Pack 9: Market Structures (part 2)

Question 1

What is monopolistic competition?

Answer 1

Market structure where there are a large number of buyers and sellers who are price makers as they sell differentiated products + have low barriers to entry/exit.

Question 2

What types of economic efficiency will firms in a competitive monopolistic market not be achieving?

Answer 2

All of them, (productive, allocative, productive and x-inefficiency but this is a good thing).

Question 3

What is an oligopoly?

Answer 3

Market structure where a few firms dominate the market, high barriers to entry/exit, products differentiated, and firms are interdependent.

Question 4

What is interdependence?

Answer 4

The actions of one firm directly affecting another

Question 5

Why do firms in an oligopoly face uncertainty?

Answer 5

Don’t know how other firms will react to their strategies, e.g. price changes and new products.

Question 6

What diagram shows this price stability?

Answer 6

Kinked demand curve

Question 7

How doe this demand curve show interdependence?

Answer 7

Shows price will stay the same because raising prices is elastic as consumers will switch and lowering prices is inelastic as so will the other firms, leading to a price war, optimal to maintain prices.

Question 8

What is concentration?

Answer 8

Extent to which a particular market is dominated by a few firms

Question 9

What is n-Firm concentration Ratio?

Answer 9

Total market share that the top n-firms have

Question 10

What are the reasons for non-collusive behaviour?

Answer 10

~higher profits
~greater monopoly power
~issues with collusion

Question 11

What is limit pricing?

Answer 11

Setting price below an entrant’s average costs as to deter entry therefore meaning new firms can’t enter the market and make profit.

Question 12

What is predatory pricing?

Answer 12

anti-competitive strategy where firm sets price below AVC to force rivals out the market and achieve market dominance. (ILLEGAL)

Question 13

What is a price war?

Answer 13

Situation where several firms in a market repeatedly lower prices to out-compete other firms, such as defending market share

Question 14

What other pricing strategies are there?

Answer 14

~Cost plus pricing
~Premium pricing
~Penetration pricing
~Price skimming
~Loss leaders
~Price leadership

Question 15

What is non-price competition?

Answer 15

Strategies which firms use to compete with rivals that involve other elements of the marketing mix, other than price, such as product, place and promotion.

Question 16

What are the key non-price strategies?

Answer 16

~Advertising
~Sales promotion
~Product launch
~Place (or distribution decisions)
~Customer service

Question 17

What is collusion?

Answer 17

Collective agreements between firms not to compete with each other in an attempt to increase industry competition and restrict competition

Question 18

What are the reasons for collusion?

Answer 18

~Up prices and profits
~Down competition and costs of it
~Reduced uncertainty
~Failure of competition authorities

Question 19

What is overt collusion?

Answer 19

Firms agree to restrict competition using a formal agreement

Question 20

What is a cartel?

Answer 20

Formal agreement between firms to limit competition in market, by limiting output or raising prices

Question 21

What is tacit collusion?

Answer 21

Firms agree to restrict competition without formal agreement

Question 22

What is price leadership?

Answer 22

One firm, the price leader, sets its own price and other firms in market set their price in relation to price leader

Question 23

What is game theory?

Answer 23

economic model which looks at how firms in an oligopoly act

Question 24

What does game theory tells us about how firms in an oligopoly will act?

Answer 24

Suggests they will be playing ‘games’ with each other, like in chess, there are tactics, strategies and the use of foresight and planning

Question 25

What does the prisoners dilemma dictate?

Answer 25

~Both testify = 3 years each
~neither testify = 1 year each
~One testify’s = 8 years for the other

Question 26

What is the conclusion that is reached from this?

Answer 26

The Nash equilibrium - If they testify the most they get is 3 years or could even go free. If you don’t testify then you risk having 8 years and are guaranteed a year. Bigger downside to not testifying.

Question 27

what are the limitations of game theory?

Answer 27

~Perfect information is assumed
~Rational economic behaviour is assumed

habitual/herding behaviour / Different business objectives prioritised