5.1 Market Structures

Question 1

Define market structure

Answer 1

-There is a range of market structures.

-The market structure is concerned with how the market is organised.

Question 2

What are the different market structures?

Answer 2

-Perfect competition, -Monopolistic competition, -Oligopoly, -Monopoly

                           <---------------------------------
                                - Low barriers to entry
                                - More contestable 
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                                -More market power
                                -Less efficiency

Question 3

What is each market structure characterised by?

Answer 3

-The number of firms in the market.
-The degree of product differentiation.
-Ease of entry into the market.

Question 4

Characteristic-What is meant by the number of firms in the market?

Answer 4

-The more firms there are, the more competitive the market is.

-This also includes the extent of competition from abroad.

Question 5

Characteristic-What is meant by the degree of product differentiation?

Answer 5

-The more differentiated the products, the less competitive the market.

-In a perfectly competitive market, products
are homogenous.

-Products can be differentiated using price, branding and quality.
-This affects cross price elasticity of demand.

Question 6

Characteristic-What is meant by the ease of entry into the market?

Answer 6

-This is the number and degree of the barriers to entry.

-Barriers to entry are designed to prevent new firms entering the market profitably.
-This increases producer surplus.

-The higher the barriers to entry, the less competitive the market.

Question 7

Give examples of some barriers to entry

Answer 7

-Economies of scale.

-Brand loyalty, which makes demand more inelastic.
-It is hard for new
firms to gain consumer loyalty, when one firm’s brand name is already
strong.

-Controlling the important technologies in the market.

-Having a strong reputation.

-Backwards vertical integration, which controls supply.
-means firms can control the price they pay their suppliers.
-This makes it hard for new firms to compete on price, which is a barrier to entry.

Question 8

What are the 3S associated with barriers to entry?

Answer 8

-Barriers to entry can be:

-Structural, where they arise due to differences in production costs

-Strategic, where firms use different pricing policies, such as undercutting another firm’s price.

-Statutory, where patents protect a franchise. An example of this is a
television broadcasting licence.