Market Structures Flashcards
Dynamic efficiency
When a firm operates gaining supernormal profit to then invest in Research and Development
X inefficency
Lack of willingness and firms to control cost of production due to size and high profits
4 Monopoly Indicators
- Productive efficiency
- Allocative efficiency
- X efficiency
- Dynamic efficiency
A monopoly is (state 4)
- Perhaps dynamically efficient
- X inefficient
- Allocatively inefficient
- Productively inefficient
AC
AR
MC
MR
Natural Monoploies
Most efficient market operation when there is only one firm in the market ( TFL or NHS), this is because of internal economies of scale and high sunk costs
Why do Natural monopolies exist
Because of high sunk costs or other high barriers to entry
High internal economies of scale
Why does the government own and support monopolies when we know their negatives
Natural monopolies- Most efficient market operation when there is only one firm in the market
Rupert’s Mum Flies Past the Moon
R- Risk bearing
M- Managerial
F- Financial
P- Purchasing
T- Technical
M- Marketing
What acronym is for causes of internal economies of scale
Rupert’s mum flies over the moon
Reason for price discrimination
High income- product represents lower % of income rather than for a young person where this would be higher
3 conditions for price discrimination to occur
- firms must have market power
- Fries must understand consumer elasticity
- Firms must limit reselling
Perfect competition
Large numbers of buyers and sellers
Firms are price setters
Goods are homogenous with no product differention
4 barriers to entry
- Legal barriers
- Sunk Costs
- Economies of scale
- Brand loyalty
Examples of sunk costs
-R&D
- Specialist machinery
- Advertising
5 Market structures
Monopoly
Perfect competition
Monopolistic competition
oligopoly
(term for normal market)
What market structure is oppostie to a monopoly
perfect competition
4 Features of perfect competition
- Small firms and buyers
- No barriers to entry
- Homogenous goods
- Perfect information
Elastic demand PED range
-infintiy to -1
What price variation exists at perfectly elastic demand
Demand exists only at one price and because firms are price takers if they charge above market price then consumers will consumer another product. No product differentiation. No barriers to entry
3 Monopolistic competition features
- many buyers and sellers
- differentiated products
- low barriers to entry (some patents and low rent)
What is a highly contestable market
A market which has low barriers to entry and exit
In a highly contestable market what types of profit is available
long run- supernormal
short run- normal, supernormal and loss
What is hit and run competition
When a firm is earning supernormal profit in a highly contestable market another firm enters and undercuts the incumbent firm. This is the ‘hit’ While still making supernormal profit the firms continue price competition until normal profit is reached and the firm which enters the market then leaves. This is the run. This is only possible because a contestable market has low barriers to entry and exit.
Features of a contestable market
Low barriers to entry
Low product differentiation
What might a firm do to avoid being in a highly contestable market
set the price of the produce at the ‘normal’ price where AC meets AR.
Features of an Oligopic market
- Few large sellers
- High barriers to entry
- Differentiated goods
- Firms are interdependant
Price War
When firms repeatedly reduce their prices below that of their competitors with the aim of offering the lowest price in the market
Outcome of price wars
Lower market price
2 types of collusion
Overt collusion
Tacit collusion
Collution
when 2 or more firms agree to limit competition by fixing prices to avoid price wars allowing them to gain supernormal profit
Overt Collution
Formal agreement between firms to fix prices which is illegal
Tacit collusion
Unspoken agreement between firms
Case study on Overt Collusion
British Airways and Virgin Atlantic
What is a price leader and what does one lead to
- A firm which has control over the cost of goods in the market as when they change price rival firms follow suit.
This is Tacit collusion
Price wars
when firms compete using price lowering techniques to steal customers from other firms
Predatory Pricing
Lowering prices to force competitors out of the market
Limit pricing
A are market entrant sets a price so low that a new firm cannot make supernormal profit in the short run so new firms are disencorgaed to enter
3 forms of price competition
- Price wars
- limit pricing
- predatory pricing
4 types of non price comp
- advertigin
- loyalty
- branding
- quality
How does Supernormal profit support non price competition
Firms operating in SN profit can invest in better quality products creating dynamic efficiency
What is the impact of firms being interdependent in an oligolpoly
When one firm takes an action another will react in an uncertain and unknowable way.
Co Operation between firms
Legal collaborations between firms to share sunk costs of producing a product or a new technology
