Market Structures Flashcards

Question

Explanation of Price Rigidity in Kinked Demand Oligopoly

Answer 1

Within an oligopoly, it is assumed that prices are rigid. This occurs due to two separate PEDs along the AR curve. If firms increase their prices, the quantity demanded will fall significantly as other firms will continue to offer the existing price in order to increase their market share, due to the interdependent nature of firms - ie. reacting to the actions of other firms. Price rigidity can also be evidenced when there is a change in a firm’s costs. If MC shifts from MC1 to MC2, then prices will remain at P1.

Answer 2

Price Competition may still occur in an oligopoly. Firms may try to reduce their price in order to increase their market share against their rivals, this is a price war - inefficient Non-price Competition will likely occur. If it is assumed that prices are rigid, it makes more sense for firms to compete using non-price methods. Temptation to collude. Due to issues that arise from prices being sticky, firms may choose to collude in order to maximise the profits throughout the market. This essentially allows firms to operate as a monopoly and fix prices.

Answer 3

Nash Equilibrium - Both firms use the low price in order to protect their prices from being undercut - LR Collusion - Agreement to maintain high prices to maximise the market's total profit. Cheating - Where firms cheat on the collusive agreement in order to extend their revenue in the SR.

Answer 4

A larger number of firms - a less concentrated market, making organising collusion harder. Lower Barriers to entry - Collusion to achieve supernormal profits acts as a signal for new firms to enter the market. If one firm has a significant cost advantage, ie EoS, organising a price to sell the product to maximise profits becomes difficult. If goods are homogeneous - firms do not have the ability to fix prices. If the market is saturated - lots of price competition, to gain market share, rather than attempted collusion

Answer 5

It is easier to organise collusion with a small number of firms. Similar costs aid collusion - easier to agree on price. High barriers - supernormal profit does not attract new firms, protect LR profit. Ineffective competition policy - allows collusion to occurs

Answer 6

Brand loyalty - consumers will not change demand if you undercut their preferred firm. Consumer inertia - consumers do not have the effort to change suppliers, barriers to switching

Answer 7

When different consumers are charged different prices for the same product. This transfers some/all of the consumer surplus into producer surplus.

Answer 8

Firms must be a price maker, Able to separate the consumers Prevent reselling at higher prices.

Answer 9

Perfect Discrimination Each individual consumer is charged the maximum price that they are willing to pay, i.e. all of the consumer surplus is converted to producer surplus.

Answer 10

Wholesale Discrimination Lower prices are offered to consumers who purchase large quantities. This converts some of the consumer surplus into producer surplus.

Answer 11

Market Segment Discrimination A firm charges different prices for the same product to different segments of the market. Potential market segments include - age, times, location. A firm is able to charge different prices by identifying differing PED between the groups, eg. rush hour travellers vs off peak travellers.

Answer 12

The use of price discrimination converts some or all of the consumer surplus into producer surplus, ie. the seller’s revenue increases at the expense of consumers. - However, this extra revenue could be used to improve products, investment etc. In all cases, AR > MC, therefore price discrimination does not lead to allocative efficiency. Consumers are not treated equally, but often the people with higher incomes are the ones charged the higher prices. This may be considered ‘fair’, especially if their higher prices allow for lower prices for others.

Answer 13

A market with low barriers to entry meaning that new firms can easily enter the market, even if actual competition is low.

Answer 14

Licences / permits Patents - production methods / goods Sunk costs Relative cost barriers / EoS Brand Loyalty Geographical barriers to entry Predatory Pricing / Limit Pricing Vertical /Horizontal Integration Experience / Time in market

Answer 15

1. The structure of the market - new low cost technology allows new firms to enter the market. 2. Production Methods - New production methods are invented / innovated allowing for cheaper production. 3. How goods + services are consumed - eg. the internet

Answer 16

Creative Destruction Structural Unemployment

Answer 17

Similar outcomes to competition are achieved, even if actual competition does not exist. As the incumbent firms move towards break even, they also become increasingly statically efficient (allocative / productive) X-Inefficiency falls as incumbent firms aim to reduce wastage and their total costs. Jobs may be created as quantity demanded increases, ie. labour demand is derived from consumer demand.

Answer 18

The lack of supernormal profits prevents dynamic efficiency occurring in the long-run. Firms may cut costs in a dangerous way, ie. health and safety Creative destruction that is promoted by contestable markets may cause structural job loss. Incumbent firms may use anti competitive strategies.

Answer 19

Length of contestability - If new firms can patent their ideas or anti competitive strategies (limit pricing, excessive marketing, flooding the market), then the market will not be contestable over time. Role of technology - New technology can be patented preventing contestability, improved information regarding consumer data - leading to Price Discrimination. Regulation - prevent anti competitive strategy and protect product / health and safety standards.

Answer 20

Where firms enter contestable markets briefly to capitalise on SR supernoraml profits, however leave the market as these profits become competed away.