Pack 9: Market Structures (part 2) Flashcards
What is monopolistic competition?
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.
What types of economic efficiency will firms in a competitive monopolistic market not be achieving?
All of them, (productive, allocative, productive and x-inefficiency but this is a good thing).
What is an oligopoly?
Market structure where a few firms dominate the market, high barriers to entry/exit, products differentiated, and firms are interdependent.
What is interdependence?
The actions of one firm directly affecting another
Why do firms in an oligopoly face uncertainty?
Don’t know how other firms will react to their strategies, e.g. price changes and new products.
What diagram shows this price stability?
Kinked demand curve
How doe this demand curve show interdependence?
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.
What is concentration?
Extent to which a particular market is dominated by a few firms
What is n-Firm concentration Ratio?
Total market share that the top n-firms have
What are the reasons for non-collusive behaviour?
~higher profits
~greater monopoly power
~issues with collusion
What is limit pricing?
Setting price below an entrant’s average costs as to deter entry therefore meaning new firms can’t enter the market and make profit.
What is predatory pricing?
anti-competitive strategy where firm sets price below AVC to force rivals out the market and achieve market dominance. (ILLEGAL)
What is a price war?
Situation where several firms in a market repeatedly lower prices to out-compete other firms, such as defending market share
What other pricing strategies are there?
~Cost plus pricing
~Premium pricing
~Penetration pricing
~Price skimming
~Loss leaders
~Price leadership
What is non-price competition?
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.
What are the key non-price strategies?
~Advertising
~Sales promotion
~Product launch
~Place (or distribution decisions)
~Customer service
What is collusion?
Collective agreements between firms not to compete with each other in an attempt to increase industry competition and restrict competition
What are the reasons for collusion?
~Up prices and profits
~Down competition and costs of it
~Reduced uncertainty
~Failure of competition authorities
What is overt collusion?
Firms agree to restrict competition using a formal agreement
What is a cartel?
Formal agreement between firms to limit competition in market, by limiting output or raising prices
What is tacit collusion?
Firms agree to restrict competition without formal agreement
What is price leadership?
One firm, the price leader, sets its own price and other firms in market set their price in relation to price leader
What is game theory?
economic model which looks at how firms in an oligopoly act
What does game theory tells us about how firms in an oligopoly will act?
Suggests they will be playing ‘games’ with each other, like in chess, there are tactics, strategies and the use of foresight and planning
What does the prisoners dilemma dictate?
~Both testify = 3 years each
~neither testify = 1 year each
~One testify’s = 8 years for the other
What is the conclusion that is reached from this?
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.
what are the limitations of game theory?
~Perfect information is assumed
~Rational economic behaviour is assumed
habitual/herding behaviour / Different business objectives prioritised
What economic efficiencies will an oligopoly achieve?
~Dynamic efficiency
~X-inefficiency (possibility)
Which economic efficiencies will an oligopoly not achieve?
~Productive efficiency
~Allocative efficiency
What is a pure monopsony?
A firm that is a single buyer
What is monopsony power?
Market where there are a few dominant/powerful buyers
What will limit monopsony power?
~More buyers set up
~Suppliers become more powerful (counter-veiling power)
What are the benefits to monopsony power for firms?
~Lower supplies cost
~higher profits
What are the costs to firms of monopsony power?
~Issues with quality and reliability
~Reduced choice of suppliers in future
~Damaged brand image and fines
What are the costs to suppliers of monopsony power?
~Lower prices
~Lower profits and chance of survival
What are the limitations to these losses for suppliers due to monopsony power?
~Some suppliers affected less (counter-veiling power)
~Increased chance of sales
What are the benefits to the employees working with the monposonist?
~Employment prospects
~Job security
What are the costs to employees working with the suppliers?
~Wages
~Living standards
What are the benefits to consumers in a market with monopsony power?
~Lower prices
~Benefits from reinvested profits
What are the potential cost to consumers in a market with monopsony power?
~Quality issues
~Less choice
What is a contestable market?
~Market with low barriers to entry/exit (or sunk costs)
~Perfect knowledge
What is contestability?
The extent to which a market has low barriers to entry/exit (or sunk costs)
What are barriers to entry?
Any factors preventing entry to a market and competing with incumbent firms
What are the key examples of barriers to entry?
~Start up costs
~Brand loyalty
~Advertising
~Economies of scale
~Limit pricing
~Patents
~Legal barriers
~Access to raw materials/distribution
What are sunk costs?
A cost that cannot be recovered if a business decides to leave the industry
What are some examples of sunk costs?
~Advertising, marketing and R&D
~Industry specific capital goods and stock
~Closure or project cancellation costs
~Loss of business reputation + goodwill
How efficient will firms in a contestable market be?
Threat of competition will lead to greater productive and allocative efficiency, mean firms will only make normal profits and threat should stop x-inefficiency
