4.1.5.1 Market structures Flashcards
What is the spectrum of market structures?
The spectrum ranges from perfect competition (most competitive) to pure monopoly (least competitive), with various imperfectly competitive markets in between.
What three main factors distinguish market structures?
- Number of firms in the market
- Degree of product differentiation
- Ease of entry into the market
How does the number of firms affect market competitiveness?
More firms typically mean more competition, as no single firm can dominate the market.
What is product differentiation?
Product differentiation refers to how distinct a firm’s product is from competitors’, affecting cross-price elasticity of demand.
How does product differentiation vary across market structures?
Perfect competition: Homogeneous products
Monopolistic competition: Differentiated products
Oligopoly: Significant differentiation
Monopoly: Unique product
What are barriers to entry?
Barriers to entry are obstacles that make it difficult for new firms to enter a market profitably.
How do barriers to entry affect market structure?
Higher barriers to entry lead to less competitive market structures (e.g., monopoly), while low barriers promote competition.
What are examples of barriers to entry?
- Economies of scale
- Brand loyalty
- Control of key technologies
- Strong reputation
- Vertical integration
- Patents and licenses
How does brand loyalty act as a barrier to entry?
Established brand loyalty makes demand more inelastic, making it hard for new firms to attract customers.
What is vertical integration as a barrier to entry?
When firms control their supply chain (backward integration), they can control input prices, making it hard for new firms to compete on price.
What are the three types of barriers to entry?
- Structural (cost differences)
- Strategic (predatory pricing)
- Statutory (legal protections like patents)
What is perfect competition?
A market structure with many small firms, homogeneous products, perfect information, and no barriers to entry.
What is pure monopoly?
A market structure with a single dominant firm, unique product, and high barriers to entry.
How does the number of firms vary across market structures?
Perfect competition: Many
Monopolistic competition: Many
Oligopoly: Few
Monopoly: One
How does ease of entry vary across market structures?
Perfect competition: Free entry
Monopolistic competition: Relatively easy
Oligopoly: Significant barriers
Monopoly: Very high barriers
What is the relationship between market structure and product differentiation?
More competitive markets tend to have less product differentiation, while less competitive markets feature more differentiation.
How do economies of scale act as a barrier to entry?
Large existing firms benefit from lower average costs, making it hard for new small firms to compete on price.
What is predatory pricing as a barrier to entry?
Established firms may temporarily lower prices below cost to drive out new competitors.
How do patents affect market structure?
Patents create statutory monopolies by legally preventing other firms from copying innovations.
Why is perfect competition considered the most efficient market structure?
It leads to productive and allocative efficiency due to intense competition and no barriers to entry.
What are the characteristics of oligopoly?
Few dominant firms, significant barriers to entry, and interdependent decision-making.
How does market structure affect pricing power?
More competitive markets limit pricing power, while less competitive markets allow firms more control over prices.
What is monopolistic competition?
Many firms selling differentiated products with relatively free entry, like restaurants or clothing brands.
How does market structure affect consumer choice?
More competitive markets typically offer more choice, while monopolies severely limit alternatives.
