Market Structures Flashcards
Three characteristics of a market structure
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
Contestibility
Ease with which new firms can enter and leave market (barriers to entry lower this)
Impact of contestibility
Treat of competition so lower prices
Price discrimination
How to maximise profits by dividing groups into inelastic and elastic PED
Price discrimination benefits for consumers
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
Price discrimination benefits for firms
Up profits, up sales as some r cheaper, and so up image and become more popular
Price discrimination negatives for consumers
Higher railfare for adults, could use profits elsewhere eg shareholders or wages or advertising, pay more in inelastic group
Monopolistic competition (hairdressers)
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)
Monopolistic comp diagram
MORE ELASTIC REV CURVES and supernormal in SR
Supernormal profit eroded by newcomers so normal profit in LR
Monopolistic comp efficiency
Prod efficiency: no (not producing on ACs lowest point)
Allocative efficiency: no (p does not equal mc)
Dynamic: no, no profit to invest
Eval monopolistic comp
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
Monopsony
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
Effect of monopsony on firms
Up profits as lower costs of prod, so up R and D and returns for shareholders, purchasing eos
Effect of monopsony on consumers
If lower costs passed on then lower p, benefit from up R and D
Perfect comp
No supernormal profit in LR Many firms Homogenous gds Perfect knowledge No barriers to entry and exit Price taker
Perfect comp efficiency
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
Oligopoly- supermarkets
Supernormal in SR and LR Few dominant firms Differentiated products V important non p comp High barriers Price maker but interdependent
N firm conc ratios
Total sales of n firm/ total size of market
X 100
Overt/ open collusion
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
Positives of collusion
Profits (gain from market manipulation), certainty and stability, no p wars, protected from threat
Incentive to compete
Illegal to collude, risk of collusion like betrayal, might have strong business model, outsmart opponents, get a portion of rivals share and profit
Tacit/ informal collusion
Eg price leadership (follow dominant firms p so no p wars), or follow a barometric firm (gd at predictions) or unwritten conduct (no poaching)
Price wars
Gds have weak brands and consumers p concious, eg Tesco in 2017
Predatory pricing
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)
Limit pricing
Firms set a low p to prevent new entrants but they’re only making normal profit now
Non p comp: advertising
Can up awareness = up sales and market share so in LR up profits and make D inelastic
Non p comp: loyalty cards
Encourage repeat purchases by rewarding ppl and gives firms data on habits so can up sales
Non p comp: branding and quality
Ppl will trust brand coz of gd quality, quality ups brand loyalty and gives gd rep so ppl trust new products
Non p comp: prod development
Invest in R and D to get comp advantage- if ur 1st to release a new product then up sales
Non p comp eval
Expensive
No guarantee of success
Only large firms able to do lots of adverts and R and D
Oligopoly efficiency
Prod: no
Allocative: no
Dynamic: yes, though may just share supernormal profit with shareholders
Can exploit eos so lower costs
Monopoly
Supernormal profit always 1 firm Limited product type V high barriers to entry Price maker Profit maximising
Natural monopoly
A decreasing cost industry, continuous eos
Eg national rail
Not prod or allocative efficient as no min AC curve
Effect of monopoly on firms
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
Effect of monopoly on consumers
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
Eval monopolies
V rarely permanent
Efficiency of monopoly
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)
Purely contestible market
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
In contestable markets…
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
Contestibility efficiency
Prod and allocative: yes as have to be on lowest point of AC curve so newbies can’t undercut p, so MC=AC
