Market structures Flashcards
Perfect competition
Many firms competing fiercely for price and have no real control over price in the market.
Perfect competition characteristics
Low barriers to entry
Price takers
Product homogenous
Perfect information
Characteristics of monopolistic competition
- High cross price elasticity of demand
- Low barriers to entry
*Product differentiation
*Price takers
Benefits of competitiveness
Productively efficient - producing on its production possibility frontier. Pareto efficiency.
Cons of competitiveness
Creative destruction - extra capital investment and research projects can lead to the destruction of other firms and jobs - rise in unemployment.
Barriers to entry
Brand loyalty
Economies of scale
Patents
Barriers to exit
Lost goodwill with customers
Exit fees such as rental agreements
Redundancy costs
Consumer sovereignty
When consumers have the spending power to buy and influence production decisions.
Producer sovereignty
When producers have the power and ability to influence consumer decisions.
Characteristics of an oligopoly
Interdependent strategic decisions
High barriers to entry
Products homogenous or differentiated
Non- price competition
Collusion - Oligopoly
Collusion is when a group of firms cooperate for their own mutual benefit.
- It is a form of anti-competitive behaviour.
Firms restrict output to drive up prices, from normal profit (AC=AR) to supernormal profit (MC=MR)
Aims of collusion
*Maximise joint profits - research & development
*Lowers costs of comp eg. wasteful marketing wars
*Brings social benefits eg. new technologies
Disadvantages of collusion
*Higher barriers to entry due to increased market share reduces market contestability
*Absence of competition - X inefficiency and lost dynamic efficiency
*Damages consumer welfare - loss of allocative efficiency and exploitation
Contestable market theory
Factors influencing contest ability of markets…
Contestable market theory states that the behaviour of firms is influenced by threat of competition.
*Absence of sunk costs
*Access to technology
*Low customer loyalty - elastic demand for firms.
Hit and Run entry
When firms enter the market to make supernormal profits, but leave in the long run when normal profits are made.
Firms may work to prevent this by producing at normal levels of profit. AC = AR
Pure monopoly
One firm supplies goods and services in an industry.
Difference between a working monopoly and dominant monopoly
A working monopoly has higher than 25% MS.
A dominant monopoly has higher than 40% MS.
Monopoly power
A firms ability to sets prices, and own 25% of the market share.
Types of monopolies
*Natural monopoly eg. railways, infrastructure
*Geographical monopoly eg. access to resources
*Government created monopoly eg. Diwa
Natural monopoly
When it’s more efficient to have one firm in the market than many competing eg. railways & electricity
Only one firm can exploit EOS and achieve the high MES.
Pros of monopolies
Supernormal profits fund extra capital investment and research projects leading to gains in dynamic efficiency - can produce larger amount at the same cost.
Monopolies strive to be productively efficient if competing with international firms.
Cons of monopolies
Monopoly produces a market failure compared to competition - Price makers is welfare loss due to consumer exploitation.
There may be less incentive to innovate if a firm dominates the industry - X inefficiency
Concentration ratio
The total market share of the leading firms in an industry.
Conditions for price discrimination to take place…
*Price-setting power
*Two consumer groups with different PED
*No market arbitrage or seepage
eg. a family using a student’s discounts.
1st Degree Price Discrimination
Consumer surplus
When a firm perfectly segments the market, and captures consumer surplus by charging what consumers are willing to pay. eg. theatre charging different prices for adults, children & seniors.
2nd degree Price Discrimination -
Excess capacity pricing
Excess capacity pricing is when a firm’s pricing depends on the remaining capacity left.
eg. off and on peak demand.
3rd Degree Price Discrimination
Market Separation
Market Separation is when a firm charges a high price in an inelastic market, and sells the additional stock a lower price in an elastic market.
eg. Adults and Students.
Monoposony
A monopsony is when there is one dominant buyer of products/ labour in a market. eg. Tesco & NHS.
Monopsony Conduct in labour markets
Wage setting power, however efficiency wage theory debates this.
Monopsony conduct in the product market
Bargaining power enables them to negotiate lower prices for raw materials.
Purchasing EOS, VC fall reducing the MC and AC curves, increasing supernormal profits.
