Market Structures Flashcards
What are the different market structures?
-Perfect Competition
-Monopoly
-Monopolistic Competition
-Oligopoly
What are the assumptions of perfect competition?
-There are many buyers and sellers
-The product is homogenous
-There is perfect information
-There is free entry and exit to the market
In perfect competition, firms are price takers
What is the profit maximising point for a price taker?
P=MC
What will happen if there is an exogenous increase in demand in a perfectly competitive market?
- SRDC shifts outwards
-Production increases as firms move along their supply curve
-This leads to supernormal profits
-This attracts more firms into the market
-This causes the SRSC to shift outwards
-The new equilibrium is at the same price, but a higher quantity
-This is why the LRSC is perfectly elastic in the long run
What is the profit maximising point for a price setter?
MC=MR
What are the assumptions for a monopoly?
-The firm is the sole supplier and there are no substitutes
-If there is a cross price elasticity, then two products are substitutes and therefore there is no monopoly
-The firm faces the market demand curve directly
What is the demand curve for a monopoly?
D=AR
How do you calculate deadweight loss for a monopoly?
-Integrate the area bounded by the demand curve, the monopolist’s profit maximising quantity and the market clearing quantity
-Subtract the area bounded by the MC curve, the monopolist’s profit maximising quantity and the market clearing quantity
What are the welfare losses with a monopoly?
-Cost inflation
-Rent-seeking
-Monopolists may gain economies of scale
-Monopolies may be the reward for innovation (patents +IP)
How can a monopolist protect its monopoly?
It can set a price lower than the profit maximising price which will not incentivise other firms to enter the market
What are the characteristics of monopolistic competition?
-Imperfect competition
-Many buyers and many sellers
-The product is differentiated
-Firms do not take price as given
-Perfect customer information
-Free entry and exit of firms
What are the outcomes of imperfect competition?
-Deadweight loss
-In the short run, MC=MR and supernormal profits are obtained
-This attracts new firms into the market
-This shifts the demand curve in
-This reduces the profits and in the long run normal profits are made
What are the characteristics of an oligopoly?
-Small number of firms in the market
-Firms produce a homogenous product
-Some barriers to entry or exit
What are some ways firms can operate in an oligopoly?
-Collusion
-Price leadership
-Non-cooperative
How can firms be analysed if they collude to maximise joint profits?
They can be analysed as a monopoly
What is price leadership?
This is when one firm takes the lead setting the price and other firms follow this decision
What is the dominant firm price leadership model?
-Dominant firm sets MR=MC
-Other firms take this price
-Dominant firm facilitates the survival of smaller firms by charging a high price
-Over time, the number of follower firms increases unless there are barriers to entry
What are the characteristic of Cournot Competition?
-There are fixed number of firms in the short run
-Firms decide output simultaneously
-Firms choose their quantities
-Price will move to clear the market
-Each firm takes its rivals’ output as given
- In this way the firm acts as a monopolist over residual demand
-The outcome is a Nash equilibrium with firms splitting the market
-P>MC
What is the demand curve dependent on in the Cournot model?
- The market share of other firms, as the demand for an individual firm is the residual demand
What are the characteristics of the Stackelberg Model?
-Assumes one firm moves first which gives it a first mover advantage
-If the first mover will produce a high output, so the second mover would maximise profits by choosing a low output
-The equilibrium outcome that follows is that the first firm producer more than the firm that follows
What are the characteristics of the Betrand Model?
-Firms compete over price
-Price is set simultaneously by firms
-Firms sell a homogenous output
-If firms charge the same price, consumers are indifferent and the market is split evenly
-If a firm charges a lower price than others, it takes the whole market share
-The Nash Equilibrium is the same as the competitive solution so P=MC
-This is because there is an incentive to cut prices
