market structures Flashcards
Oligopoly Definition
Market that is controlled by a few large firms with the majority market share
Characteristics of an Oligopoly
Few large firms
Imperfect knowledge
Low price setting power
Homogenous goods
High barriers to entry
Interdependent
Oligopoly vs Monopoly
Both profit max
Both have high barriers to entry
Both are productively and allocatively inefficient
Oligopoly vs PC
Both have homogenous goods
Both profit max
Monopoly Definition
When one firm exclusively controls the supply of a good or service with 100% market share
Characteristics of a Monopoly
One large firm
High barriers to entry
Imperfect knowledge between sellers and buyers
Price follows demand curve (elastic)
Goods with no close substitutes
Monopoly vs MC
Both profit max
Both have element of price control
Both allocatively inefficient
Monopoly vs PC
Both profit max
Both have large number of buyers
Both productively and allocatively inefficient
Monopolistic Competition Definition
Many producers competing against each other, but selling products that are differentiated from one another and hence are not perfect substitutes
Characteristics of MC
Many small firms
Low barriers of entry
Imperfect knowledge between consumers and buyers
Slightly differentiated goods
Small price setting power
MC vs PC
Both have many small firms
Both profit max
Both have price sensitive consumers - as new firms enter market, price goes down and long run normal profit is made
Both allocatively and productively inefficient
Kinked Demand Curve Conclusions
Firms don’t want to change price - as price elastic part of the curve leads to lower rev. and market share as other firms don’t follow. Same case for price reduction, as other firms will also follow.
Firms don’t need to change price - if costs stay in the vertical gap, a profit max firm will charge at P1
Eval of Kinked Demand
There still is price competition even though it doesn’t make sense
Non-price competition is more common
Temptations to collude
Nash Equilibrium
A rational long term equilibrium
Game Theory Conclusions
Price Rigidity - leads to non price competition
Temptation of Collusion as Nash Equilibrium is not optimal
Incentive to cheat on collusive agreement to make even higher profits - even though long term that makes no sense.
Competitive Oligopoly Factors
Number of Firms - hard to organise collusion
Low barriers of entry - new firms can just join and steal market share
One firm with significant cost advantages means firms can’t agree on price
Homogenous goods - firms don’t have price making power to fix prices
Saturated Market - Incentive to cheat on collusion is high
Collusive Oligopoly Factors
Low firms in market
Similar costs of firms
High entry barriers
Ineffective competition policy makes the stakes lower
Consumers may not have perfect knowledge about price + may be loyal
Competitive Oligopoly Performance Evaluation
Pros:
X, Allocative and Productive Efficiency gains
Cons:
Lose EoS
Lose dynamic efficiency
Collusive Oligopoly Performance Evaluation
Same as pros and cons of monopoly
Contestable Markets Characteristics
Low barriers of entry
Large pool of potential entrants
Good information
Incumbent firms subject to hit and run competitions
Contestable Market Conclusions
Monopolies may lower prices to AC=AR (limit price) - threat elimination
Lower prices prepares firm for contesting firms
Contestable Market Pros
Allocative Efficiency - Lower price, more consumer surplus, more choice, more quantity
Productive Efficiency - implies EoS, lower costs and consumer prices
X-Efficiency - reduces waste, lower costs and consumer prices
Jobs Created - To compensate for higher quantity output
Contestable Market Cons
Dynamic Inefficiency - as profit margins low, reduced investment. HOWEVER new firms and new ideas IS the benefit of dynamic efficiency
Cost Cutting - could lead to reduced safety and wages and external costs increase
Job Loss - new firms come in and destroy incumbent firms and its employees HOWEVER as long as overall employment goes up doesn’t matter
Anti-competitive Strats - new firms may adopt methods eg market flooding etc that result in long term inefficiencies
Contestable Market Eval
Length of Contestability - Firms may be anticompetitive, firms may patent ideas
Technology can introduce patents, lawsuits etc, consumer data leads to first and third degree price discriminations
Regulation can negate some of the cons, protecting standards and consumers
Dynamic Efficiency of incumbent firms - if high they can innovate and outcompete hit and run firms.
