market structures Flashcards
spectrum of competition from most to least competitive
1) perfect competition
2) monopolistic competition
3) oligopoly
4) monopoly
factors used to distinguish market structures
1) barries to entry and exit
2) product differentiation
3) number of firms
what do we assume is the main objective of firms and where does this occur?
- profit maximisation
- occurs where MC=MR
sales maximisation
- involves selling the maximum output possible before MR starts to decrease
- revenue maximisation occurs where MR=0
survival
- making enough profit to simply stay afloat
- may be the objective of new smaller firms
growth
- may occur after buisnesses have established themselves
- involves increasing output and scale of operations
increasing market share
- when firms seek to maximise their share in the market which they operate in
divorce of ownership and control
- differences in objectives between the owners of the firm (i.e. the shareholders) and who controls the firm (i.e. managers)
the satisficing principle
- suboptimal but satisfactory level of profit
- may be the aim of firms as producing where MR=MC can be extremely difficult
characteristics of perfect competition
- large number of firms operating in strong competition
- low/no barriers to entry and exit
- homogenous goods being produced
- perfect information
- firms are price-takers
profit in perfect competition
- firms can make abnormal profit in the short run
- however this isn’t possible in the long run as firms become attracted to the market from these abnormal profits
- this increases supply in the market forcing firms to lower prices in order to remain competitive
- means firms can only make normal profit in the long run
advantages of perfect competition
- firms are productively efficient as they must minimise costs to prevent being undercut by other firms- links to x-efficiency
- are allocatively efficient- produce the optimal level to satisfy concumer demand- if not they will lose market share to firms who do produce an optimal level
characteristics of monoplistic competition
- large number of firms operating in strong competition
- slighty differentiated products
- low barriers to entry and exit
- firms are price makers
non-price competition in monopolistically competitive markets
- non-price competition= competiting using non-monetary factors as opposed to monetary factors (such as price)
- examples= location and store opening hours, packaging, delivery and after-sales service
profit in monopolistically competitive markets
- in the short run firms can make abnormal profits
- this is limited in the long run as firms join the market as a result of this abnormal profit in the short run
- means that in the long run only normal profit can be made
characteristics of oligopoly
- handful of firms
- low competition
- high barriers to entry and exit
- product differentiation
concentration ratios
indicate the total market share held by the largest firms in a particular market
collusion in an oligopoly market
- when firms work together to determine prices and/or output
- this reduces uncertianty for firms in the market regarding price and output decisions of rivals
a cartel in an oligopoly market
a collusive agreement among firms to fix prices and/or output between themselves.
tactic collusion
a collusive relationship between firms in an oligopoly without any formal agreement being made.
overt collusion
a collusive relationship between firms involving an open agreement.
cooperation in oligopoly
when firms legally and voluntarily agree to take mutually beneficial measures without breaking laws- involves open and honest collaboration
interdependance in oligopoly markets
- firms in an oligopoly market monitor and act upon the behaviour of rival firms
the kinked demand curve model of oligopoly
- if a firm chooses to lower its charging price it will be relatively inelastic as other firms will see this change and then lower their charging price as a result
- if a firm chooses to raise prices it will be relatively elastic as the quantity demanded will fall for that firm, causing a loss in market share, as rival firms will keep their prices the same so consumers will switch to them
kinked demand curve evaluation
- firms may not seek to maximise profits (weaker argument)
- ignores the significance of non-price competition
- some brands have strong brand loyalty so may be able to raise prices without being affected by elasticity
advantages of oligopoly
- Firms differentiate their products and engage in non-price competition- builds brand loyalty + provides consumers with better suited options to them
- Make abnormal profits in the long run
- With these abnormal profits firms can invest into R&D, education and training, capital, etc
- Price wars- firms may cut prices which is better for consumers (short run)
disadvantages of oligopoly
- Firms can collude and form cartels- make prices higher which negatively effects consumers
- Not allocatively efficient as they produce where profit is maximised
pure monopoly
exists when there is a singular supplier of a good or service- which therefore has 100% market share.
monopoly power
the power of a firm in a market to act as a price maker.
