Market Structures Flashcards
What is perfect competition?
- A form of market structure that produces allocative and productive efficiency in the long run
What are the characteristics of perfect competition?
- Firms aim to max profits
- there are many participants
- The product is homogeneous
- no barriers to entry/ exit
- firms are price takers
What is a price taker?
The firm that must accept whatever price is set in the market as a wall
What does the perfect competition model suggest in the long run?
- all firms have the same cost curve and fact prices such as wages will remain unchanged
Examples of perfect competition
- Street food in developing countries
- The fish market
What is a monopoly?
- A form of market structure in which there is only one seller of a good or service
What are the characteristics of a monopoly?
- One firm in the industry
- The product or service is unique
- The firm is a price maker
- The aim to max profits
- High barriers to entry
What are the key barriers to entry in a monopoly market?
- economies of scale
- High fixed costs
What is a pure monopoly?
- where only one producer exists in the industry
What is monopoly power?
- firms influence the market in some way through their behaviour e.g influencing prices and output
What is monopoly power influenced by?
- Barriers to entry: when higher monopoly power is easy to maintain
- Number of competitors
- Advertising
- degree of product differentiation
What is price discrimination?
- The practice of charging a different price for the same good service due to reasons other than cost difference
What are the three types of price discrimination?
- 1st° 2nd° and 3rd°
What are the conditions for price discrimination?
- Firms must have market
- Must have information about customers and willingness to pay
- Consumers have limited ability to resell
What is 1st° price discrimination?
- A situation arising in a monopoly market where firm is able to charge each consumer a different price
Quite rare in real world example may include art
What is second-degree price discrimination?
- Charging different prices depending on the quantity consumed
E.g electricity
What is the degree price discrimination?
A firm is able to charge groups of customers a different price for the same product
E.g student discount
What are the advantages of price discrimination
- Firms benefit from increase profit- dynamic efficiency
- Increase investment
- Some consumers benefit from lower prices
Disadvantages of price discrimination
- higher prices for some
- Fall and consumer surplus for some
What is an natural monopoly?
A monopoly that arises due to substantial economies of scale and therefore only one firm is viable
- e.g London underground because of substantial fixed costs and low modal costs
Characteristics of a natural monopoly
- Occurs when there are large economies of scale
- AC falls over entire output range
- No threat of entrances
- mC is low
Advantages of a monopoly
- Economies of scale (natural monopoly)
- Can be dynamically efficient
- It may be able to compete internationally
Disadvantages of a monopoly
- lack of productive and allocate efficiency
- X inefficiency
- Reduced consumer choice
Why does the government tolerate monopolies
- They are difficult to break up
- They can implement regulation
- They may be more efficient
What is competition policy?
- Used to prevent firms from abusing market dominance e.g CMA
What is regulatory capture?
- A form of government failure aware bodies regulating industries become sympathetic to the business
How does regulatory capture occur?
- They become friendly
- Asymmetric information
What is monopolistic competition?
- combines some of the features of monopoly and purpose competition
- Reflects actual real life markets
Characteristics of monopolistic competition
- many small firms
- Product differentiation
- Price makers
- Low barriers to entry and exit
- No dominant firm
Examples of monopolistic competition
- restaurant
- Package holidays
- Hotels
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