Chapter 35 - Different Market Structures

Question 1

Market Structure

Answer 1

The way in which a market is organized in terms of certain characteristics which can be used to explain the behavior of firms in a market.

Question 2

Perfect Competition

Answer 2

An ideal market structure that has many buyers and sellers, identical products, no barriers to entry; sometimes referred to as total competition.

Question 3

Imperfect Competition

Answer 3

Any market structure except for perfect competition.

Question 4

Monopolistic Competition

Answer 4

A market structure where there are many firms, differentiated products and few barriers to entry.

Question 5

Oligopoly

Answer 5

A market structure with few firms and high barriers to entry.

Question 6

Barriers To Entry

Answer 6

Restrictions that prevent new firms entering an industry.

Question 7

Pure Monopoly

Answer 7

Where there is just one seller in the market.

Question 8

Natural Monopoly

Answer 8

Where with falling long-run average costs, it makes sense to have only one firm providing the good or service.

Question 9

Concentration Ratio

Answer 9

A measure of the combined market share of the biggest 3, 4 or 5 in a market.

Question 10

Predatory Pricing

Answer 10

Where a firm sells its goods below average variable cost to force competitors out of the market.

Question 11

Limit Pricing

Answer 11

Where firms deliberately lower prices and abandon a policy of profit maximisation to stop new firms entering a market.

Question 12

Collusion

Answer 12

An anti-competitive action by producers.

Question 13

Barriers To Exit

Answer 13

A restriction that prevents a firm from leaving a market.

Question 14

Shut Down Price

Answer 14

A firm will stop production when price falls below average variable cost.

Question 15

Price Competition

Answer 15

Where firms compete on price to attract customers.

Question 16

Non-Price Competition

Answer 16

When firms use methods other than price to attract customers from rival producers.

Question 17

Kinked Demand Curve

Answer 17

A traditional model of a firms’s behaviour in oligolpoly.

Question 18

Price Rigidity

Answer 18

Where prices are unchanged despite a change in costs.

Question 19

Price Leadership

Answer 19

A situation in a market whereby a particular firm has the power to change prices, the result of which is that competitors follow this lead.

Question 20

Cartel

Answer 20

A formal argument between firms to limit competition by limiting output or fixing prices.

Question 21

X Inefficiency

Answer 21

Where the firm’s costs are above those experienced in a more competitive market.

Question 22

Contestable Market

Answer 22

A Market where entry is free and exit is costless.

Question 23

Contestability

Answer 23

The extent to which barriers to entry into a market are free and exit from the market is costless.

Question 24

Deregulation

Answer 24

Where barriers to entry into an industry are removed.

Question 25

Market if perfectly contestable If :

Answer 25

1) Pool of potential entrants
2) Entry and exit are costless
3) All firms have the same regulations and technology
4) Prohibition of limit pricing
5) Existing firms are vulnerable to hit-and-run competition

Question 26

A perfectly competitive market is contestable if ;

Answer 26

• Only normal profits are earned in the long run
• Firms do not have cross-subsidization
• Prices cannot be set below average cost
• Allocative efficiency and productive efficiency are achieved
• Number of firms in the market does not matter