Market Structures

Question 1

What are the main 4 characteristics of perfect competition?

Answer 1

1. Many buyers and sellers
2. No barriers to entry
3. Buyers and sellers possess perfect knowledge prices
4. Homogenous products

Question 2

Where is the profit maximising point?

Answer 2

MC = MR

Question 3

How much market power does each firm have in perfect competition?

Answer 3

None

Question 4

Can firms make supernormal and subnormal profits in the short-run and long-run in perfect competition?

Answer 4

Short-run: yes
Long-run: no

Question 5

What are the 4 major characteristics of monopolistic competition?

Answer 5

1. Many small firms
2. Low barriers to entry and exit from the industry
3. Slightly differentiated products
4. Firms have little market power

Question 6

What is the difference between a price maker and a price taker?

Answer 6

Price makers have some pricing power, while price takers have none

Question 7

Can firms make profits and losses in the short-run and the long-run in monopolistic competiton? Why/why not?

Answer 7

Short-run: yes
Long-run: no - new firms see profits and enter the market, eroding profits, while loss-making firms leave the industry

Question 8

What are the 4 major characteristics of an oligopoly market?

Answer 8

1. High barriers to entry and exit
2. High concentration ratio
3. Interdependence of firms
4. Product differentiation

Question 9

Why are entry and exit barriers to oligopolies high?

Answer 9

Entry: existing dominance of relatively few firms leading to high start-up costs
Exit: high sunk costs

Question 10

What is the minimum 5-firm concentration ratio needed for a market to be considered an oligopoly?

Answer 10

60%

Question 11

What is collusion?

Answer 11

Where firms work together to fix prices and restrict output

Question 12

What are the 5 main causes of collusion?

Answer 12

1. Few firms/competitors (easy to understand rivals)
2. Similar costs and revenues
3. High entry barriers (lack of disruption to status quo)
4. Ineffective regulation (lack of consequences)
5. Brand loyalty

Question 13

What are the 2 types of collusion?

Answer 13

1. Overt - explicit agreements
2. Tacit - avoid formal agreements

Question 15

What are the 4 main methods of overt collusion?

Answer 15

1. Price fixing
2. Output quotas
3. Blocking new firms
4. Low supplier prices

Question 16

What is price leadership?

Answer 16

Where firms monitor the price of the largest firm in the industry and adjust their prices to match

Question 17

What is game theory?

Answer 17

A mathematical framework used by firms to make optimal decisions where there is a high level of interdependence

Question 18

When do firms use game theory? (4 ways)

Answer 18

1. Pricing decisions
2. Advertising and branding decisions
3. Investment decisions
4. Product bundling decisions

Question 19

What are the 3 types of price competition?

Answer 19

1. Price wars
2. Predatory pricing
3. Limit pricing

Question 20

What are price wars?

Answer 20

Where competitors repeatedly lower prices to undercut each other

Question 21

What is predatory pricing?

Answer 21

Where prices are lowered below costs of production

Question 22

What is limit pricing?

Answer 22

Where firms set limits on how high prices can go

Question 25

What is the minimum market share a firm must have for the CMA to consider it a monopoly?

Answer 25

25%

Question 26

What is price discrimination?

Answer 26

Where firms charge different prices for the same good or service to maximise revenue

Question 27

What is third-degree price discrimination?

Answer 27

Where firms charge different prices to different consumers for the same good or service

Question 28

What are the 3 conditions that must be met for 3rd degree price discrimination to take place?

Answer 28

1. The firms must have high market power 2. Varying consumer PED 3. Ability to prevent resale of tickets

Question 29

What are the 4 main benefits of 3rd degree price discrimination?

Answer 29

1. Some consumers can take advantage of lower prices 2. Increased consumer utility due to lower demand from higher prices 3. Increased revenue for producers 4. Increased producer surplus

Question 30

What are the 3 main costs of 3rd degree price discrimination?

Answer 30

1. Higher prices for some consumers 2. Lower consumer surplus 3. Setting up and enforcing price discrimination can increase average costs

Question 31

How does monopoly power benefit firms? (4 ways)

Answer 31

1. High and long-term supernormal profits 2. Increased global competitiveness due to high market power 3. Economies of scale 4. Price discrimination

Question 32

How does monopoly power cost firms? (4 ways)

Answer 32

1. X-inefficiency 2. Cross-subsidisation can create inefficiency 3. Misallocation of resources as P > MC 4. Lack of effective innovation

Question 33

How does monopoly power benefit workers?

Answer 33

Higher wages due to higher profits

Question 34

How does monopoly power cost workers?

Answer 34

Limited opportunity to change employers so lower wages

Question 35

How does monopoly power benefit consumers? (2 ways)

Answer 35

1. High investment could lead to higher quality product 2. Lower prices due to economies of scale and, for some prducts, cross-subsidisation

Question 36

How does monopoly power cost consumers? (5 ways)

Answer 36

1. Higher prices due to lack of competition 2. No product innovation due to lack of competition 3. Poor customer service 4. Higher prices on some products due to cross-subsidisation 5. Lack of choice

Question 37

How does monopoly power benefit suppliers? (2 ways)

Answer 37

1. Increased sales volume 2. Easier to build good reputation

Question 38

How does monopoly power cost suppliers?

Answer 38

1. Lower revenues due to monopsony power 2. Low or no profits

Question 39

What is a natural monopoly?

Answer 39

Where the most efficient number of firms in a market is 1