surplus
  • not as much choice for consumers
37
Q

Year 2 advantages of a monopoly?

A
  • monopolies earn significant supernormal profits so they might invest in research and development
  • natural monopoly means only one firm is in the area, meaning there is no wasted infrastructure
  • monopolies could generate export revenue
  • exploit economies of scale
  • gov revenue
38
Q

What is price discrimination?

A

When the monopolist decides to charge different groups of consumers different prices for the same good or service

39
Q

What is first degree price price discrimination?

A

When a consumer is charged a different price I.e a lawyer might charge a high income family more than a low income family

40
Q

What is second degree price discrimination?

A

When prices are different according to volume purchased I.e with gas

41
Q

What is third degree price discrimination?

A

When different groups are charged a different price for the same good / service I.e higher price at peak times on trains as there are more users at peak times

42
Q

What are the costs of price discrimination to consumers?

A
  • usually it leads to a loss of consumer surplus so there is a loss of allocative efficiency
    It strengthens the monopoly power of firms which could result in higher prices in the long run
  • it might cost the firm to divide the market which limits the benefits they could gain
43
Q

What are the benefits of price discrimination?

A
  • consumers could benefit from a net welfare game as a result of cross subsidisation if they receive a lower price
  • consumers who may once have been excluded from high prices can now benefit from the good / service
  • producers make better use of spare capacity
    Higher supernormal profits which results from price discrimination could help stimulate investment
44
Q

What is a long run benefits that are likely to result from competition?

A

Firms are likely to be more productively and allocatively efficient as they provide goods and services that consumers want, and competitive pressures force them to lower costs of production

45
Q

What is a short run benefit that is likely to result from competition?

A

In the short run, firms might make supernormal profits which can be reinvested back into the firm. This can increase dynamic efficiency and lower LRAC

46
Q

What non-price competition methods can firms aim to achieve?

A
  • improved product quality
  • reduced costs (higher productive efficiency)
  • improve the quality of the service provided
47
Q

What are some characteristics of a contestable market?

A
  • face actual and potential competition
  • entrants to contestable markets have free access to production techniques and technology
  • so significant entry or exit barriers
  • low consumer loyalty
  • number of firms in markets vary
48
Q

What are some implications of contestable market conditions for firms?

A
  • firms are more likely to be allocatively efficient
  • threat of new entrants affects firms just as much as existing competitors. Due to low barriers firms are weary of new entrants taking supernormal profits then leaving AKA hit and run
  • highly contestable markets are akin to perfectly competitive markets
  • supernormal profits only in the short run meaning there is little incentive to enter
49
Q

Which barriers make markets less contestable?

A
  • legal barriers I.e patents
  • consumer loyalty / branding
  • predatory pricing
  • limit pricing
  • vertical integration
50
Q

What is a sunk cost?

A

Costs which cannot be recovered once they have been spent i.e advertising

51
Q

Why is a market with high sunk costs less favourable?

A

Because the risks associated with entering the market are high — likely to push a market towards a price and output that is similar to a monopoly

52
Q

Define static efficiency

A

Describes the level of efficiency at one point in time.
I.e productive and allocative efficiencies

53
Q

Define dynamic efficiency

A

Concerned with new technology and increases in productivity, which causes efficiency to increase over a period in time

54
Q

What conditions are required for productive efficiency?

A

Productive efficiency occurs when firms minimise their average total costs
(When firms produce at the lowest point on the average cost curve)

55
Q

What conditions are required for allocative efficiency?

A

Occurs when resources are distributed to the goods and services that consumers want (this maximises utility)

Exists at P = MC

Consumers pay for the value of the marginal utility they derive from consuming the good or service

56
Q

Is dynamic efficiency affected by short or long run factors?

A

Short run:
- demand
- interest rates
- past profitability

Short run costs may be increased to cause long run costs to fall

57
Q

At what point is a firm ax-inefficient (AC curve)

A

When it is producing within the AC boundary
Costs are higher than they would be with competition in the market

> could be due to waste in the production process, poor management, or simply laziness

58
Q

What is consumer surplus?

A

The difference between the price the consumer is willing and able to pay, and the price they will actually pay (P1 to P2). Based on what the consumer perceives their private benefit will be from consuming the good

59
Q

Do elastic or inelastic demand curves give a larger consumer surplus?

A

Inelastic demand curves; consumers are willing to pay a higher price

60
Q

What is producer surplus?

A

The difference between the price the producer is willing to charge and the price they actually charge. AKA the private benefit gained by the producer that covers their costs

61
Q

What is economic welfare?

A
  • total benefit society receives from an economic transaction
  • calculated by the area of producer surplus and consumer surplus added together
  • it is important when considering the effects of gov policies, which could affect either producer or consumer surplus
62
Q

What is price discrimination concerning deadweight loss with monopoly?

A
  • price discrimination occurs in a monopoly when the monopolist decides to charge different groups of consumers different prices for the same good / service
  • different prices mean monopolists can maximise overall profits
  • deadweight loss is the loss of economic efficiency when the equilibrium price and quantity is not achieved
63
Q

What is market conduct / behaviour?

A

Price and market policies pursued by firms

64
Q

Because of what 2 factors do competitive oligopolies exist? (Interdependence and independence)

A
  1. Interdependence:
    must take account of each others reactions when forming a market strategies
  2. Independent:
    Decide market strategies without cooperation or collusion
65
Q

What is a pricing ring / how is it formed?

A

Formed with a certain number of members, who agree to change a price that keeps the least productively efficient firm in the market
> raises prices
> restricts choice
> inefficient

66
Q

What are sticky prices?

A

Prices which resist change quickly, despite other shifts in the broad economy suggesting a different price is optimal

67
Q

Why do we experience sticky prices?

A

Often caused by volatility in the inflation rate, i.e expected inflation, temporary inflation or wage push inflation etc

68
Q

How does collusion harm consumers?

A
  • raised prices
  • sticky high prices mean allocative inefficiency
  • productive inefficiency
  • reduction in choice
69
Q

How does collusion harm firms?

A
  • not productively efficient
  • DOS
  • incentive to cheat
  • undercut by firms outside the cartel
  • risk to reputation
70
Q

How does collusion benefit consumers?

A
  • EOS means cheaper prices
  • better quality goods / services
71
Q

How does collusion benefit firms?

A
  • supernormal profits
  • lowered costs
  • increased market share
  • knowledge + tech transfer
72
Q

What are natural barriers?

A

Innocent barriers to market entry which aren’t manmade

73
Q

What are artificial barriers?

A

Strategic barriers to market entry which is manmade, as a result of action by existing firms in the market to prevent new entrants

74
Q

What are challenger brands?

A

Products / businesses with the potential to upset the apple cart by disrupting the models and market power of established firms

75
Q

What is price gouging?

A

When businesses heavily inflate the price of products / services which is unfair for consumers

76
Q

Define competition policy

A

Part of the governments microeconomic policy and industrial policy which aims to make goods markets more competitive m

77
Q

What are the conditions for price discrimination?

A
  • consumers with identifiable characteristics
  • markets can be separated to prevent seepage
  • different price elasticities of demand at any particular price
78
Q

What are some anticompetitive behaviours used by monopolies?

A
  • predatory pricing
  • price discrimination
  • exclusive deal
  • tying and bundling

✅👁️Y2 Economics Micro (6 decks)

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