Market structures

Question 1

Perfect competition

Answer 1

Many firms competing fiercely for price and have no real control over price in the market.

Question 2

Perfect competition characteristics

Answer 2

Low barriers to entry
Price takers
Product homogenous
Perfect information

Question 3

Characteristics of monopolistic competition

Answer 3

• High cross price elasticity of demand
• Low barriers to entry
  *Product differentiation
  *Price takers

Question 4

Benefits of competitiveness

Answer 4

Productively efficient - producing on its production possibility frontier. Pareto efficiency.

Question 5

Cons of competitiveness

Answer 5

Creative destruction - extra capital investment and research projects can lead to the destruction of other firms and jobs - rise in unemployment.

Question 6

Barriers to entry

Answer 6

Brand loyalty
Economies of scale
Patents

Question 7

Barriers to exit

Answer 7

Lost goodwill with customers
Exit fees such as rental agreements
Redundancy costs

Question 8

Consumer sovereignty

Answer 8

When consumers have the spending power to buy and influence production decisions.

Question 9

Producer sovereignty

Answer 9

When producers have the power and ability to influence consumer decisions.

Question 10

Characteristics of an oligopoly

Answer 10

Interdependent strategic decisions
High barriers to entry
Products homogenous or differentiated
Non- price competition

Question 11

Collusion - Oligopoly

Answer 11

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)

Question 12

Aims of collusion

Answer 12

*Maximise joint profits - research & development
*Lowers costs of comp eg. wasteful marketing wars
*Brings social benefits eg. new technologies

Question 13

Disadvantages of collusion

Answer 13

*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

Question 14

Contestable market theory
Factors influencing contest ability of markets…

Answer 14

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.

Question 15

Hit and Run entry

Answer 15

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

Question 16

Pure monopoly

Answer 16

One firm supplies goods and services in an industry.

Question 17

Difference between a working monopoly and dominant monopoly

Answer 17

A working monopoly has higher than 25% MS.
A dominant monopoly has higher than 40% MS.

Question 18

Monopoly power

Answer 18

A firms ability to sets prices, and own 25% of the market share.

Question 19

Types of monopolies

Answer 19

*Natural monopoly eg. railways, infrastructure
*Geographical monopoly eg. access to resources
*Government created monopoly eg. Diwa

Question 20

Natural monopoly

Answer 20

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.

Question 21

Pros of monopolies

Answer 21

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.

Question 22

Cons of monopolies

Answer 22

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

Question 23

Concentration ratio

Answer 23

The total market share of the leading firms in an industry.

Question 24

Conditions for price discrimination to take place…

Answer 24

*Price-setting power
*Two consumer groups with different PED
*No market arbitrage or seepage
eg. a family using a student’s discounts.

Question 25

1st Degree Price Discrimination
Consumer surplus

Answer 25

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.

Question 26

2nd degree Price Discrimination -
Excess capacity pricing

Answer 26

Excess capacity pricing is when a firm’s pricing depends on the remaining capacity left.
eg. off and on peak demand.

Question 27

3rd Degree Price Discrimination
Market Separation

Answer 27

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.

Question 28

Monoposony

Answer 28

A monopsony is when there is one dominant buyer of products/ labour in a market. eg. Tesco & NHS.

Question 29

Monopsony Conduct in labour markets

Answer 29

Wage setting power, however efficiency wage theory debates this.

Question 30

Monopsony conduct in the product market

Answer 30

Bargaining power enables them to negotiate lower prices for raw materials.

Purchasing EOS, VC fall reducing the MC and AC curves, increasing supernormal profits.