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Microeconomics > Market structures > Flashcards

Market structures Flashcards

1
Q

What are barriers to entry?

A

Difficulty or expense a firm might face if it wants to enter a market

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2
Q

What does the size of the barrier to entry determine?

A

How long and how expensive it will be for a new entrant to enter the market
Whether new entrants can enter the market at all

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3
Q

What does barriers to entry result in for incumbant firms

A

Supernormal profits until new entrants compete profits away

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4
Q

What does how long the incumbant firms make super normal profits depend on?

A

Height of barriers to entry - preventing firms from entering
The level of supernormal profits made - greater profits, greater effort to enter the market

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5
Q

Do perfect competition markets have barriers to entry?

A

No barriers to entry

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6
Q

Are there barriers to entry in puire monopoly markets?

A

Total barriers to entry - no firms can enter

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7
Q

How do barriers to entry come about?

A

Tendency of incumbant firms to create barriers
Nature of the industry
Extent of government regulation and licensing

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8
Q

What are some examples of barriers to entrys due to incumbant firms actions?

A

An innovative new product or service - headstart entrants find hard to overcome. (patents)
Strong branding - familiarity of the product makes it a consumers first choice
Better products/effective advertising
Pricing tactics (predatory pricing) - drives new firms out before it becomes established
Threat of a price war

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9
Q

What is predatory pricing?

A

Incumbant firms lowering prices to a level that a new entrant cannot match (economies of scale)

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10
Q

What are some examples of barriers to entry due to the nature of the industry?

A

Capital intensive firms require huge amounts of capital expenditure before a firm receives any revenue. The cost of entering these markets is huge, so smaller enterprises may not be able to break through
If investments cannot be recovered when a firm leaves the market, it will make an attempt to enter the market unappealing
If there is a MES, then new firms entering the market will be higher up on the average cost curve - higher production cost per unit –> higher prices.

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11
Q

What are some barriers to entry from government regulations?

A

If an activity requires a license, it restricts the number and speed of entry. In regulated industrys, firms have to be approved by a regulator.
New factories need planning permission before being built
Regulations for health and safety and working conditions.

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12
Q

What is a monopoly or pure monopoly

A

Market with only one firm in it, a single firm has 100% market share

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13
Q

What is monopoly power

A

When firms can influence the price - price makers

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14
Q

How can monopoly power come about?

A

Barriers to entry - prevents new competition entering markets to compete profits
Advertising and product differentiation - if consumers think there products are more desirable than produced by other firms
Few competitors in the market

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15
Q

Do monopolists make super normal profits in the long run>

A

yes

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16
Q

Why can monopolists make supernormal profits in the long run?

A

The barriers to entry are total, so no new firms can enter the market, so supernormal profits are not competed away.

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17
Q

Are monopolists allocatively or productively efficient?

A

Neither

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18
Q

Why arent monopolist firms productively efficient?

A

MC is not equal to AC in the long run position - the firm is not producing at the lowest point on AC

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19
Q

Explain deadweight loss for monopolys.

A

Consumer surplay is lost if the price was evaluated at P^C and not P^M.
Lost revenue from Q^M to Q^C.

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20
Q

Why arent monopolist firms allocatively efficient?

A

P > MC, so products are over rewarded

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21
Q

Are monopolist products underconsumed?

A

Yes, because firms restrict supply and raise price.

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22
Q

What are some drawbacks for monopolys?

A

No need to innovate and adapt to consumer preferences - become complacent
No need to increase efficiency - high x-inefficiency
Monopsonist power.

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23
Q

What are natural monopolies?

A

Great deal of monopoly power

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24
Q

What leads to natural monopolies

A

High fixed costs or large economies of scale

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25
Q

Why is it bad if there is more than one firm in an natural monopoly industry

A

Firms would all have the same fixed costs, higher costs per customer than could be obtained with a single firm.
Monopolys might be more effficient than having lots of firms competing.

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26
Q

What are continuous economies of scale in natural monopolys.

A

LRAC always falls as output increases (MC always below AC) - Profit maximising monopolys will restrict output.

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27
Q

Why are governments reluctant to break up natural monopolys

A

Because it reduces efficiency. Might provide subsidies to the natural monopoly so that it increases output to where AR=MC

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28
Q

What are some benefits to monopolys?

A

Take advantage from economies of scale - can keep average cost low - produce more than any individual producer in a perfect competitive market
Means for dynamic efficiency - invest in developing and improving products.
Financial security reassures employees.

