chapter 14: market structure and degrees of market power

Question 1

what does market structure refer to?

Answer 1

refers to the competitive environment in which a firm operates

the environment informs both pricing strategy and output decisions

Question 2

what is market power?

Answer 2

the ability to raise price above MC

informs your pricing strategy

Question 3

what are the four types of market structures?

Answer 3

1. perfect competition
2. monopoly
3. oligopoly
4. monopolistic competition

Question 4

what are the assumptions of perfect competition?

Answer 4

1. there are many buyers. individual consumers are small relative to the size of the market
2. there are many sellers (producers). Individual firms are small relative to the size of the market
3. firms produce homogeneous goods - consumers regard goods produced by each firm as a perfect substitute
4. buyers and sellers have perfect information
5. there is free entry and exit of firms

Question 5

what are three examples of markets that are perfectly competitive?

Answer 5

1. agricultural markets
2. commodities markets
3. stock market

Question 6

what is a monopoly?

Answer 6

a market with a single seller/ single firm

it is not a price taker, they can raise prices

Question 7

what is the result of a monopoly?

Answer 7

a monopoly firm will have lots of power

Question 8

what is an oligopoly?

Answer 8

a market with only a handful of large sellers

they are not price takers

Question 9

what is the result of an oligopoly?

Answer 9

an oligopoly firm will have some market power, but less than monopolist

Question 10

what is strategic interaction?

Answer 10

when the oligopolist sets price or quantity it must consider how rival firms will respond to the price or quantity choice

Question 11

what is monopolistic competition?

Answer 11

a market with many small businesses competing, each selling differentiated products

Question 12

what is product differentiation?

Answer 12

efforts by sellers to make their products diff from those of their competitors

Question 13

what is the result of monopolistic competition?

Answer 13

the more distinct a firm makes its product, the more market power it will have

Question 14

what is the spectrum of market power?

Answer 14

perfect competition - imperfect competition - monopoly

many competitors - few competitors - no competitors

identical product - differentiated product - unique product

Question 15

what are the 5 key insights into imperfect competition?

Answer 15

1. having more competitors leads to less market power
2. market power allows you to pursue independent pricing strategies
3. successful product differentiation gives you more market power
4. imperfect competition among buyers gives them bargaining power
5. your best choice depends on the actions that other busiensses take

Question 16

what is a firm demand curve?

Answer 16

illustrates how the quantity that buyers demand from an individual business varies as it changes the price it charges

Question 17

what does not much market power mean?

Answer 17

• raising your prices even a little sharply reduces the quantity you sell
• the firm’s demand curve is relatively flat (highly elastic)

Question 18

what does having some market power mean?

Answer 18

• raising your price will result in the loss of some, but not all customers
• more market power = more inelastic demand curve

Question 19

what does having full market power mean?

Answer 19

• your firm’s demand curve is the market demand curve
• relatively steep demand curve (inelastic)
• a price hike will lead you to lose very few sales (but law of demand still applies)

Question 20

what do retailers charge different prices based on?

Answer 20

1. different groups of customers
2. different locations
3. at different times

Question 21

what is marginal revenue?

Answer 21

the addition to total revenue you get from selling one more unit

Question 22

what is the formula for marginal revenue?

Answer 22

marginal revenue = output effect - discount effect

Question 23

what is the output effect?

Answer 23

you gain revenue from selling a larger quantity of items

• output effect = price

Question 24

what is the discount effect?

Answer 24

you lose revenue when you cut the price a bit

Question 25

what is the formula for discount effect?

Answer 25

delta P * q = discount effect

Question 26

what does market power lead to?

Answer 26

1. higher prices
2. inefficiently smaller quantity
3. larger economic profit
4. survival despite inefficiently high costs

Question 27

what is the government’s response to tension?

Answer 27

regulate markets through policy
1. policies ensure competition thrives
2. policies to minimize the harmful ways businesses might exploit their market power

Question 28

what is competition policy?

Answer 28

laws and regulations designed to ensure that markets remain competitive

Question 29

what are policies that encourage competition?

Answer 29

1. anticollusion laws
2. merger laws
3. illegal to attempt to monopolize
4. encourage international trade

Question 30

what is predatory pricing?

Answer 30

charging prices so low that you force your competitor out of the business, with the goal of then raising prices later

Question 31

what is a natural monopoly?

Answer 31

a market in which it is cheapest for a single business to service the market

often lead to gov intervention