Market Structures

Question 1

Characteristics of perfect competition? (6)

Answer 1

• 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

Question 2

Examples of perfectly competitive markets? (3)

Answer 2

Foreign exchange markets (effected by accessibility, service, ease)
Gold
Oil (but there are large firms)

Question 3

Characteristics of a monopoly? (4)

Answer 3

• Lack of substitutes for consumers
• Barriers to entry
• Price-making ability
• Super-normal profits

Question 4

What is a pure monopoly?

Answer 4

When there is only one firm in a particular market

Question 5

What barriers to entry are there?

Answer 5

• Economies of scale
• Brand loyalty
• Legal Barriers (licences)
• Intimidation
• Previous profits
• Set up costs

Question 6

What is a natural monopoly?

Answer 6

A natural monopoly occurs when the most efficient number of firms in the industry is one

Question 7

What are the necessary conditions of 3rd degree price discrimination? (4)

Answer 7

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

Question 8

What are the effects of 3rd degree price discrimination on consumers?

Answer 8

• Some benefit from receiving a lower price

- Some are harmed from paying a higher price

Question 9

What are the effects of 3rd degree price discrimination on consumers?

Answer 9

More profit

Question 10

What are the disadvantages of a monopoly?

Answer 10

Higher price

Fewer incentives to be efficient

Question 11

What are the advantages of a monopoly? (5)

Answer 11

• Research and development
• Economies of scale
• International competitiveness
• Monopolies can be successful firms
• Avoid the duplication of services

Question 12

What are the characteristics of an oligopoly? (4)

Answer 12

• Small no. firms (3-8)
• High barriers to entry/exit
• Mutual interdependence
• Product differentiation

Question 13

What is mutual interdependence?

Answer 13

Basing one’s actions off the expected actions of others (price strategies)

Question 14

What is predatory pricing?

Answer 14

When firms in the markets are threatened by a new entrant so set their price extremely low to drive out competitors

Question 15

What is predatory pricing funded by? (3)

Answer 15

• Saved profits
• Loans
• Take advantage of Economies of scale

Question 16

Why is predatory pricing harmful to small firms? (2)

Answer 16

• No financial backing from the bank or investors

- No economies of scale (so can’t match the low prices

Question 17

What is limit pricing?

Answer 17

Is pricing below the short-run profit maximising price (but above the competitive level) to deter entry of fringe firms

Question 18

Why is limit pricing harmful to small firms?

Answer 18

They lack the economies of scale so cannot compete with these low prices

Question 19

What is price wars?

Answer 19

Two big firms competing with one another slash prices to undercut their rivals, in order to gain consumers

Question 20

What are the 3 non-price strategies?

Answer 20

• Product
• Place
• Promotion

Question 21

What ways can products be improved? (3)

Answer 21

• Quality of products
• Reliability
• Unique selling point

Question 22

What ways can place impact sales? (3)

Answer 22

• Regionally (exclusivity, income levels, managerial issues)
• Online/physical retail (cheaper, customer base)
• International?

Question 23

What ways can promotion impact sales? (2)

Answer 23

• Advertising (getting the message out there)

- Branding (what the message/look/vision is)

Question 24

What factors are part of advertising? (2)

Answer 24

• Persuasive (non-informative)

- Informative

Question 25

What factors are part of branding? (6)

Answer 25

• Logo
• Slogan
• Adverts
• Product design
• Ethos
• Packaging

Question 26

Why would a firm choose to collude with one another? (3)

Answer 26

• Boost revenue
• Decrease costs
• Protecting market share (blocking new entrants to the market)

Question 27

Why does collusion boost revenue?

Answer 27

• Through cooperation they act as a single entity
• > Price making ability
• > can raise prices without losing customers
• > total revenue increases

Question 28

Why does collusion decrease costs? (2)

Answer 28

• No competitions in suppliers

- Squeezing suppliers to the market (monopolistic power)

Question 29

What issues might deter collusion? (4)

Answer 29

• 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)

Question 30

Why is the illegality of collusion a deterrent?

Answer 30

• Reputational damage
• Fines
• Criminal charges (jail time?)

Question 31

What is tacit collusion?

Answer 31

When there is no communication between firms, they signal their intent through other means

Question 32

What is price leadership?

Answer 32

When a firm raises prices as a signal to other firms to do the same thing

Question 33

What determines in price leadership is likely? (3)

Answer 33

• Willingness of customers to switch between brands
• Retained profits/existing wealth of firm -> makes it less risky
• Number of firms -> fewer firms = less risk

Question 34

What are the characteristics of monopolistic competition? (5)

Answer 34

• 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)

Question 35

What is a Monopsony?

Answer 35

A market structure dominated by a single buyer, so they can influence the price at which they buy