Market Structure Flashcards
Barriers to Entry
Factors which make it difficult or impossible for firms to enter an industry and compete with existing producers.
Market structure
The characteristics of a market which determine the behaviour of the firms within the market.
Barriers to Exit
Factors which make it difficult or impossible for firms to cease production and leave an industry.
Brand
A name, design, symbol or other feature that distinguishes a product from other similar products and which makes it non- homogenous good.
Concentration Ratio
The market share of the largest firms in industry.
Market concentration
The degree to which the output of an industry is dominated by its largest producers.
Market Share
The proportion of sales in a market taken by a firm it a group of firms.
Homogenous goods
Goods made by different firms that are identical.
Non- homogenous goods
Goods made by different firms which are similar but not identical e.g. branded goods.
Perfect Knowledge
When all buyers in a market are fully informed of prices and quantities for sale, whilst producers have equal access for production techniques.
Perfect Competition
A market structure where there are many buyers and sellers, where there is freedom of entry and exit to the market, where there is perfect knowledge and where all firms produce a homogenous product.
Price Taker
A firm which has no control over the market price and has to accept the market price if it wants to sell its product.
Break- even
The levels of output where total revenue equals total cost.
Shut down point
When a firm is indifferent between continuing operations and shutting down temporarily, as it is producing at a level where the revenue its earning is just enough to cover its variable costs.
Monopoly
A market structure where one firm supplies all output in the industry without facing competition because of high barriers to entry in the industry.
Price discrimination
Charging a different price for the same good or service in different markets.
Product differentiation
When a business seeks to distinguish what was essentially the same products from one another by real or illusory means.
Monopolistic Competition
A market structure where a large number of small firms produces non- homogenous products and where there are no barriers to entry or exit.
Monopsony
When there is only one buyer in the market.
Oligopoly
A market dominated by a few large suppliers. The degree of market concentration is high with typically the leading five firms taking over 60% of total market sales. They can be collusive or non- collusive, and there is normally a great deal of interdependence between firms.
Interdependence
When the actions of one firm has an effect on its competitors in the market. Interdependence is a common feature of an oligopoly.
Formal collusion
When firms make agreements between themselves to restrict competition, typically by reducing output, fixing prices at a high level and keeping potential competition out of the market.
Tacit Collusion
When firms collude without making agreements.
Cartel
A group of firms seeking to maximise joint profits in a market by engaging in price fixing. This can be achieved by controlling market output.
Price War
When two or more retailers progressively put prices down to try and take each other’s market share (price competition.)
Marketing Mix
Factors used to attract consumers to a product (non- price competition): Price, Place, Product and Promotion.
Game Theory
The analysis of situations in which players are interdependent.
Prisoner’s Dilemma
A game where, given that neither player knows the strategy of the other players, the optimum strategy for each player leads to a worse situation wham if they had known the strategy of the other player and been able to co-ordinate their strategies.
Contestable Market
A market where there are low barriers to entry and the cost of exit is low.
Monopolistic Competiton Characteristics
- A large number of small firms.
- No barriers to entry/exit.
- Have some control over price.
- Differentiated products.
Oligopoly Charcteristics
- Barriers to Entry
- Non- Price Competition
- Sticky/ Rigid Prices
- Price Wars
- Collusion
- Interdependent firms
What factors attract a customer to a product?
- Promotion (adverts, special offers and discounts etc.)
- Place (internet vs. physical space, quantity, opening times etc.)
- Product (choice, high quality vs. low quality)
- Price
Examples of barriers to entry…
- Patents
- Limit Pricing
- Cost Advantages
- Advertising and Marketing
- Research and Development Expenditure
- Presence of Sunk Costs
- International Trade Restrictions
Examples of barriers to exit…
- Asset Write-Offs
- Closure Costs (redundancy)
- Loss of Business Reputation and Consumer Goodwill
- A Market Downturn
Perfect Competition Characteristics
- Many Buyers and Sellers
- Freedom of Entry and Exit
- Perfect Knowledge
- All Firms Produce Homogeneous Goods
Positives of Collusion
- Keeps Price Stable
- Rations Scarce Resources, e.g. Oil, which is an finite resource
OPEC
- Permament intergovernmental organisation
- Consists of 12 oil producing and exporting countries- Algeria, Angola, Ecaudor, the Islamic Republic of Iran, Iraq, Kuwait, Nigeria, Qatar, Saudi Arabia, United Arab Emirates, the Socialist People’s Libyan Arab Jamahiriya and Venezuela.
