Market structures!

Question 1

What are the characteristics for perfect competition?

Answer 1

Many firm and no firm has any influence over market ruling price.
There’s no barriers to entry/exit.
The products are homogenous.
The firm is a price taker.
They make normal profits in the long run but can make supernormal profits in the short run.
There’s perfect knowledge.
Firms are productively and allocatively efficient, making them x-efficient.
There’s a perfectly elastic demand / AR curve.

Question 2

What are the characteristics of monopolistic competition?

Answer 2

Many suppliers, each with an insignificant market share.
Each firm has SLIGHT PRICE SETTING POWER.
Products are SLIGHTLY DIFFERENTIATED.
Consumers have perfect information on prices.
All firms have equal access to resources.
No barriers to entry/exit in the long run.
No externalities in production or consumption.

Question 3

What are the characteristics of an oligopoly?

Answer 3

Dominated by a few firms with a high concentration ratio.
The firms have highly branded, differentiated products, with high customer loyalty.
They can make supernormal profits in the short run and in the long run.
They’re productively and allocatively inefficient, making them x-inefficient.
They’re a price maker.
They have PRICE AND NON-PRICE COMPETITION.
There’s INTERDEPENDENCE AND UNCERTAINTY.

Question 4

What’s game theory?

Answer 4

Game theory suggests that the best option is the second best option.

Question 5

What’s collusion?

Answer 5

Where firms recognise their interdependence and uncertainty and come together, rather than compete and undertake profit maximisation.

Question 6

What’s are examples of collusion?

Answer 6

OPEC, independent schools, energy companies.

Question 7

What conditions are needed for collusion to occur?

Answer 7

There must be an imperfect market, and firms must have control over supply. The product must be inelastic in demand.

Question 8

What’s tacit collusion?

Answer 8

Where you get price leadership e.g, Tesco’s.

Question 9

What’s overt collusion?

Answer 9

Where firms undertake price fixing (illegal). There are two types of overt collusion: horizontal and vertical.

Question 10

What are the pros of collusion for producers?

Answer 10

Profit maximisation.
External growth.
Avoiding PAP.

Question 11

What are the cons of collusion for producers?

Answer 11

Attention from the CMA.
Attention from governments.
Potential for new entrants in the market.

Question 12

What are the pros of collusion for consumers?

Answer 12

Guaranteed supply.
R+D e.g, covid vaccines.

Question 13

What are the cons of collusion for consumers?

Answer 13

High prices.
Less choice.
Poor quality.

Question 14

Why are collusion agreements inherently unstable?

Answer 14

New entrants e.g, South American coffee and Vietnam.
Economic downturns and excess demand and supply can break collusion down.
The CMA could intervene.
Game theory (British Airways vs Virgin Airlines).

Question 15

What are the types of price competition?

Answer 15

Price wars.
Predatory pricing.
Limit pricing.

Question 16

What are the types of non-price competition?

Answer 16

Advertising.
Loyalty cards.
Branding.
Quality.
Customer service.
Product development.

Question 17

What’s price discrimination?

Answer 17

Where different consumers are charged a different price which doesn’t account for the cost of production. It involves extracting consumer surplus and turning that into revenue and profit.

Question 18

What are the conditions for price discrimination?

Answer 18

The firm must have some price setting power, operating in an imperfect market. There must be at least two different consumer groups with different PED’s. The firm must have perfect information and perfectly segmented customers. The firm must prevent customers in one group from selling to those in the other.

Question 19

What’s first degree price discrimination?

Answer 19

There’s perfect segmentation of the market by the supplier. Every customer is charged their ‘willingness to pay’, meaning there’s no consumer surplus in the transaction. The monopolists demand curve becomes the marginal revenue curve. More goods are sold in total but the price is higher to some customers. Total output is higher than profit maximisation.

Question 20

What’s second degree price discrimination?

Answer 20

Occurs in an imperfect market. There’s different types of PED, peak and off peak. An off peak customer will be elastic.

Question 21

What’s third degree price discrimination?

Answer 21

Different consumers are charged different prices of the same product at the same time but they have different characteristics e.g, nightclubs, cinemas.

Question 22

What are the pros of price discrimination for consumers?

