Market Structure

Question 1

Market Structure

Answer 1

Market Structure is the characteristics of a market which determine firms behaviour within that market.

Question 2

Key Characteristics in Market Structures

Answer 2

Numbers of Firms in Industry
Types of Product (Homo/Heterogeneous)
Barriers to Entry
Pricing Power
Choice for Consumers

Question 3

Monopoly

Answer 3

One supplier dominates the market

Question 4

Duopoly

Answer 4

Two suppliers dominate the market

Question 5

Oligopoly

Answer 5

Market dominated by a few large firms

Question 6

Perfect Competition

Answer 6

A large number of small firms.

Question 7

Market Concentration

Answer 7

The degree to which large firms dominate an industry

Question 8

Concentration Ratio

Answer 8

Used to measure market concentration, looks at the market share of largest firm in the industry.

Eg 3-firm concentration - Total market share held by 3 largest firms

Question 9

Barriers to Entry Examples

Answer 9

Capital Costs - Entering one market (eg corner shop) may be cheaper than entering another (eg car plant industry)

Sunk Costs - Costs that are not recoverable. Example: a new restaurant opens, and spends money on advertising and a store. If the firm does not work out, the store can be sold, but advertising is already used, and cannot be resold.

Scale Economies - In some industries, economies of scale is very large. Firms within the industry will usually be operating at the optimum level of production (lowest average cost) which will act as a barrier because they are likely to produce less to begin with, therefore having larger average costs compared to established firms.

Natural Cost Advantages - Have advantages over other firms eg Petrol Station on a busy road vs quiet road. Petrol stations on a quiet road will struggle to compete against petrol station on a busy road.

Legal Barriers - eg patients (stop firms ‘copying’ other firms products), licenses to broadcast within a business, and the government may give exclusive rights to firms.

Marketing Barriers - Existing firms within an industry may be able to impose high barriers eg increase spending on advertising/branding. Also, brand names may have influence if they call products by brand name eg a vacuum cleaner is often called a hoover, which is a brand name.

Limit Pricing - Firms may decrease prices if they have maximised their short-run profits. This is to keep new entrants out of the market.

Anti-Competitive Practices - Deliberately restricting competition through restrictive practices eg a manufacturer may refuse to sell a good, which it has the monopoly on, unless the buyer purchases a range of goods from them.

Question 10

Independence

Answer 10

When the actions of one firm have no significant impact on any other firm in the market.

Question 11

Interdependence

Answer 11

When the actions of one firm have an impact on the other firms in the market.