Market Structures Flashcards
Characteristics of perfect competition? (6)
- Lots of firms with small market share
- Perfectly homogenous
- Price takers (perfectly elastic AR)
- Perfect information
- No patents or protections for incumbent firms
- We assume all agents act rationally
Examples of perfectly competitive markets? (3)
Foreign exchange markets (effected by accessibility, service, ease)
Gold
Oil (but there are large firms)
Characteristics of a monopoly? (4)
- Lack of substitutes for consumers
- Barriers to entry
- Price-making ability
- Super-normal profits
What is a pure monopoly?
When there is only one firm in a particular market
What barriers to entry are there?
- Economies of scale
- Brand loyalty
- Legal Barriers (licences)
- Intimidation
- Previous profits
- Set up costs
What is a natural monopoly?
A natural monopoly occurs when the most efficient number of firms in the industry is one
What are the necessary conditions of 3rd degree price discrimination? (4)
Firm must:
- Have some degree of monopoly power
- Be able to identify different market segments
- Different segments must have different PEDs for the product
- Markets must be kept separate
What are the effects of 3rd degree price discrimination on consumers?
- Some benefit from receiving a lower price
- Some are harmed from paying a higher price
What are the effects of 3rd degree price discrimination on consumers?
More profit
What are the disadvantages of a monopoly?
Higher price
Fewer incentives to be efficient
What are the advantages of a monopoly? (5)
- Research and development
- Economies of scale
- International competitiveness
- Monopolies can be successful firms
- Avoid the duplication of services
What are the characteristics of an oligopoly? (4)
- Small no. firms (3-8)
- High barriers to entry/exit
- Mutual interdependence
- Product differentiation
What is mutual interdependence?
Basing one’s actions off the expected actions of others (price strategies)
What is predatory pricing?
When firms in the markets are threatened by a new entrant so set their price extremely low to drive out competitors
What is predatory pricing funded by? (3)
- Saved profits
- Loans
- Take advantage of Economies of scale
Why is predatory pricing harmful to small firms? (2)
- No financial backing from the bank or investors
- No economies of scale (so can’t match the low prices
What is limit pricing?
Is pricing below the short-run profit maximising price (but above the competitive level) to deter entry of fringe firms
Why is limit pricing harmful to small firms?
They lack the economies of scale so cannot compete with these low prices
What is price wars?
Two big firms competing with one another slash prices to undercut their rivals, in order to gain consumers
What are the 3 non-price strategies?
- Product
- Place
- Promotion
What ways can products be improved? (3)
- Quality of products
- Reliability
- Unique selling point
What ways can place impact sales? (3)
- Regionally (exclusivity, income levels, managerial issues)
- Online/physical retail (cheaper, customer base)
- International?
What ways can promotion impact sales? (2)
- Advertising (getting the message out there)
- Branding (what the message/look/vision is)
What factors are part of advertising? (2)
- Persuasive (non-informative)
- Informative
What factors are part of branding? (6)
- Logo
- Slogan
- Adverts
- Product design
- Ethos
- Packaging
Why would a firm choose to collude with one another? (3)
- Boost revenue
- Decrease costs
- Protecting market share (blocking new entrants to the market)
Why does collusion boost revenue?
- Through cooperation they act as a single entity
- > Price making ability
- > can raise prices without losing customers
- > total revenue increases
Why does collusion decrease costs? (2)
- No competitions in suppliers
- Squeezing suppliers to the market (monopolistic power)
What issues might deter collusion? (4)
- It is illegal under UK competition law
- Size of firms relate to the rewards
- Are firms benefitting equally
- Risks of being undermined (how many firms in the agreement)
Why is the illegality of collusion a deterrent?
- Reputational damage
- Fines
- Criminal charges (jail time?)
What is tacit collusion?
When there is no communication between firms, they signal their intent through other means
What is price leadership?
When a firm raises prices as a signal to other firms to do the same thing
What determines in price leadership is likely? (3)
- Willingness of customers to switch between brands
- Retained profits/existing wealth of firm -> makes it less risky
- Number of firms -> fewer firms = less risk
What are the characteristics of monopolistic competition? (5)
- Many firms and a low market concentration
- Freedom of entry/exit
- Firms can produce differentiated products
- Firms has a downward sloping D curves (price making ability)
- Make normal profit in the long-term (likely supernormal in SR)
What is a Monopsony?
A market structure dominated by a single buyer, so they can influence the price at which they buy
