Chapter 35 - Different Market Structures Flashcards
Market Structure
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.
Perfect Competition
An ideal market structure that has many buyers and sellers, identical products, no barriers to entry; sometimes referred to as total competition.
Imperfect Competition
Any market structure except for perfect competition.
Monopolistic Competition
A market structure where there are many firms, differentiated products and few barriers to entry.
Oligopoly
A market structure with few firms and high barriers to entry.
Barriers To Entry
Restrictions that prevent new firms entering an industry.
Pure Monopoly
Where there is just one seller in the market.
Natural Monopoly
Where with falling long-run average costs, it makes sense to have only one firm providing the good or service.
Concentration Ratio
A measure of the combined market share of the biggest 3, 4 or 5 in a market.
Predatory Pricing
Where a firm sells its goods below average variable cost to force competitors out of the market.
Limit Pricing
Where firms deliberately lower prices and abandon a policy of profit maximisation to stop new firms entering a market.
Collusion
An anti-competitive action by producers.
Barriers To Exit
A restriction that prevents a firm from leaving a market.
Shut Down Price
A firm will stop production when price falls below average variable cost.
Price Competition
Where firms compete on price to attract customers.
Non-Price Competition
When firms use methods other than price to attract customers from rival producers.
Kinked Demand Curve
A traditional model of a firms’s behaviour in oligolpoly.
Price Rigidity
Where prices are unchanged despite a change in costs.
Price Leadership
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.
Cartel
A formal argument between firms to limit competition by limiting output or fixing prices.
X Inefficiency
Where the firm’s costs are above those experienced in a more competitive market.
Contestable Market
A Market where entry is free and exit is costless.
Contestability
The extent to which barriers to entry into a market are free and exit from the market is costless.
Deregulation
Where barriers to entry into an industry are removed.
Market if perfectly contestable If :
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
A perfectly competitive market is contestable if ;
- 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
