Market Structures Flashcards
Name the 4 types of Efficiency?
- Allocative –> P=MC (D=S) –> Price charged maximises social welfare, taking consumer + Producer welfare into account
- Productive –> MC= AC (P=MinAC) –> Point AC is lowest –>Maximises Consumer Surplus, as Price is at lowest point
- Dynamic –> Companies invest profits / resources into become more efficient. productive over time e.g. R&D
- X-Inefficiency –> inefficiency occurs with lack of competitive pressure in market –> occurs in monopolies or subsidies –> little incentive to minimise AC
Why is Productive Efficiency not common in markets?
- Little incentive for firm to operate at Productive efficiency, and offer lowest price
- P=MinAC
What are the 4 Market Structures
- Perfect Competition
- Monopolistic Competition
- Oligopoly
- Monopoly
What Markets structures are Productively efficient in the SR?
- SR = at least one factor of production fixed
- Productively Efficient = MC= AC (P=MinAC)
–> Point AC is lowest –>Maximises Consumer Surplus, as Price is at lowest point - None of them
What Market Structures are Productively Efficient in the LR
LR = All factors of production are variable
- Productively Efficient = MC=AC (P=MinAC) –> Point AC is lowest
- Perfect Competition
What Market Structures are Allocatively Efficient in SR
SR = at least one FoP variable
- Allocatively Efficient = P=MC (D=S)
–> Price charged maximises social welfare, taking consumer + Producer welfare into account
- Perfect Competition
What Market Structures are Allocatively Efficient in LR
LR= All FoP variable
- Allocatively = P=MC (D=S) –> social welfare maximised
- Perfect Competition
List the conditions for Perfect Competition
- Firms are Price takers –> AR=MR
- Goods homogenous
- No barriers to entry or exit
- Firms aim to maximise profits
- Perfect information
- Many small firms
Market structures from most –> least competitive
- Perfect competition
- Monopolistic competition
- Oligopoly
- Monopoly
Assumption made with Market structures (e.g. the goal of the firms)
- All firms are profit maximisers (MR=MC)
In Long Run what happens to profits in Perfect Competition?
- In the Long Run all profits become normal profits
Market Structure definition?
The market environment within which firms operate
When drawing a Normal Profits diagram where is the AC curve?
On the intersect of the (D=AR=MR) and (MC) curves
Draw Super-normal profit diagram for Price takers + Price Makers
Takers
AC curve - below intersect of the (D=AR=MR) and (MC) curves
Makers
im really not sure, sorry
When drawing a Losses diagram where is the AC curve?
Above the intersect of the (D=AR=MR) and (MC) curves
Why, in a perfect market, does supernormal profits turn into Normal profits in the Long-Run
- Super Normal profits attract suppliers, they enter the market easily (due to no barriers to entry)
- S Curve shifts right, Supply ↑ –> P↓ (P1–> P2)
Why, in a perfect market, does losses turn into Normal profits in the Long-Run?
- When firms are making a loss, some decide to shut
- When they do, Supply curve shifts left
- P↑
- Remaining firms face less competition, sell more Q↑
Process stops when Normal Profits occur
What is the Main difference between Monopolistic Competition and Perfect Competition?
- Monopolistic has differentiated products giving firms some influence over price making and D/AR curve downwards sloping
What are the Characteristics of Monopolistic competition?
- Many Firms
- Low barriers to entry and exit
- Goods differentiated
- Firms are Price makers –> Downward sloping D/AR curve –> MR Curve 1/2 AR
- Firms aim to maximise profits, Produce at MR=MC
In Monopolistic Competition what happens when Super-Normal Profits occur?
- In LR SNP act as incentive/ signal to other firms to enter market
- low barriers to entry mean firms can easily enter until Normal profits occur
- In LR will only make Normal Profits
What is an Oligopoly? + Key characteristics?
- When a few firms dominate the market
- High Concentration Ratio
- High Barriers to entry + Exit
- Firms are interdependent –> actions of one firm dependent on action of other e.g. price, output, adverts
- Product differentiation
- Downwards sloping D/ AR curve
Concentration ratio Definition?
Proportion of the market supplied by the number / larger firms in industry
What does a high concentration ratio mean?
- industry is dominated by a few firms with high degree of monopoly powers
- CR5 over 50% means oligopoly
–> lower ratio = more competitive = customers less exploited
What is Collusion in Oligopoly?
- When firms collaborate with other firms in market –> e.g. agree to set Price at above Market Price so both enjoy SNP
What is a reason for Collusive behaviour?
- Enables firms to ↑Profits
–> believe CMA wont realise
What are 3 reasons for non-collusive behaviours?
- No trust between firms
- Possibility of new entry into market, who can offer product at Lower P
- High penalties for being found guilty
What are the 2 types of collusion + definition?
- Overt –> direct contact between firms, formal agreement to control market by fixing prices, illegal
- Tacit –> Firms act individually but jointly exercise market powers e.g. following market leader in raising prices –> unspoken agreement, also illegal but hard to control
What is a cartel?
- Firms in oligopoly acting as a monopoly through agreement
–> form of overt collusion
What are the 5 types of Pricing Strategies
- Predatory Pricing –> illegal (CMA) When prices are set below AVC to drive competitors out
- Limit pricing –> prices are set below the profit maximising price but not so low losses are made (lower prices a lot but not to make loses)
- Pricing-meet the objectives –> Profit Max (MR=MC), Revenue Max (MR=0), Sales Max (AR=AC) (diagram)
- Cost-plus or Mark-up pricing –> firm calculates AC and add mark-up to make profits (used in irl)
- Price Wars
List some types of non-price competition / strategies?
