Market structures Flashcards
What are the characteristics of monopolistic competition?
Many buyers and sellers (small firms)
Slightly differentiated goods
Low barriers to entry and exit
Price makers
Non-prive competition
Short run position of incumbent firms diagrammatically in monopolistic comp
Long run position of incumbent firms diagrammatically in monopolistic comp
Efficiency performance of a monopolistic firm in long run
Allocative inefficiency
Productively inefficient
Dynamically inefficient
Why might monopolistic firms actually be dynamically efficient?
Firms re-invest short run supernormal profit or long run normal profit into business to stay ahead of rivals (non price comp that exists)
Is allocative inefficiency in monopolistic firms really that bad?
It seems not when compared to other markets like monopolies. Monopolistic firms have less price making ability so charge lower prices than those charged by monopolies so exploit consumers less. Product quality and service better.
Characteristics of a Monopoly market
One dominant firm in the market
Goods are differentiated
High barriers to entry and exit
Imperfect knowledge of market conditions
Firms are profit maximisers
Define pure monopoly
when a firm has 100% share of the market
Define a legal monopoly (monopoly power)
A firm has 25%+ market share in the market
What’s an example of a firm in the UK with huge market power
Durex 85% market share of the condom market
Monopoly diagram
Dead weight welfare loss of consumer surplus and producer surplus diagram for a monopoly
Societies welfare surplus at competitive outcomes
Draw an evaluative diagram to show why monopolies may actually be better than competitive outcomes
Why may monopoly outcomes be better than competitive outcomes ?
Larger firms, can exploit greater economies of scale than smaller competitive firms.
Cost of production lower for monopolies compared to competitive firms
Lower prices charged by monopolies
So monopolies may actually promote outcomes that benefit society.
What are the characteristics of an Oligopoly?
Few large dominant firms
High barriers to entry and exit
Differentiated goods
Interdependence
Profit maximisers
Non price competition
List 4 types of non price competition
Advertising
Loyalty cards
Branding
Quality of good and service
What are collusive oligopolies?
When firms agree and collude to set the price
What are non competitive Oligopolies?
When firms do not collude and instead compete with rivals using price competition
Real World Example of Oligopolies using price competition
In 1990s, Asda and Tescos price war on baked beans prices
Dropped prices viciously to £0.03 per tin
How do economists define an oligopoly?
Few dominant firms in a market with a high concentration ratio.
Max number of firms in the market is 7 with combined market share of more than 70%
Why might firms collude?
To avoid price wars which negatively impact the profits made by firms
Define collusion
When two or more firms agree to limit competition
Define overt collusion
When firms make a formal agreement on setting price
Define Tacit collusion
When there is an unspoken agreement between firms. Occurs when there is price leadership
What is price leadership
there is a dominant firm in a market and other firms follow the actions of that firm
Real world example of overt collusion
Airline companies, British Airways and Virgin Atlantic overtly colluded to set high ticket prices
how much were British Airways fined for colluding
£250 million
List 3 types of price competitive strategies
Price Wars
Predatory pricing
Limit pricing
What is limit pricing
Firms set their prices low enough to stop other firms from joining the market
What is predatory pricing
When firm ferociously drops their prices below its AVC below its competitors.
Short run loss
Long run steal consumers, pushing rivals out of the market and gain market share
What is a price war
When firms undercut each other with lower prices to try steal consumers and gain more market share
What is a cartel
A collusive oligopoly is considered to be a cartel as firms collude together to set manipulate prices
What are some of the performance outcomes of cartels
Allocative inefficiency
Productive inefficiency
Diagram of comparison between cartel and competitive outcomes
Could cartels be considered a market failure??
Yes.
Quantity in the market is restricted, lower than quantity at competitive outputs, moving away from allocative efficiency outcomes.
This indicted a misallocation of resources, allocative inefficiency and a welfare loss to the rest of society
Why are oligopolies productively inefficient?
Don’t produce at the lowest point on the AC curve, therefore voluntarily forgoing economies of scale. Output could be increased further with lower average costs, but as this does not correspond to profit max then they instead charge higher prices and restrict output , so productive inefficiency prevails.
Diagram showing interdependence and price rigidity of an oligopoly
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What is cheating
When a colluding firm, breaks the collusion agreement, slashing its prices to try undercut the other firm and gain the other firms consumers
What are 2 reasons why cheating in collusive agreements won’t work
Consumer loyalty
Consumer inertia
What is consumer inertia
Concerned with behavioural economics
Consumers have a tendency to choose the same products from the same firm due laziness or habitual behaviour so consumers unlikely to switch suppliers
What is a natural monopoly
A special market structure where a single firm can produce at lower costs to all other firms. Making logical sense for this firm to be the sole provider of specific good due to economies of scale
Do governments regulate natural monopolies
Singular supplier in the market and therefore potential for monopolistic abuse in natural monopolies, there is therefore a rationale for regulation to protect public interest
What do the economies of scale mean for a natural monopoly
The internal economies of scale available to the largest firms mean that there is a tendency for one business to dominate the market in the long run
Natural monopoly diagram, with labelled regulation and subsidies given to firms
Why is there a rationale for just one firms to be the sole supplier in a natural monopoly?
Competition is undesirable because it will result in a wasteful duplication of resources
Cons of monopoly
Allocatively inefficient
Productively inefficient
X-inefficient
Pros of monopoly
Dynamically efficient
Exploit large economies of scale - however risk of diseconomies of scale
What is meant by being X-inefficient?
Firms become complacent and lazy
Excess waste to creep in (cost in excess to AC)
Consumers suffer from high prices
Minimising waste can be time consuming and sometimes against the objectives of managers as it may require changing the whole system of work which could be costly
Evaluation points for monopoly
No guarantee profits from dynamic efficiency will be used to reinvest
Profit maximisation is not the objective of all firms
Should be regulated
What is a monopsony product market
One single dominant buyer with price making power exists
Drives down prices of suppliers
High barriers to entry and exit
Impact of monopsony on consumers
+ Benefit from low prices
However no guarantee
+ Affordability of potential necessity goods increases, improving equity
- However could suffer from lower quantity
- Consequently excess demand and allocative inefficiency
Why do monopsonists needs to be careful
Careful not to abuse their market power too much otherwise they run the risk of competition authorities investigating their business which could ruin their reputation and objectives being achieved.
