Market structures Flashcards
Perfect competition
Market structure where is there are many firms; where there is freedom of entry into the industry; where all firms produce an identical product; and where all firms are price takers.
Monopoly
A market structure where is only one firm in the industry
Monopolistic competition
A market structure where, like perfect competition, there are many firms and freedom of entry into the industry, but where each firm produces a differentiated product and thus has some control over its price
Oligopoly
A market structure where there are few enough firms to enable barriers to be erected against the entry of new firms
The are four alternative market structure under which firms operate. In ascending order to firms’ marker power, they are:
Perfect competition, monopolistic competition, oligopoly and monopoly
The market structure under which a firm
operates affects its conduct, which in turn affects its performance
Imperfect competition
the collective name for monopolistic competition and oligopoly
Short run under perfect competition
the period during which there is too little time for new firms to enter the industry
The long run under perfect competition
The period of time that is long enough for new firms to enter the industry
Allocative efficiency
a situation where the current combination of goods produced and sold gives the maximum satisfaction for each consumer at their current levels of income
The assumptions of perfect competition are:
a very large number of firms, complete freedom of entry, a homogeneous product, and perfect knowledge of the good and its market by both producers and consumers
In the short run, there is not time for new firms to
enter the market, and thus supernormal profits can persist. In the long run, however, any supernormal profits will be competed away by the entry of new firms.
The short-run equilibrium for the firm is:
where the price, as determined by demand and supply in the market, is equal to marginal cost. At this output the firm will be maximising profit.
The long-run equilibrium is where
the market price is just equal to firms’ long-run, average cost
There can be no substantial economies of scale to be gained in a
perfectly competitive industry. If there were, the industry would cease to be perfectly competitive as the large, low-cost firms drove the small, high-cost once out of business.
Productive efficiency
A situation where firms are producing the maximum output for a given amount of inputs, or producing a given output at the least cost.
Natural monopoly
A situation where long-run average costs would be lower if an industry were under monopoly than if it were shared between two or more competitors.
Network economies
The benefits to consumers of having a network of other people using the same product or service.
Competition for corporate control
The competition for the control of companies through takeovers.
Perfectly contestable market
A market where there is free and costless entry and exit.
Sunk costs
Costs that cannot be recouped (e.g. by transferring assets to other uses).
A monopoly is where
there is only one firm in an industry. In practice, it is difficult to determine where a monopoly exists because it depends on how narrowly an industry is defined.
Barriers to the entry of new firms will normally be necessary to
protect a monopoly from competition. Such barriers include economies of scale (making the firm a natural monopoly or at least giving it a cost advantage over new (small) competitors), control over supplies of inputs or over outlets, patents or copyright, and tactics to eliminate competition (such as takeovers or aggressive advertising).
Profits for the monopolist will be maximised (as for other firms) where
MC = MR.
If demand and cost curves are the same in a monopoly and a perfectly competitive industry
the monopoly will produce a lower output and at a higher price than the perfectly competitive industry.
On the other hand, any economies of scale will, in part, be passed on to
consumers in lower prices, and the monopolist’s high profits may be used for research and development and investment, which in turn may lead to better products at possibly lower prices.
Potential competition may be as important as
actual competition in determining a firm’s price and output strategy.
The threat of this competition is greater, the lower are the
entry and exit costs to and from the industry. If the entry and exit costs are zero, the market is said to be perfectly contestable. Under such circumstances an existing monopolist will be forced to keep its profits down to the normal level if it is to resist entry of new firms. Exit costs will be lower, the lower are the sunk costs of the firm.
Independence (of firms in a market)
Where the decisions of one firm in a market will not have any significant effect on the demand curves of its rivals.
Product differentiation
Where one firm’s product is sufficiently different from its rivals’ to allow it to raise the price of the product without customers all switching to the rivals’ products. A situation where a firm faces a downward-sloping demand curve
Non-price competition
Competition in terms of product promotion (advertising, packaging, etc.) or product development.
Monopolistic competition occurs where there is
free entry to the industry and quite a large number of firms operating independently of each other, but where each firm has some market power as a result of producing differentiated products or services.
In the short run, firms can make
supernormal profits. In the long run, however, freedom of entry will drive profits down to the normal level. The long-run equilibrium of the firm is where the (downward-sloping) demand curve just touches the long-run average cost curve.
The long-run equilibrium is one of
excess capacity. Given that the demand curve is downward sloping, the point where it just touches the LRAC curve will not be at the bottom of the LRAC curve. Increased production would thus be possible at lower average cost.