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29
Q

What is monopsony?

A

Market with a single buyer

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30
Q

What do monopsonists do?

A

Price makers and drive down prices
Exploit suppliers - low costs, low prices.
If the firm is a single buyer of labour, may exploit power and give lower wages

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31
Q

What is an example of a monopsonist?

A

Supermarkets unfairly use their market power to force suppliers to sell their products at a price that means those suppliers make a loss

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32
Q

What is price discrimination?

A

Charging different prices to different customers for exactly the same price.

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33
Q

What are the conditions for price discrimination?

A

Price making power. So monopolies can price discriminate.
Must be able to distinguish seperate groups of customers who have different price elasticities of demand. More groups, greater gains
Resale is not allowed.

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34
Q

What is resale in the context of price discrimination?

A

Prevent customers who have bought at a low price from reselling at a higher price to customers who could have been charged more.

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35
Q

What does price discrimination aim to do?

A

Turn extra consumer surplus into additional revenue.

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36
Q

What are evaluations for first degree price discimination?

A

Cost of gathering the required information and the difficulty in preventing resale

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36
Q

What is first degree price discrimination?

A

First degree price discrimination is where each individual customer is charged the maximum that they would be willing to pay

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37
Q

What is second degree price discrimination

A

Where lower prices are charged to people who purchase large quantities.

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38
Q

How does second degree price discrimination benefit firms

A

Turns some of consumer surplus to additional revenue and encourages large orders.

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39
Q

What is third degree price discrimination?

A

When a firm charges different prices for the same product to different segments of the market

40
Q

What are examples of different segments of the market?

A

Ages
Buying at different times
Customers in different places.

41
Q

How can a seller identify different groups of consumers

A

With different price elasticities of demand
Charge higher price for inelastic demand curves and vice versa.

41
Q

How to calculate nfirm concentration ratio?

A

(A+B+C)/Total market share revenue times 100.

41
Q

How can price discrimination be good for customers?

A

More equitable if high income consumers are charged more.
Profits from high income are used to subsidise low income.
Revenue could be used to improve products or invest in more efficient methods which lower prices.

41
Q

How can price discrimination be bad for consumers

A

Consumer welfare turned into additional welfare.
Allocative inefficient.

41
Q

What are features of an oligopolistic market?

A

Dominated by just a few firms ( high concentration ratio)
High barriers to entry - entrants cant compete supernormal profits away
Product differentiation
Interdependent
Competitive and collusive strategies.

42
Q

Define interdependence?

A

The actions of each firm will have some kind of effect on the others

43
Q

What different long term strategies are there in the long run (oligopoly)?

A

Competitive and collusive

44
Q

What is competitive behaviour in oligopolistic markets?

A

When firms dont cooperate but compete with eachother (especially on price)

45
Q

What is collusive behaviour in oligopoly markets?

A

Various firms cooperate with each other especially over prices charged

45
Q

What is formal collusion?

A

Involves an agreement between firms - forming a cartel - illegal.

45
Q

What is informal/tacit collusion?

A

Happens without a sort of agreement. Not to compete with eachother aslong as all firms do the same.

45
Q

What are price leaders in collusive oligopoly.

A

Setting the patterns for others to follow.

46
Q

Which characteristics of a firm would lead to competitive behaviour?

A

Lower costs
Large number of firms
Produce similar products
barriers to entry are relatively low

47
Q

Which characteristics of a firm would lead to collusive behaviour?

A

Similar costs
Few firms in the market
Brand loyaltly
Barriers to entry are high

48
Q

What does collusion produce

A

Results similar to monopolys

49
Q

What do collusive oligopolies result in?

A

Higher prices and lower output
Underconsumption
Allocative and productive inefficiency

50
Q

Are there means and incentives for dynamic efficiency in collusive oligopolies

A

Means: yes, have recources to invest
Incentive, no –> market failure.

51
Q

What are quotas in collusive firms

A

Where they agree on the level of output each of the firms produce.

52
Q

How do firms which collude on price compete

A

Differentiating products
Sales promotion
Export markets.

53
Q

What do some economists argue (collusive oligopolies)

A

Not as bad as they sound
Unstable - dont last long
Both

54
Q

Why do economists argue informal collusion is temporary?

A

One firm will cheat, lower prices (first mover advantage). Results in a price war.

54
Q

Why do economist argue collusion isnt bad

A

Formal collusion is unlikely to occur because it is illegal
Informal collusion is temporary

54
Q

Why are collusive oligopolies not bad?