Answer 22

Can bring low income consumers into the marketplace.
Research and development.
Higher quality.
Cross subsidisation.

Question 23

What are the cons of price discrimination for consumers?

Answer 23

High prices.
Poor quality.
Discrimination.
Price fixing.

Question 24

What are pros of price discrimination for producers?

Answer 24

Profit maximisation.
Avoiding PAP.

Question 25

What are the cons of price discrimination for producers?

Answer 25

Intervention from the CMA.
Intervention from the government.

Question 26

What’s a monopoly and a monopsony?

Answer 26

A monopoly is a single seller of a product, a monopsony is a single buyer of a product.

Question 27

What are the characteristics of a monopoly?

Answer 27

Dominated by one firm with over 25% market share.
High barriers to entry/exit.
Firms sell a unique product.
There’s high brand loyalty.
Consumers have imperfect and asymmetric information.
They make supernormal profits in the short run and the long run.
Firms are both allocatively and productively inefficient, making them x-inefficient.

Question 28

What are the barriers to entry?

Answer 28

Structural (high fixed costs).
Strategic (high marketing costs).
Statutory (patents).
Sunk costs (non-recoverable costs).

Question 29

What are the barriers to exit?

Answer 29

High decomissioning costs.
High redundancy costs.
Penalty clauses.
Reputation damage.

Question 30

What are the pros of monopolies for the producer?

Answer 30

Profit maximisation.
Overcoming PAP.
Research and Development.

Question 31

What are the pros of monopolies for the consumer?

Answer 31

Better R+D.
Better quality.
Guaranteed supply.
Cross subsidisation.

Question 32

What are the cons of monopolies for the consumer?

Answer 32

Poorer quality.
Less choice.
Higher prices.

Question 33

What are the cons of monopolies for the producer?

Answer 33

Attention from the government.
Attention from the CMA.
Can attract new firms.

Question 34

What’s a natural monopoly?

Answer 34

A monopoly that makes sense, where duplication is unnecessary e.g, railways. A natural monopoly will have very high fixed costs, meaning they have to benefit from economies of scale.

Question 35

What’s contestable market theory?

Answer 35

Where the threat of hit and run strategies by new entrants makes the incumbent firms behave in a perfectly competitive manner. You can have all of the benefits of an imperfect market, in a perfectly competitive manner. It’s the UK’s industrial policy and you can only have a contestable market in an imperfect market structure.

Question 36

What are the conditions to market contestability?

Answer 36

The ability and/or legal right to use the best available technology.
Legal freedom to enter a market.
The relative absence of sunk costs.

Question 37

What are hit and run strategies?

Answer 37

Where incumbent firms make supernormal profits. Because of the conditions, new firms will enter the marketplace, earn supernormal profits, then leave when they earn normal profits.

Question 38

What are the approaches to making markets more contestable?

Answer 38

De-regulation.
Tougher competition laws acting against predatory behaviour.
The changing nature of technology.

Question 39

What are the 5 barriers to contestability?

Answer 39

Collusion.
Control of the supply chain through external growth.
Bundling.
Predatory pricing.
There’s rarely an absence of sunk costs.

Question 40

What’s privatisation?

Answer 40

The processes by which assets or activities that are owned and controlled by the public sector are subjected to market forces.

Question 41

What are the approaches to privatisation?

Answer 41

Closing plants in sunset industries.
Competitive tendering for activities that were solely run by the public sector.
Deregulation of markets.
Transfer of assets to the private sector.

Question 42

What are the pros of privatisation?

Answer 42

No more subsidies.
Revenue from the sale.
Corporation tax.
Lower prices.
More choice.
Better quality.

Question 43

What are the cons of privatisation?

Answer 43

Increased unemployment.
Collusion.
Dividends leaving to other countries.
Some strategic industries can’t be privatised.
Can’t privatise natural monopolies.

Question 44

What’s an example of privatisation failing?

Answer 44

British railways was privatised with infrastructure (railtrack) and TOCs. The 2000 Hatfield train crash revealed very poor maintenance and railtrack was renationalised. TOCs remained but are heavily subsidised by the government. It’s estimated that privatisation has cost over £60 billion more than it would’ve if it’d been state owned.