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Economics > Market Structures > Flashcards

Market Structures Flashcards

1
Q

What are the main 4 characteristics of perfect competition?

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

Where is the profit maximising point?

A

MC = MR

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3
Q

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

A

None

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4
Q

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

A

Short-run: yes
Long-run: no

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5
Q

What are the 4 major characteristics of monopolistic competition?

A
  1. Many small firms
  2. Low barriers to entry and exit from the industry
  3. Slightly differentiated products
  4. Firms have little market power
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6
Q

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

A

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

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7
Q

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

A

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

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8
Q

What are the 4 major characteristics of an oligopoly market?

A
  1. High barriers to entry and exit
  2. High concentration ratio
  3. Interdependence of firms
  4. Product differentiation
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9
Q

Why are entry and exit barriers to oligopolies high?

A

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

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10
Q

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

A

60%

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11
Q

What is collusion?

A

Where firms work together to fix prices and restrict output

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12
Q

What are the 5 main causes of collusion?

A
  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
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13
Q

What are the 2 types of collusion?

A
  1. Overt - explicit agreements
  2. Tacit - avoid formal agreements
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14
Q
A
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15
Q

What are the 4 main methods of overt collusion?

A
  1. Price fixing
  2. Output quotas
  3. Blocking new firms
  4. Low supplier prices
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16
Q

What is price leadership?

A

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

17
Q

What is game theory?

A

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

18
Q

When do firms use game theory? (4 ways)

A
  1. Pricing decisions
  2. Advertising and branding decisions
  3. Investment decisions
  4. Product bundling decisions
19
Q

What are the 3 types of price competition?

A
  1. Price wars
  2. Predatory pricing
  3. Limit pricing
20
Q

What are price wars?

A

Where competitors repeatedly lower prices to undercut each other

21
Q

What is predatory pricing?

A

Where prices are lowered below costs of production

22
Q

What is limit pricing?

A

Where firms set limits on how high prices can go

23
Q
A
24
Q
A
25
Q

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

A

25%

26
Q

What is price discrimination?

A

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

27
Q

What is third-degree price discrimination?

A

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

28
Q

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

A
  1. The firms must have high market power
  2. Varying consumer PED
  3. Ability to prevent resale of tickets
29
Q

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

A
  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
30
Q

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

A
  1. Higher prices for some consumers
  2. Lower consumer surplus
  3. Setting up and enforcing price discrimination can increase average costs
31
Q

How does monopoly power benefit firms? (4 ways)

A
  1. High and long-term supernormal profits
  2. Increased global competitiveness due to high market power
  3. Economies of scale
  4. Price discrimination
32
Q

How does monopoly power cost firms? (4 ways)

A
  1. X-inefficiency
  2. Cross-subsidisation can create inefficiency
  3. Misallocation of resources as P > MC
  4. Lack of effective innovation
33
Q

How does monopoly power benefit workers?

A

Higher wages due to higher profits

34
Q

How does monopoly power cost workers?

A

Limited opportunity to change employers so lower wages

35
Q

How does monopoly power benefit consumers? (2 ways)

A
  1. High investment could lead to higher quality product
  2. Lower prices due to economies of scale and, for some prducts, cross-subsidisation
36
Q

How does monopoly power cost consumers? (5 ways)

A
  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
37
Q

How does monopoly power benefit suppliers? (2 ways)

A
  1. Increased sales volume
  2. Easier to build good reputation
38
Q

How does monopoly power cost suppliers?

A
  1. Lower revenues due to monopsony power
  2. Low or no profits
39
Q

What is a natural monopoly?

A

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

Economics (12 decks)

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