A

Price competition - dynamic efficiency
Wont increase prices too much as it incentivises new entrants to enter the market

55
Q

What model is used to show price stability?

A

Kinked demand curve.

55
Q

What are the assumptions in the kinked demand curve

A

If one firm raises its price, the other firms will not raise theirs
If one firm lowers its price, the other firms will also lower theirs.

55
Q

Why are competitive oligopolies good?

A

Can achieve high levels of efficiency.

55
Q
A
55
Q

How does the kinked demand curve work?

A

Interdependent firms,

55
Q

What are features of monopolistic competition?

A

Some product differentiation - due to advertising or real differences between products
Low or no barriers to entry

56
Q
A
56
Q

What happens when an oligopoly raises prices (kinked demand curve)

A

Large drop in demand, price in elastic (substitutes)
Firms raising prices will lose out, the fall in demand will more than cancel out the gains from charging a higher price.

56
Q

What happens when an oligopoly lowers prices (kinked demand curve).

A

Will not gain any market share. Price is inelastic
Firms lose out. Wont gain market share and the price of the good has fallen.

57
Q

What is evaluation for kinked demand curve

A

Not appropriate for every monopoly - models wont predict firms behaviour

57
Q

What occurs in monopolistic competition when there is product differentiation?

A

Price making power
Demand curve slopes downwards
More price elastic

58
Q

What is the short run position of monopolistic competition?

A

Monopoly diagram - barriers to entry or product differentiation mean that supernormal products can be made

59
Q

What is the long run position of monopolistic competition?

A

Perfect competition diagram

60
Q

Why does the long run position of monopolistic competition change?

A

Barriers to entry are low. Demand curve shifts to the left. Shifts till only normal profit is earned
AC curve and demand curve touch in a tangent

60
Q

Is long run monopolistic competion productive or allocatively efficient?

A

Neither

61
Q

Why do monopolistic firms have higher prices than perfectly competitive firms?

A

Spend more money on differentiating their product and creating brand loyalty

61
Q

Do monopolistic firms fully maximise economies of scale?

A

No because it restricts supply and raises price

62
Q

Are monopolistic prices lower than monopoly prices

A

Yes

62
Q

Why does monopolistic competition not lead to dynamic efficiency?

A

Lack of barriers to entry means that firms are unlikeley to invest huge amounts of money on new innovations
In the long run, the lack of supernormal profit results in dynamic efficiency not occuring

63
Q

When do incumbant firms make supernormal profit.

A

Time it takes for firms to enter for normal profit to occur is the same amount of time incumbant firms make supernormal profit

63
Q

What are the features of a contestable market?

A

Barriers to entry and exit are low - if incumbant firms make supernormal profits, new firms enter the market.

63
Q

What does contestability mean?

A

How open a market is to new competitors

64
Q

Do incumbant firms have threat of competition in contestable markets

A

Yes because new firms can enter the market

65
Q

What results in low contestability?

A

High barriers to entry

66
Q

What are examples which lead to high barriers to entry?

A

Patents on production methods
Advertising - Strong brand loyalty
Predatory pricing
Trade restrictions (tariffs and quotas)
Vertical integration
Sunk costs.

67
Q

What are patents?

A

Gives a firm legal protection against other firms copying its products or production methods

68
Q

What are trade restrictions

A

Tariffs, quotas - dont allow foreign entrants to compete in domestic markets.

69
Q

What is vertical integration

A

When access to supplies of raw materials or distribution networks is difficult for newfirms

70
Q

What are hit and run tactics

A

Entering a market when supernormal profit is made
Leaving when prices have been driven to normal profit.

71
Q

How does the contestability of a market affect the behaviour of incumbant firms.

A

Incumbant firms to sacrifice some short term profits, and set lower prices to avoid attracting new entrants
Creating high barriers to entry: heavy spending on advertising

72
Q

How does technological change impact a markets structure?

A

Creative destruction
Production methods
Consumption of goods and services

73
Q

What does invention and innovation lead to

A

Improvements in capital equipment, improvements in goods and services
Barriers to entry reduced or increased
Monopoly power for first mover
Improvements in labour productivity and efficiency
Larger economies of scale

74
Q

What is creative destruction

A

Markets are changing and evolving due to innovation and invention - can lead to destruction and creation of markets

75
Q
A
76
Q

What does creative destruction lead to?

A

Lead to firms being put out of business.

Microeconomics (7 decks)

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