Chapter 8 (PRICING POWER) Flashcards

1
Q

Monopoly

A

-single seller of product or service
- no close substitutes (steep inelastic demand)
- price maker
- maximum pricing power (complete control over market)
- market power is still limited by the consumer’s willingness and ability to pay
- high barriers

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2
Q

Oligopoly

A
  • few big sellers control most of the market
  • price maker
  • not as much pricing power
  • differentiated substitutes (Ex: Apple and Samsung)
  • medium barriers to entry
  • inelastic demand
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3
Q

Perfect Competition

A
  • many sellers producing identical products or services
  • no barriers to entry
  • price taker
  • demand is perfectly elastic (horizontal on graph)
  • perfect substitutes
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4
Q

Monopolistic Competition

A
  • many small businesses make similar but slightly differentiated products or services
  • differentiated substitutes (ex: restaurants, piercing parlours)
  • price maker (limited pricing power)
    -no barriers to entry
  • elastic
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5
Q

Market structure

A
  • characteristics that affect competition and a business pricing power

Factors:
1. Available substitutes
2. Number of competitors
3. Barriers to entry of new competitors

  • more substitutes and competitors = more elastic demand = less pricing power
  • fewer substitutes and competitors = more inelastic demand = more pricing power
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6
Q

Product differentiation

A
  • attempt to distinguish product or service from those of competitors
  • allows seller to reduce competition and substitues which increases price power
  • can take the form of actual differences or perceived differences
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7
Q

Economies of scale

A

economic barriers - average total cost of producing decreases as quantity (scale) of production increases

  • usually exists in perfect competition
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8
Q

Average total cost

A

Total cost per unit of output

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9
Q

Higher pricing power

A

=more inelastic demand
- consumers have few substitues or strong brand loyalty

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10
Q

Lower pricing power

A

= more elastic demand
- consumers have many substitutes or no brand loyalty

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11
Q

5 factors of competition

A
  1. Cutting costs
  2. Improving quality and product innovation
  3. Advertising and brand loyalty
  4. Eliminating competition
  5. Building barriers to entry

Competition: active attempt to increase profits and gain the market power of monopoly

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12
Q

Creative destruction

A
  • competitive business innovations generate economic profits for winners, improve living standards for all but destroy less productive or less desirable products and production methods
  • competitive actions by businesses can have the unintended consequences of business cycle up and down fluctuations of overall economic activity
  • responsible for moving jobs offshore
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