Competition and Market Power: Flashcards
What is a monopoly?
a sole supplier with no competition (price maker)
Monopoly power?
the market share is large enough to influence the market e.g. Tesco with 25%
What is a natural monopoly?
When a monopoly occurs because too expensive or wasteful, usually in infrastructure
What assumptions are there in perfect competition?
many sellers, buyers, no barriers, perfect knowledge, no externalities, homogenous products and normal profits.
Limitations to perfect competition?
Unrealistic, no R+D, no economies of scale, only theoretical
what is a duopoly?
When 2 firms dominate market, high entry barriers, rely on brand loyalty.
give an example of a duopoly
Airbus and Boeing, 99% of global orders
give an example of an oligopoly?
Insulin (Sanofi, Eli Lilly and Novo Nordisk. 1 vile is $285.
How long do patents last for?
20 years
what is contestability and who created it?
William Baumol and when firms have perfect entry and exit to market with low sunk costs so consumers are protected because prices are low.
give 3 examples of strategic Entry deterrents?
Hostile takeovers, product differentiation, predatory pricing
Give an example of a legal barrier to entry
patents/ trademarks
Give 2 examples of natural barriers to entry
Natural monopoly, internal economies of scale
Give 3 examples of an internal economy of scale
Technical, marketing, risk bearing, managerial, purchasing, financial
Give 4 examples of artificial barriers to entry
product differentiation, branding, spread risk in R+D, vertical integration,
What is predatory pricing?
Setting prices below that off profit with the intention of driving other firms out of business (Illegal in UK)
What is X-inefficiency?
A waste of resources and little incentive to control costs due to to lack of competition/ low PED
how do you measure concentration ratio?
All firms’ total sales/ industry’s total sales x 100
what is interdependence?
When the actions of each big firm will have impact on markets and rivals (damaged by price wars)
what is Tacit collusion?
Illegal- large firms have monopoly power and price leadership where others follow.
what is overt collusion?
Legal if firms openly agree to action if in public interest e.g. transport and a multi-operator ticket
What is a consumer surplus?
Where consumers are willing to pay more for a product which can lead to price discrimination