- Advertising / branding
- Design
- Reliability
- Costumer Service
–> aim to ↑D
Pure Monopoly Vs. Legal Monopoly + Example
Pure
- One firm supplying whole market
Legal
- One firm has 25% or more of market share
- Google 90% search engine traffic
- Tesco 30%
Characteristics of Monopoly Competition?
- One firm in market
- High barriers to entry
–> Able to make SNP in LR and SR - Price makers –> Downward Sloping D/AR curve + MR 1/2 AR
What types of efficiency is Monopoly?
- Dynamic –> Invest in R&D –> Yes
- Productive –> P=MinAC –> Probably not, Firm wants profit
- Allocative –> D=S –> Social Welfare maximised –> No, monopoly sell lower output to maximise profit
-X-Inefficient –> Inefficient –> no other firms
Benefits + Costs of Monopoly Competition for Consumers?
Benefits
- Dynamically Efficient –> able to Invest in R&D + Innovate develop new / better products
- ↓Price –> Monopoly can produce at Low AC (e.g. ↑EOS) –> can offer lower price
Disadvantages
-Less Choice –> one firm compared to many small one
- ↑Price –> ↓ Supply/ ↑P –> maximise Profit
- ↓Quality –> no competition, no incentive to produce high Quality
- X-inefficient –> ↑Cost for Business, ↑Cost for Consumer
Benefits (two) + Costs (two) of Monopoly for Workers?
Advantages
- Job Security –> firm faces no competition, likely to have steady D –> firm wont shut down
- ↑Pay –> ↑Profits for firm mean firm can afford ↑Wages
Disadvantages
- Weak Bargaining power –> Unhappy workers cannot transfer firms –> Means wages can be low
- Machinery replace workers –> Dynamic efficiency lead to automation
Benefits + Costs of Monopoly for Government?
Advantages
- ↑Tax Revenue –> Large firm ↑Profit –> ↑Cooperation Tax
- ↓Unemployment –> Monopoly power keeps jobs in country –> Improve Balance of Payments
Disadvantages
- Tax Avoidance –> Especially Transnational
- ↑Inflation –> No competition –> ↑Prices –> Inflationary Wage-Price spiral
Costs + Benefits of Monopoly for other firms?
e.g. Supplier or Retailer
Advantages
- Secure Demand –> ensure steady demand
- Consistent Quality of Products –> Firms buying from monopoly depend on consistent quality
Disadvantages
- Exploitation –> can ↑P for buyers as no competition e.g. Computer output have to buy Apple
- Over-dependence –> Success of other firms depend on monopoly
What is the Prisoners Dilemma ? = Draw game theory diagram
related to game theory (the little table for oligopoly)
- Even if collusion is in firms best interest –> lower AC cannot trust each-other, will do whats in there best interest
What is Price discrimination + What are the conditions needed?
- When a firm charges more than one price for the same good / service
Conditions
- Market power –> needs to be price maker
- Ability to separate markets –> Firm able to identify + keep submarkets separate
- PED different in dif markets –> Firm able to charge dif prices
- Cost of keeping markets separate less than Profits made from Price discrimination
Benefits (2) + Costs (2) of Price discrimination for Consumers?
Consumer
Ad
- ↓Price for those in elastic PED market –> ↑Consumer Surplus
- Helps consumers in elastic PED market afford product
Dis
- ↑Price + ↓Consumer Surplus for those in inelastic PED market
- Unequal distribution of income –> Consumers ↑Price, Shareholders ↑Dividends
Benefits (three) and Costs (two) of Price Discrimination for Producers?
Ad
- ↑Revenue –> ↑Profit
- Enables Dynamic Efficiency
- Enables firm to provide product might otherwise be unable to
Dis
- Costs involved in separating markets ay outweigh profit gained
- Can create bad image of firm
What is a natural monopoly?
- Most efficient number of firms is one
–> minimum efficient scale only reached at ↑Level Output
–> Continuously falling LRAC + Marginal cost
–> due to high barriers to entry
What is a Monopsony?
- a Market where there is only one buyer
e.g. developing apps Apple is a monosponsy as have to be on app store for Iphones ?? (kinda bad example)
Benefits (3) and Costs (2) of Monopsony?
Ad
- If firm is Monopsony can ↑Profits –> Supplier cannot overcharge
- lower buying costs passed onto consumer –> ↑Price
- Firm that is Monopsony can use profits for dynamic efficiency
Dis
- Supplier forced to make losses + shutdown
- Choice limited –> Monopsony act as barrie to entry
What are Sunk costs?
Costs that cannot be recovered if a firm closes down e.g. rent
What are the Characteristics of a contestable market? (five)
Contestability = measure of how easy it is to enter / exit a market
Can tell if a market is Contestable if there are:
- Low Sunk Costs
- Low barriers for entry/exit
- New entries in the market
- Low level of Super-Normal profits –> implies Firms can enter market
- Low / No Concentration Ratio
What are the types of Barriers to entry?
3 main types
- Artificial / strategic barriers –> deliberately imposed e.g. predatory pricing, Brand loyalty etc.
- Natural / Structural –> due to the nature of the Market / Business e.g. EOS, High start up cost (machinery)
- Legal Barriers –> Imposed by authorities e.g. patents, Licenses etc.
What are the Barrier to Exit a market?
Sunk costs –> cannot be recovered if a company leaves market
e.g.
- Advertising
- Cost of Closure e.g. redundancy pay
- Specialised Machinery –> not able to transfer to new market / business –> can sell but wouldn’t make back same money
