Market Structures

Question 1

What are the different market structures?

Answer 1

-Perfect Competition
-Monopoly
-Monopolistic Competition
-Oligopoly

Question 1

What are the assumptions of perfect competition?

Answer 1

-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

Question 2

What is the profit maximising point for a price taker?

Answer 2

P=MC

Question 3

What will happen if there is an exogenous increase in demand in a perfectly competitive market?

Answer 3

• 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

Question 4

What is the profit maximising point for a price setter?

Answer 4

MC=MR

Question 5

What are the assumptions for a monopoly?

Answer 5

-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

Question 6

What is the demand curve for a monopoly?

Answer 6

D=AR

Question 7

How do you calculate deadweight loss for a monopoly?

Answer 7

-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

Question 8

What are the welfare losses with a monopoly?

Answer 8

-Cost inflation
-Rent-seeking
-Monopolists may gain economies of scale
-Monopolies may be the reward for innovation (patents +IP)

Question 9

How can a monopolist protect its monopoly?

Answer 9

It can set a price lower than the profit maximising price which will not incentivise other firms to enter the market

Question 10

What are the characteristics of monopolistic competition?

Answer 10

-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

Question 11

What are the outcomes of imperfect competition?

Answer 11

-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

Question 12

What are the characteristics of an oligopoly?

Answer 12

-Small number of firms in the market
-Firms produce a homogenous product
-Some barriers to entry or exit

Question 13

What are some ways firms can operate in an oligopoly?

Answer 13

-Collusion
-Price leadership
-Non-cooperative

Question 14

How can firms be analysed if they collude to maximise joint profits?

Answer 14

They can be analysed as a monopoly

Question 15

What is price leadership?

Answer 15

This is when one firm takes the lead setting the price and other firms follow this decision

Question 16

What is the dominant firm price leadership model?

Answer 16

-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

Question 17

What are the characteristic of Cournot Competition?

Answer 17

-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

Question 18

What is the demand curve dependent on in the Cournot model?

Answer 18

• The market share of other firms, as the demand for an individual firm is the residual demand

Question 19

What are the characteristics of the Stackelberg Model?

Answer 19

-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

Question 20

What are the characteristics of the Betrand Model?

Answer 20

-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