Market Structures

Question 1

Name 2 Pros of a Perfectly Competitive Market Structure

Answer 1

• There are more Static efficiencies (Productive, Allocative, X), enabling lower prices and a higher consumer surplus
• More job creation due to higher quantity demanded- labour is a derived demand, raised living standards

Question 2

Name 2 Cons of a Perfectly Competitive Market

Answer 2

• Lack of Dynamic efficiency as a result of normal profit in the long run, causing a reduction in R&D and a slowing in technological advances
• Lack of Economies of Scale, can lead to higher prices and lower quantities in the Long Run
• Perfectly competitive firms minimise costs. Is this in a non-beneficial area to society (wages, health and safety…)
• Creative destruction due to low barriers to entry can increase unemployment and instability in a market

Question 3

What are some of the Evaluation points for a Perfectly Competitive Market?

Answer 3

• There may still be dynamic efficiency, even if it is small-scale (Re-Investment could be the Competition)
• Level of Economies of Scale due to the type of industry may result in Perf. Comp. being better
• Where is the cost-cutting taking place? Is regulation needed to ensure welfare is maximised
• Weighing up Static Vs Dynamic efficiency- what do we need? Dependant on the type of good and service

Question 4

Name 2 Pros of a Monopolistic Competition Market

Answer 4

• PED is elastic with differentiated good
• There are good/perfect substitutes due to slightly differentiated goods
• Non-Price Competition, as firms only have a slight price-making ability
• Can be some Economies of Scale

Question 5

Name 2 Cons of a Monopolistic Competition Market

Answer 5

• Long Run Static Inefficiencies, due to Normal Profit, AR=AC, Not MC, EoS are being foregone
• Long Run Dynamic Inefficiency, due to Long Run Normal Profit that cannot be reinvested

Question 6

What are some of the Evaluation points for a Monopolistic Competitive Market?

Answer 6

• The idea of “Best-of-both-Worlds”
• Good competition, meaning price exploitation is low- greater static efficiency than Monopolies
• Differentiated goods are more desirable in many cases, and this causes Static inefficiencies - market dependant
• Short Run supernormal profits may be enough to reinvest, reducing Dynamic inefficiency.

Question 7

Name 2 Pros of an Oligopoly Market

Answer 7

• There will be rigid prices due to interdependence, increasing confidence within the market
• Price wars reduce prices for consumers
• Non-Price competition allows for greater product differentiation and greater brand loyalty through schemes and advertising

Question 8

Name 2 Cons of an Oligopoly Market

Answer 8

• Collusion incentive leads to cartels and higher prices for consumers
• Interdependance leads to economists not knowing what each firms true objectives are

Question 9

What are some of the Evaluation points for an Oligopoly Market?

Answer 9

• Size and Type of Market- what good and service
• Is the Oligopoly collusive or competitive- If Collusive, acts as a Monopoly, and if Competitive, acts as a Competitive firm
• Regulation of Oligopolies, CMA (Sainsbury’s & ASDA, Microsoft & Activision Blizzard)

Question 10

Name 2 Pros of a Monopoly Market

Answer 10

• Dynamic efficiency leads to innovation over time. Lower prices and lower costs in the LR
• Firms can patent new technology, gaining even more market share
• Perhaps lower prices in the Long Run due to greater economies of scale, means MC is lower due to the size of business
• Monopolies can cross-subsidise goods and services that may be socially desired

Question 11

Name 2 Cons of a Monopoly Market

Answer 11

• Static inefficiencies, resulting in higher prices, lower consumer surplus and a greater Deadweight Loss to society
• Suffering either Diseconomies of scale or not maximising EoS
• Monopolies in necessity markets widen inequality, as higher prices act as a ‘regressive tax’

Question 12

What are some of the Evaluation points for a Monopoly Market?

Answer 12

• Will Dynamic efficiency actually occur?
• The Size of the Monopoly
• The objective of the Monopoly- CSR
• Monopoly regulation can be good, especially if it is Natural
• Price Discrimination can widen inequalities
• Monopoly Vs Monopoly Power-> Is there any competition/contestability?
• If a Natural Monopoly is made to compete, this leads to inefficiencies (X)
• The type of goods and services

Question 13

Name 2 Pros of a Contestable Market

Answer 13

• Movements towards Static Efficiencies
• Lower Prices, Higher C.S, Higher quantity produced of goods, better quality and choice of goods
• Lower costs and Less waste
• Higher quantity of goods leads to more labour, Labour is a derived demand

Question 14

Name 2 Cons of a Contestable Market

Answer 14

• Lack of Dynamic efficiency as a result of normal profit in the long run, causing a reduction in R&D and a slowing in technological advances
• Businesses may use anti-competitive strategies (mergers, predatory pricing, flooding the market), thus in the Long Run, we may see static inefficiencies
• Competitive firms minimise costs, which could be in a non-beneficial area to society (wages, health and safety…)
• Creative destruction due to low barriers to entry can increase unemployment and instability in a market

Question 15

What are some of the Evaluation points for a Contestable Market?

Answer 15

• The Length of Contestability, if firms are able to patent new tech and use anti-competitive strategies, it will not stay contestable over time
• The role of technology, could increase or decrease Contestability
• Regulation can reduce anti-competitive strategies and dangerous cost-cutting, negating some cons
• Creative destruction can actually create some jobs in new firms (BUT training costs for new machines?)
• Dynamic inefficiency can be counterbalanced by firms entering the market