market structures

Question 1

Oligopoly Definition

Answer 1

Market that is controlled by a few large firms with the majority market share

Question 2

Characteristics of an Oligopoly

Answer 2

Few large firms
Imperfect knowledge
Low price setting power
Homogenous goods
High barriers to entry
Interdependent

Question 3

Oligopoly vs Monopoly

Answer 3

Both profit max
Both have high barriers to entry
Both are productively and allocatively inefficient

Question 4

Oligopoly vs PC

Answer 4

Both have homogenous goods
Both profit max

Question 5

Monopoly Definition

Answer 5

When one firm exclusively controls the supply of a good or service with 100% market share

Question 6

Characteristics of a Monopoly

Answer 6

One large firm
High barriers to entry
Imperfect knowledge between sellers and buyers
Price follows demand curve (elastic)
Goods with no close substitutes

Question 7

Monopoly vs MC

Answer 7

Both profit max
Both have element of price control
Both allocatively inefficient

Question 8

Monopoly vs PC

Answer 8

Both profit max
Both have large number of buyers
Both productively and allocatively inefficient

Question 9

Monopolistic Competition Definition

Answer 9

Many producers competing against each other, but selling products that are differentiated from one another and hence are not perfect substitutes

Question 10

Characteristics of MC

Answer 10

Many small firms
Low barriers of entry
Imperfect knowledge between consumers and buyers
Slightly differentiated goods
Small price setting power

Question 11

MC vs PC

Answer 11

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

Question 12

Kinked Demand Curve Conclusions

Answer 12

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

Question 13

Eval of Kinked Demand

Answer 13

There still is price competition even though it doesn’t make sense
Non-price competition is more common
Temptations to collude

Question 14

Nash Equilibrium

Answer 14

A rational long term equilibrium

Question 15

Game Theory Conclusions

Answer 15

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.

Question 16

Competitive Oligopoly Factors

Answer 16

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

Question 17

Collusive Oligopoly Factors

Answer 17

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

Question 18

Competitive Oligopoly Performance Evaluation

Answer 18

Pros:
X, Allocative and Productive Efficiency gains
Cons:
Lose EoS
Lose dynamic efficiency

Question 19

Collusive Oligopoly Performance Evaluation

Answer 19

Same as pros and cons of monopoly

Question 20

Contestable Markets Characteristics

Answer 20

Low barriers of entry
Large pool of potential entrants
Good information
Incumbent firms subject to hit and run competitions

Question 21

Contestable Market Conclusions

Answer 21

Monopolies may lower prices to AC=AR (limit price) - threat elimination
Lower prices prepares firm for contesting firms

Question 22

Contestable Market Pros

Answer 22

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

Question 23

Contestable Market Cons

Answer 23

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

Question 24

Contestable Market Eval

Answer 24

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.