Chapter 5 Flashcards
What is market structure
The organisational and other characteristics of a market
What are entry barriers
Obstacles that make it difficult for a new firm to enter a market
What are exit barriers
Obstacles that make it difficult for an established firm to leave a market
What is product differentiation
The marketing of generally similar products with minor variations or the marketing of a range of different products
What is the divorce of ownership from control
The owners and those who control the firm are different groups with different objectives
What is satisficing
Achieving a satisfactory outcome rather than the best possible outcome
What is productive efficiency
For the economy as a whole occurs when it is impossible to produce more of one good with pricing less of another
For a firm occurs when the average total cost is minimised
What is allocative efficiency
Occurs when it is impossible to improve overall economic welfare by reallocating resources between markets in the whole economy price must equal marginal cost
What is allocative inefficiency
Occurs when p>Mc in which case too little of a good which is produced and consumed and when p< mc in which case too much of a good is produced and consumed
What is allocative inefficiency
Occurs when p>Mc in which case too little of a good which is produced and consumed and when p< mc in which case too much of a good is produced and consumed
What is a monopoly
One firm only in a market
What is monopoly power
The ability of a monopoly to raise and maintain price above the level that would prevail under perfect competition. Market power can also be exercised usually to a lesser degree by firms in oligopoly and monopolistic competition.
What are natural barriers
Barriers to market entry cause by geography
What are sunk costs
Costs that have already been incurred and cannot be recovered
What are artificial barriers
Man made barriers to market entry eg patent protection
What is the concentration ratio
Measures the market share of the biggest firms in the market
What is market conduct
The pricing and marketing policies pursued by firms this is also known as market behaviour, but it is not be confused with market performance which refers to the end results of these policies
What is a cartel
A collusive agreement by firms usually to fix prices sometimes there is also an agreement to restrict output and to deter the entry of new firms
What is price leadership
The setting of prices in a market, usually by a dominant firm which is then followed by other firms in the same market
What is price agreement
An agreement between a firm and similar firms, supplier or customers regarding the pricing of a good or service
What is a price war
Occurs when rival firms continuously lower prices to undercut each other
What is price discrimination
Charging different prices to different customers for the same product or service with the prices based on different willingness to pay
What is a contestable market
A market in which the potential exists for new firms to enter the market. A perfectly contestable market has no entry or exit barriers and no sink costs and both incumbent firms and new entrants have access to the same level of technology
What is hit and run competition.
Occurs when new entrant can hit the market make profits and then run given that there are no or low barriers to exit
What is static efficiency
Efficiency at a particular point in time
What is consumer surplus
A measure of the economic welfare enjoyed by consumers: surplus utility received over and above the price paid for a good
What is producer surplus
A measure of the economic welfare enjoyed by firms or producers the difference between the price a firm succeeds in charging and the minimum price it would be prepared to accept
What is deadweight loss
The loss of economic welfare when the maximum attainable level of total welfare fails to be achieved
What are the key features of perfect competition?
- a large number of buyers and sellers
- with perfect market information
- able to buy/sell as much as they wish at ruling market price
- unable to influence the market ruling market price
- uniform product
- no barriers to entry or exit in the long run
How to distinguish between different market structures?
- The number of firms in a market
- Market entry barriers
- product differentiation
What are other possible objectives other than profit maximisation?
Growth maximisation and survival as business objectives
Sales revenue maximisation
satisficing principle
what are the advantages of monopoly?
economies of scale
dynamic efficiency
what are the disadvantages of monopoly?
productive inefficiency
allocative inefficiency
How does monopolistic competition resemble perfect competition?
- large number of firms in the market
- in long run there are no barriers to entry and exit
- as a result entry of new firms attracted by short run abnormal profit brings down price
How does monopolistic competition resemble monopoly?
- each firm faces a downward-sloping demand curve this results from the fact that each firm sells slightly differentiated products
- Each firms marginal revenue curve is below its average revenue curve which of course is the demand curve for the firms output
What are the various forms of non price competition?
- marketing competition, including obtaining exclusive outlets such as tied public houses and petrol stations through which breweries and oil companies sell their products
- use of persuasive advertising, product differentiation, brand imaging, packaging, fashion and style and design
- quality competition, point of sale service and after sales service
What are some different examples of market conduct in oligopoly?
- Interdependence and uncertainty in oligopoly
- non collusive oligopoly, collusive oligopoly and cartels
- collusion vs market cooperation
What are the criticisms of the kinked demand curve?
it does not explain how and why a firm chooses in the first place to be at a point x where the two lines meets
the evidence provided by the pricing decisions of real world firms give little support to the theory
What are the possible advantages of oligopoly?
- firms can benefit from economies of scale which means they can become more dynamically efficient and can pass on cost cuts as low prices to consumers
- with only a few firms will be easy for consumers to compare and choose the best option for their needs
- provided there is a degree of competition oligopolists continue to innovate and develop new and better products
what are the possible disadvantages of oligopoly?
- restrict output and raise prices firms may satisfice content with an easy life
- cartels are a bad form of market structure
- small competitive, innovative firms may find it difficult to enter the market
- producer rather than the consumer ends up being king
successful price discrimination requires what following conditions to be met?
- must be possible to identify different groups of customers or sub-markets for the product
- the different groups of customers must have different price elasticities of demand
- markets must be separated to prevent seepage
Appropriate policies suggested by the theory of contestable markets include removal of:
- licensing regimes for public transport and television and radio transmission
- controls over ownership, such as exclusive public ownership
- price controls that act as a barrier to entry such as those which used to be practised in the aviation industry
