Market Structures And Contestability Flashcards
What is dynamic efficiency
occurs when resources are allocated efficiently over time.
What is allocative efficiency
occurs when scarce resources are used to produce a bundle of goods that satisfies consumer preferences and maximizes their welfare. P = MC
What is productive efficiency
Achieved when production is achieved at the lowest average cost
What are market structures
characteristics of a market which determine the behavior of firms within the market
What is supply chain
the number of businesses which are involved, at different stages, in the production and distribution of a single good
what is X-inefficiency
inefficiency arising because a firm or other productive organization fails to minimize its average costs of production at a given level of output
What are barriers to entry
Factors that make it difficult or impossible for firms to enter an industry and compete with existing producers
What are barriers to exit
Factors which make it difficult for firms to cease production and leave an industry
What is the concentration ratio
The market share of the largest firms in an industry.
What is independent and interdependent
Independent is when the actions of one firm will have no significant impact on any other single firm. Whilst interdependent is the opposite.
What is market concentration
The degree to which the output of an industry is dominated by its largest producers
What is market share
The proportion of sales in a market held by a firm or a group of firms
What is product differentiation
aspects of a good or service which serve to distinguish one product from another such as product formulation, packaging, marketing and availability
Market concentration ratio equation
(Sales of firm/total sales in the industry) x 100%
What is perfectly competitive market structure
Many small buyers and sellers, with freedom of entry and exit from the industry. Both parties with perfect knowledge; producing a homogeneous product.
What are the features of monopolistic competition
There are a large number of buyers and sellers in the market, small and independent. No barriers to entry to exit. Firms are profit maximizers. But firms produce differentiated or non-homogeneous goods.
What is product differentiation
The way firms convince customers that their products are different to competitors’ products
What are a few ways firms can differentiate a product
Physical differentiation
Marketing differentiation
Distribution differentiation
How does a firm behave in the short run in terms of profit
Firms can make supernormal profit in the short run.
How does a firm behave in the long-run in terms of profit
Firms make normal profit in the long run
How does productive, allocative efficiency look like for monopolistic firms
Monopolistic firms in the long run are not productively and allocatively efficient
What are concentrated markets
a market where most of the output is produced by a few firms and where therefore the concentration ratio is high
What is an oligopoly
a market structure where there is a small number of firms in the industry and where firms are interdependent with one another, creating uncertainty; barriers of entry are likely to exist.
What is market conduct
the behavior of firms, such as pricing policies, promotion of products, branding and collusion with other firms
What are the assumptions of an oligopolistic market
Supply is concentrated in the hands of relatively few firms. Firms must be an interdependent. Markets have high barriers to entry, selling slightly differentiated products.
What is game theory
the analysis of situations in which players are interdependent
What is collusion
collective agreements, either formal or tacit, between firms that restrict competition
What is a cartel
a group of firms that have make a formal agreement to limit competition in the market, for example by limiting output in order to raise prices
What is price leadership
when one firm. the price leader, sets its own prices and other firms in the market set their prices in the relationship to the price leader
What is a price war
a situation where several firms in a a market repeatedly lower their prices to outcompete other firms; the objective may be to gain or defend market share.
What is collusive oligopoly
a market with a high concentration ratio where a few interdependent firms cooperate, either formally or tacitly, to restrict competition
What is a price agreement
a type of formal collusion where two or more firms arrange to fix prices of their products
What is tacit collusion
where firms collude without formal agreement and no explicit communication.
What is a price follower
a firm which sets its price by reference to the prices set by the price leader in the market
What is the prisoners dilemma
a game where, given that neither player knows the strategy of the other player, the optimum strategy for each player leads to a worse situation than if they had known the strategy of the other player.
What is a monopoly
market structure where one firm supplies all output in the market without facing competition because of high barriers to entry in the market
What is a monopsony
exists when there is only buyer in the market
What is monopoly power
Ability to control the price they charge for their product in a market
What is a natural monopoly
a monopoly that arises due to continuing falling economies of scale
What is a price discrimination
charging a different price for the same good or service in different markets
How does the efficiency act in monopolistic firms
neither productively or allocatively efficient
What is the assumption of a monopsony
There is a dominant buyer in the market
what is the theory of contestable markets
a market where there is freedom of entry to the industry and where costs of exits are low
characteristics of contestable markets
Number of firms may vary
freedom of entry and exit (no sunk costs)
firms are short run profit maximizers
may produce homogeneous goods/branded goods
There is perfect knowledge
potential for hit-and-run competition
What is hit and run competition
when firms can enter a market at low cost attracted by high profits and then leave the market at low cost when profits fall.
How does profit behave in contestable markets
supernormal profits can be earned in the short run
normal profit in the long run
