Market Structures

Question 1

Three characteristics of a market structure

Answer 1

The degree of competition in the industry

The no. and behaviour of firms and buyers in the industry

Market prices and quantities in the industry

Question 2

Contestibility

Answer 2

Ease with which new firms can enter and leave market (barriers to entry lower this)

Question 3

Impact of contestibility

Answer 3

Treat of competition so lower prices

Question 4

Price discrimination

Answer 4

How to maximise profits by dividing groups into inelastic and elastic PED

Question 5

Price discrimination benefits for consumers

Answer 5

Lower p for young uns and oldies
Discount fare for off peak times: there’s more choice
Less overcrowding
Can reinvest extra profit into eg customer service

Question 6

Price discrimination benefits for firms

Answer 6

Up profits, up sales as some r cheaper, and so up image and become more popular

Question 7

Price discrimination negatives for consumers

Answer 7

Higher railfare for adults, could use profits elsewhere eg shareholders or wages or advertising, pay more in inelastic group

Question 8

Monopolistic competition (hairdressers)

Answer 8

Only supernormal in SR
Large no of buyers and sellers
Non-homogenous goods (so some non price comp)
Low entry and exit costs
Price maker (but limited by comp)

Question 9

Monopolistic comp diagram

Answer 9

MORE ELASTIC REV CURVES and supernormal in SR

Supernormal profit eroded by newcomers so normal profit in LR

Question 10

Monopolistic comp efficiency

Answer 10

Prod efficiency: no (not producing on ACs lowest point)
Allocative efficiency: no (p does not equal mc)
Dynamic: no, no profit to invest

Question 11

Eval monopolistic comp

Answer 11

Asymmetric info so potential entrants unaware of supernormal profit, firms slightly different sizes so slightly different cost curves so some can maintain profit longer, unlikely to be stable normal for long as constantly changing market

Question 12

Monopsony

Answer 12

Only 1 buyer in the market, so can prevent new firms entering
Eg gov for teachers and NHS
Pay suppliers lowest possible so profit max
Produce where MC=AR/D

Question 13

Effect of monopsony on firms

Answer 13

Up profits as lower costs of prod, so up R and D and returns for shareholders, purchasing eos

Question 14

Effect of monopsony on consumers

Answer 14

If lower costs passed on then lower p, benefit from up R and D

Question 15

Perfect comp

Answer 15

No supernormal profit in LR
Many firms
Homogenous gds
Perfect knowledge
No barriers to entry and exit
Price taker

Question 16

Perfect comp efficiency

Answer 16

Prod: yes, profit maximisers, but only in LR as the producing at bottom of AC curve
Allocative: yes as producing where p = mc
Dynamic: no as no profit to invest and as perfect knowledge another firm would just take ur invention so no comp advantage gained from investment or R and D

Question 17

Oligopoly- supermarkets

Answer 17

Supernormal in SR and LR
Few dominant firms
Differentiated products
V important non p comp
High barriers
Price maker but interdependent

Question 18

N firm conc ratios

Answer 18

Total sales of n firm/ total size of market

X 100

Question 19

Overt/ open collusion

Answer 19

A cartel (formal agreement to limit comp by eg price fixing), members behave like a monopoly eg OPEC, firms need to have similar costs and products and high barriers to entry to be in a cartel

Question 20

Positives of collusion

Answer 20

Profits (gain from market manipulation), certainty and stability, no p wars, protected from threat

Question 21

Incentive to compete

Answer 21

Illegal to collude, risk of collusion like betrayal, might have strong business model, outsmart opponents, get a portion of rivals share and profit

Question 22

Tacit/ informal collusion

Answer 22

Eg price leadership (follow dominant firms p so no p wars), or follow a barometric firm (gd at predictions) or unwritten conduct (no poaching)

Question 23

Price wars

Answer 23

Gds have weak brands and consumers p concious, eg Tesco in 2017

Question 24

Predatory pricing

Answer 24

Established firm set such a low p to drive new entrants out of market as they can’t make profit, and then firm raises p back up (illegal)

Question 25

Limit pricing

Answer 25

Firms set a low p to prevent new entrants but they’re only making normal profit now

Question 26

Non p comp: advertising

Answer 26

Can up awareness = up sales and market share so in LR up profits and make D inelastic

Question 27

Non p comp: loyalty cards

Answer 27

Encourage repeat purchases by rewarding ppl and gives firms data on habits so can up sales

Question 28

Non p comp: branding and quality

Answer 28

Ppl will trust brand coz of gd quality, quality ups brand loyalty and gives gd rep so ppl trust new products

Question 29

Non p comp: prod development

Answer 29

Invest in R and D to get comp advantage- if ur 1st to release a new product then up sales

Question 30

Non p comp eval

Answer 30

Expensive No guarantee of success Only large firms able to do lots of adverts and R and D

Question 31

Oligopoly efficiency

Answer 31

Prod: no Allocative: no Dynamic: yes, though may just share supernormal profit with shareholders Can exploit eos so lower costs

Question 32

Monopoly

Answer 32

``` Supernormal profit always 1 firm Limited product type V high barriers to entry Price maker Profit maximising ```

Question 33

Natural monopoly

Answer 33

A decreasing cost industry, continuous eos Eg national rail Not prod or allocative efficient as no min AC curve

Question 34

Effect of monopoly on firms

Answer 34

Huge profits Can finance investment and reserves (gd for covid) Maximise eos Up wages BUT no profit max of x inefficient, profit satisficing, in LR lack of competition means lazy and inefficient

Question 35

Effect of monopoly on consumers

Answer 35

Eos = ⬆️ CS, dynamic efficiency ups quality Firms may produce larger range of gds if cross subsidisation But lack of comp could up p and down quality Less choice as only 1 firm Eos = down costs of prod which could be passed on as down p

Question 36

Eval monopolies

Answer 36

V rarely permanent

Question 37

Efficiency of monopoly

Answer 37

Prod: no not producing at MC=AC Allocative: no price exceeds MC Dynamic: yes coz supernormal profits (but no comp could mean no incentive to invest)

Question 38

Purely contestible market

Answer 38

No barriers to entry and perfect knowledge and low product loyalty and no sunk costs (FCs that can’t be recovered eg advertising)- unlikely as there are always sunk costs

Question 39

In contestable markets...

Answer 39

Constant threat of comp, so charge a low p and gain less profit (normal) so other firms don’t want to join, so firms only able to produce whet AC=AR

Question 40

Contestibility efficiency

Answer 40

Prod and allocative: yes as have to be on lowest point of AC curve so newbies can’t undercut p, so MC=AC