price maker
a firm with the power to set the ruling market price.
characteristics of monopoly markets
- little or no competition
- high barriers to entry and exit
profit maximisation in a monopoly market
- firms can raise prices and restrict output in order to maximise their profits
- downward-sloping demand curve, indicates price making ability
- can make abnorml profit in the long run
factors which increase monopoly power
- barriers to entry- makes it harder for new firms to enter the market
- little competition- means firms can increase their monopoly power
- advertising- helps the firm promote the brand and build brand loyalty
- product differentiation- means firms can make their product unique from others
barriers to entry
any feature of a market that makes it difficult or impossible for new firms to enter.
natural barriers to entry
- develop naturally within the market
1) economies of scale
2) high R&D costs
3) high start up costs
strategic barriers to entry
- are deliberately put in place by firms in the market
1) patents
2) product differentiation
3) brand loyalty
4) limit pricing
5) predatory pricing
limit pricing
occurs when firms sets prices low enough to discourage others from entering the market.
predatory pricing
occurs when a firm temporarily sells a product below cost in order to drive competitiors out of the market.
disadvantages of monopoly
- not productively efficient as firms have no incentive to cut costs
- not allocatively efficient as firms restrict output to maximise profits- i.e. not satisfying consumer preferences
- x-inefficient
- diseconomies of scale may start to occur if the firm becomes too large
advantages of monopoly
- range of possible economies of scale
- ability to fund investment, R&D and innovation
natural monopoly
a market where a single firm can benefit from continuous economies of scale
- these industries have very high fixed costs for infrastructure e.g. TFL, Thames Water
- in a natural monopoly, LRAC falls continuously over a large range of output due to strong economies of scale
- more efficient than if multiple firms were in the market
price discrimination
where firms with monopoly power charge different consumers different prices for the same product.
consumer and producer surplus during price discrimination
price discrimination allows firms to hijack consumer surplus and convert it into a producer surplus.
conditions necessary for price discrimination
- must be able to seperate consumers into different groups- with different elasticities of demand
- firms must have price-making power- i.e. some degree of monopoly power
- no “seepage” between markets- i.e. consumers being charged the higher price must not be able to access the cheaper prices
advantages of price discrimination
- supernormal profits may be re-invested to create better quality goods and services for consumers
- the price discriminator may only use the inelastic market so is simply subsidising those paying a lower price
- those on lower incomes may now be able to access services they were unable to before
disadvantages of price discrimination
- increases producer surplus at the expense of consumer surplus
- may be seen as exploiting consumers who have no other choice than to use the service
- may not be allocatively efficient if the price is greater than MC
consumer surplus
the difference between what a consumer would be prepared to pay and the price they actually pay for a good or service.
surplus or satisfaction that consumers enjoy.
producer surplus
the difference between what a firm would be willing to accept for a good or service and what they actually recieve.
surplus value enjoyed by producers.
price competition
reducing the price of a good or service in order to make it more attractive than those of competitors.
dynamic efficiency
improvement in productive efficiency over a period of time.
price war
where firms repeatedly cut prices below those of competitors in order to win market share.
however, this tends to reduce firms profit so is only used as a last resort.
creative destruction
means that firms use innovation to overcome existing barriers to entry in a monopoly.
contestable markets
- a market with freedom of entry and exit
- existing firms in the market face a high threat of competition from new firms entering the market
- incumbent firms have no advantage over new firms entering the market
- firms produce where price=MC
sunk costs
costs that can’t be recovered if a firm is unsuccessful in a market and has to exit.
hit and run competition
in contestable markets, where new entrants take a share of supernormal profits and then exit the industry when these profits have been exahusted.
advantages of contestable markets
- threat of potential competition means that consumers may pay lower prices and recieve better customer service
- firms have an incentive to reduce costs and satisfy consumer preferences
static efficiency
consists of productive and allocative efficiency and is achieved at a particular point in time using existing resources.
productive efficiency
is acheieved when average total costs are minimised.
allocative effciency
is achieved when price=marginal cost.
x-inefficiency
occurs when a firms actual LRAC is higher than its potential LRAC.
