Micro-C13 Market Structure

Question 1

Define Market.

Answer 1

A market exists whenever there is a transaction (goods & services) between buyers and sellers.

Note: Market doesn’t requrie any physical locaiton.

Question 2

What are the 4 types of market structure?

Answer 2

• Perfect Competition
• Imperfect Competition
  
  • Monopolistic Competition
  • Oligopoly
  • Monopoly

Question 3

• What are the 4 major criteria of market structure classification?
• What are the other features usually discussed?

Answer 3

• Four major criteria
  
  • Number of sellers
  • Nature of prodcuts
  • Ease of entry
  • Availability of market information
• Other features
  
  • Price (price taking / price searching)
  • Competition (Engagement in price & non-price competition)

Question 4

What are the major features of a perfectly competitive market?

Answer 4

• Many sellers
  
  • large number of sellers each taking an infinitely small market share with no influence of market price
• Homogeneous products
• Perfect information
• Free market entry or exit
• Sellers are price takers
  
  • small and not associated sellers cannot influence the market price and take it as given. Thus it is only determined by D&S.
  • demand curve for a single firm is perfectly elastic due to homogenous products and perfect information.
• No price or non-price competition
  
  • all firms sell at the same price as given
  • no non-price competition due to homogeneous products and perfect market inforatmion.

Question 5

What are the major features of a monopolistically competitive market?

Answer 5

• Many sellers (each with a small market share)
• Heterogeneous products (prodcut differentiation)
• Imperfect information
• Free market entry or exit
• Sellers are price-searchers
  
  • sellers searches/sets its own price to maximise profit
• Both price and non-price competition exist

Question 6

What are the major features of an oligopoly?

Answer 6

• A few dominant sellers
• Homogeneous or heterogeneous products
• Imperfect market information
• Difficult/restricted entry
• Sellers are price searchers
• Interdependence among sellers
  
  • would consider the reactions of competitors
• Price rigidity
  
  • Cutting price when lose profit; raising price will lose market share
  • Avoid adjusting price –> rigidity
• Price leadership
  
  • Others will follow when dominant firms change price
• Both price and non-price competition exist

Question 7

What are the major features of a monopoly?

Answer 7

• One seller only
• Heterogeneous products (compared to close substitutes)
• Imperfect market information
• Diffcult/restricted/no entry
• Sellers are price-searchers
  
  • sellers searches/sets its own price to maximise profit
• Both price and non-price competition exist

Question 8

• What is monopoly power?
• What are the sources of monopoly power?

Answer 8

• Ability to search for its own profit-maximising price
• Common sources:
  
  • Ownership of superior resource or technology
  • Natural monopoly (no room for more than one firm)
  • Patents & copyrights
  • Government franchise
  • Government provision
  • Collusion/Integration (Cartel)