Market Structures (theme 3

Question 1

What are the 4 characteristics a perfectly competitive market must possess

Answer 1

• Must be many buyers and sellers (price takers)
• Freedom of entry and exit
• Buyers and sellers must possess perfect knowledge of prices
• All firms produce a homogeneous product

Question 2

Example of a perfectly competitive market

Answer 2

Farming

Question 3

What is meant by price taker

Answer 3

A firm which has no control over the market price

Question 4

What is meant by monopolistic competition

Answer 4

A market structure with similar characteristics to perfect competition, but products are not homogeneous

Question 5

What do firms in a monopolistically competitive market achieve in the short run

Answer 5

Abnormal profits

Producing at MC=MR

Question 6

What do firms in a monopolistically competitive market achieve in the long run

Answer 6

Normal profits
Due to the opportunity for abnormal profits in the short run, new firms enter the market, increasing supply and so reducing price

Question 7

What is meant by a concentrated market

Answer 7

A market where most of the output is produced by a few firms and where therefore the concentration ratio is high

Question 8

What are the 2 main characteristics of an oligopoly, and the 2 other ones that are relevant but less so

Answer 8

• Supply in industry is concentrated by a few firms
• Firms are interdependent
• Barriers to entry are high
• Products are differentiated

Question 9

What is meant by non-collusive or competitive oligopoly

Answer 9

When firms in an oligopolistic industry compete amongst themselves and there is no collusion

Question 10

What is meant by collusion

Answer 10

Collective agreements that are formal or tacit between firms, that restrict competition

Question 11

What is meant by formal collusion

Answer 11

Where an agreement is made to restrict competition by reducing output, raising prices or creating barriers to entry

Question 12

What is meant by a price agreement

Answer 12

A type of formal collusion where 2 or more firms arrange to fix prices of their products

Question 13

What is meant by a cartel

Answer 13

A formal agreement between firms to limit competition in the market, typically limiting output to increase prices
Eg oil producing countries

Question 14

What is meant by tacit or informal collusion

Answer 14

When firms collide without any formal agreement having been reached

Question 15

What is meant by price leadership

Answer 15

A type of tacit collusion, where one firm, the price leader, sets its own prices and other firms in the market set their prices in relationship to the price leader

Question 16

What is meant by a price follower

Answer 16

A firm that sets its prices by reference to the prices set by the price leader

Question 17

What is meant by game theory

Answer 17

The analysis of situations in which players are interdependent

Question 18

Prisoner’s dilemma

Answer 18

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 and been able to co-operate and co-ordinate their strategies

Question 19

What is meant by the payoff matrix

Answer 19

In game theory, shows the outcomes of a game for the players given different possible strategies

Question 20

What is meant by a duopoly

Answer 20

An industry where there are only 2 firms

Question 21

What are the three types of price competition

Answer 21

Price wars
Predatory pricing
Limit pricing

Question 22

What is a price war

Answer 22

A situation where several firms in a market repeatedly lower their prices to outcompete other firms
Typically occurs in a market where non-price competition is weak

Question 23

What do price wars achieve in the short term

Answer 23

Increase sales due to lower prices

Question 24

What do price wars cause in the long term

Answer 24

Have to leave the market as there is a lack of profit, or raise prices

Question 25

What is meant by limit pricing

Answer 25

When a firm sets it prices below the estimated average costs of the new firms, so that the new firm can not enter the market and gain supernormal profit

Question 26

What is meant by predatory pricing

Answer 26

Lowering prices below your own average costs in the short run, to compete with either current or new competitors, and being prepared to make a loss in this time

Question 27

What are examples of non-price competition

Answer 27

Marketing mix | Brands

Question 28

What is the marketing mix made up of

Answer 28

``` 4 P’s Product Price Promotion Place ```

Question 29

What are the characteristics of a monopoly

Answer 29

- Only one firm supplying output - Barriers to entry prevent others - The monopolist is a short run profit maximiser

Question 30

What is meant by a monopolist

Answer 30

A firm which controls the output in a market

Question 31

What is meant by monopoly power

Answer 31

The ability of a firm to control the price they charge for their product

Question 32

What are examples of the barriers to entry for a monopoly

Answer 32

Legal barriers Sunk costs Scale economies Anti-competitive practices

Question 33

What is meant by price discrimination

Answer 33

Charging a different price for the same good or service in different sub-markets

Question 34

Examples of price discrimination

Answer 34

- Age - On peak/off peak - Income

Question 35

What are the 3 conditions that must be present for a monopolist to be able to price discriminate effectively

Answer 35

- The monopolist must face different demand curves from separate groups of buyers - The monopolist must be able to split the market into distinct groups of buyers - Must be able to keep markets separate (eg income)

Question 36

What are the three types of price discrimination

Answer 36

First degree Second degree Third degree

Question 37

What is meant by third degree price discrimination

Answer 37

As explained previously

Question 38

What is meant by second degree price discrimination

Answer 38

When a monopolist charges customers according to how much they buy

Question 39

What is meant by first degree price discrimination

Answer 39

When a firm is able to charge each customer a different price

Question 40

At what point does a monopoly set its price

Answer 40

MC = MR | Profit maximisation

Question 41

What is meant by a monopsony

Answer 41

When there is only one buyer in a market

Question 42

Examples of monopsony’s

Answer 42

Network rail Government Factory in individual town

Question 43

What is specific about price and output in a monopsony

Answer 43

Monopsonists will pay lower prices to suppliers due to power Suppliers will supply a lower quantity because of this Monopsonists will therefore sell at a higher price

Question 44

Impact of a monopsony to the monopsonist

Answer 44

Gain higher profits due to power

Question 45

Impact of monopsony to suppliers

Answer 45

Receive lower revenues

Question 46

Impact of monopsony to customers

Answer 46

``` Higher prices (depending on elasticity) Reduced supply ```

Question 47

Impact of monopsony to employees

Answer 47

May receive low wages | However if number of employees is low due to reduced supply, wages may be normal

Question 48

What is meant by a bilateral monopoly

Answer 48

When there is only one buyer and one seller in a market

Question 49

What is meant by a contestable market

Answer 49

A market where there is freedom of entry to the industry and where costs of exit are low

Question 50

Assumptions of a contestable market

Answer 50

- Freedom to entry and exit - Firms compete and don’t collide - Firms are short run profit maximisers - Firms May produce homogeneous goods or branded goods - There is perfect knowledge in the industry

Question 51

What does the theory of contestable markets suggest about profit

Answer 51

Abnormal profits can be earned in the short run | Only normal profits can be earned in the long run

Question 52

Evaluation point of a firm in a contestable market being able to achieve abnormal profit in short run

Answer 52

Due to opportunity for new firms to enter, they will continuously be using price competition to compete with hit and run competition and so don’t achieve abnormal profit in short run

Question 53

What is meant by hit and run competition

Answer 53

When firms enter a market due to high profits and then leave soon when profits fall

Question 54

Example of hit and run competition

Answer 54

Clothes shop launching new clothing line for short period of time