Monopoly Characteristics
- One firm (pure monopoly)
- High Degree of Product Differentiation
- High Barriers to entry/ exit
Problems with Monopolies
- No incentive to develop more efficient technology, as there is no one to compete with.
- No need for research and development.
- No incentive to be efficient, or to decrease advantage cost.
- Do not need to increase investment, as the quality of the good does not need to increase.
Conditions for Price Discrimination
- The firms must have some price-setting power.
- At least two consumer goods with different PED’s.
- Firms to have sufficient information about consumer preferences.
- No arbitrage.
Problems with Monopoly Diagrams
- Monopolies not always inefficient, monopolies may be desirable on some occasions e.g. natural, but would still need strong regulation.
- Monopolies do not have to be big, may exist locally.
- Monopolies do not always aim to profit, as they may want to guard themselves against government intervention.
The Market can be Spilt by…
- Time (peak and off-peak)
- Age (children and elderly)
- Location
- Income (students)
Firms in an Oligopoly might enter into collusive behaviour because…
- Can stop revenue and price from being unstable.
- Limits competitive responses, prevent price wars.
- Guarantees long- term profits.
Why do Cartels Fail?
- Incentive to cheat.
- Recession.
- The entry of non- cartel firms.
- Government or other regulatory agencies.
Nash Equilibrium
When each player chooses the best possible strategy for themselves, given the strategy of the other player, neither has the reason to change their strategy.
Benefits to consumers from Price Discrimination
- Results in cheaper prices for some consumers.
- Expands the market.
Monopsony
When there is only one buys in the market.
Characteristics of a Monopsony
- The sole buyer in the market.
- Sellers cannot sell their products to other firms outside the market, only to the monopsony.
- They are profit maximisers who aim to minimise their costs, by paying their suppliers the lowest price.
Problems with Monopsony’s
- Low wages
- Bad working conditions
Monopsony Benefits
- Improved value for money.
- Producer surplus, may lead to further research and development through investment.
- Useful counterweight to monopolies.
- Long term sustainably.
- The growth of the FairTrade label shows how consumers can have an influence on welfare in the countries producing the product ( feel good factor.)
Monopsony Costs
- Low prices drives firms out of the market, which also reduces the amount that’s available for purchase, economic problem, consumers have infinite wants.
- Reduced profits and wages for firms that remain, workers are also consumers.
- May force suppliers to change their product.
Monopoly Disadvantages
- Abnormal profits means…
1) Less incentive to be efficient and to develop new products.
2) Efforts are directed to protect market dominance. - Higher prices and lower output for domestic consumers.
- Monopolies may waste resources by undertaking cross- subsidisation, using profits form one sector to finance losses in another sector.
- Monopolists may undertake price discrimination to raise producer surplus and reduce consumer surplus.
- Monopolists do not produce at the most effective point of output.
- Monopolists can be complacent and develop inefficiencies.
- Monopolies lead to a misallocation of resources by setting prices above marginal cost, so that price is above the opportunity cost of providing the good.
Monopoly Advantages
- Abnormal profits means…
1) Finance for investment to maintain competitive edge.
2) Reserves to overcome short-term difficulties and provide funds for research and development. - Monopoly power may mean powers to match large overseas organisation.
- Cross subsidisation may lead to an increased range of goods or services available to the consumer.
- Price discrimination may raise total revenue to a point, which allows survival of a product or service (it is often said that economy class flights are funded by those flying business and first class.)
- Monopolists can take advantage of economies of scale, which means that average costs may still be lower than the most efficient average of a small competitive firm.
- There are few permanent monopolies. Super- normal profits act as an incentive to break down the monopoly through a process of creative destruction, i.e. undermining the monopoly through product development and innovation.
- Monopolists avoid undesirable duplication of services and therefore a misallocation of resources.
How do you make markets more contestable?
- De- regulation
- Tougher competition
- The changing nature of technology
Nationalism
Transfer of a firms ownership from the private individuals to the state.
