Perfect Competition, Imperfectly Competitive Markets And Monopoly

Question 1

Features of perfect competition

Answer 1

Low barriers to entry and exit
Price takers
Homogeneous goods
Many buyers and sellers
Perfect information

Question 2

Monopoly features

Answer 2

One firm dominating the market
High barriers to entry and exit
Highly differentiated goods
Price makers

Question 3

Types of monopolies

Answer 3

Natural monopoly
Legal monopoly
Pure monopoly

Question 4

Types of oligopolies

Answer 4

Collusive
Competitive

Question 5

How to distinguish between market structures

Answer 5

Number of firms in the market
Market entry barriers
Product differentiation

Question 6

Firm objectives

Answer 6

Profit maximisation
Growth maximisation
Survival
Sales revenue maximisation
Satisficing

Question 7

Where’s the point of profit maximisation

Answer 7

P max is where MR=MC

Question 8

Divorce of ownership from control

Answer 8

The owners and those running the firm (managers) are different groups with different objectives

Question 9

Consequences of divorce of ownership from control

Answer 9

Managers can adopt a principle of their own, not in the interests of shareholders/owners (principal agent problem)
Managers can take risks that would benefit them if successful yet impose heavy costs if it failed
Moral hazard of managers acting against best interest of owners to benefit themselves (ceteris paribus?)
Information asymmetry between owners and managers

Question 10

Point of Revenue maximisation

Answer 10

MR = 0

Question 11

Satisficing definition and benefits

Answer 11

Achieving a satisfactory outcome rather than the best possible outcome can compromise on managers and owners differing views on the firm

Question 12

Productive efficiency

Answer 12

Occurs when it is impossible to produce more of one good without producing less of another, within a firm this is when ATC is minimised (at its lowest point)

Question 13

Allocative efficiency

Answer 13

Occurs when it is impossible to improve economic welfare by reallocating resources between markets.
Price = MC

Question 14

Allocative inefficiency

Answer 14

P>MC
P<MC

Question 15

Monopoly

Answer 15

Market with 1 dominant firm (usually 25% of market share)

Question 16

Natural and artificial barriers to entry

Answer 16

Natural : barriers caused by geography
Artificial: man-made barriers e.g: patents

Question 17

Advantages of monopoly

Answer 17

Economies of scale
Dynamic efficiency
Monopolies can use supernormal profits to fund R&D

Question 18

Disadvantages of monopoly

Answer 18

Can lead to productive and allocative inefficiencies
Reduces competition and therefore consumer choice

Question 19

Features of monopolistic competition

Answer 19

Large number of buyers/sellers
Low barriers to entry/exit
Differentiated yet similar goods
Elastic demand
Price makers

Question 20

Price competition

Answer 20

Occurs when a firm reduces prices in order to sell more of a good
Can be in the form of limit pricing, predatory pricing or ‘special offer’ pricing

Question 21

Consequences of price competition

Answer 21

Can lead to self-destructive price wars, this, however, benefits consumers

Question 22

Types of Non-price competition

Answer 22

Marketing competition
Quality competition
Persuasive advertising
Product differentiation
Brand imaging/packaging
Style/design

Question 23

Oligopoly features

Answer 23

Few firms making up ~60% market share
Interdependent
Collusive or competitive

Question 24

Concentration ratio

Answer 24

Measures market share of biggest firms in the market (excluding ‘others’)

Question 25

Cartel

Answer 25

Collusive agreement between firms, usually to fix prices, or to restrict output to deter entry of new firms

Question 26

Tacit vs Explicit collusion

Answer 26

Tacit : when there’s an understanding but no explicit agreement between the firms Explicit : direct communication and agreement among firms to fix prices or divide markets

Question 27

Limitations of the kinked demand curve

Answer 27

Incomplete theory, not explaining how/why the firm chooses to operate at the pint of gradient change Evidence in real live gives little support More reasonable to assume firms would test the market

Question 28

Advantages of oligopoly

Answer 28

Firms benefit from economies of scale, meaning they can become dynamically efficient Can pass low costs to consumers in the form of low prices Easy for consumers to compare and choose their best option Can innovate and develop new/better products

Question 29

Disadvantages of oligopoly

Answer 29

Often they restrict output and raise prices Cartels can cause high prices and productive/allocative inefficiencies Small firms struggle to enter the market

Question 30

Price leadership

Answer 30

Setting of prices in a market (usually by a dominant firm) which is then followed by the smaller firms in the market

Question 31

Price agreement

Answer 31

Agreement between a firm, similar firms, suppliers or customers regarding the pricing of a good/service

Question 32

Price wars

Answer 32

When rival firms continuously lower prices in order to undercut each other

Question 33

Price discrimination

Answer 33

Charging different prices to different consumers for the same product based off willingness to pay

Question 34

Conditions for price discrimination

Answer 34

Different groups must be identifiable Groups must have different elasticities Markets must be separate to avoid seepage (lower buyers selling at higher price)

Question 35

Contestable market

Answer 35

A market where the potential exists for new firms to enter. Perfectly contestable market has no barriers to entry/exit and no sunk costs

Question 36

Why contestability is significant to the performance of an industry

Answer 36

Low contestability leads to monopoly abuse and exploitation of consumers Contestability incentivises firms to boost quality rather than just to profit maximise

Question 37

Hit and run competition

Answer 37

When a new entrant hits the market, makes profits, then leaves (when there are no costs to barriers of entry or exit)

Question 38

Sunk costs

Answer 38

Costs that have already been incurred & can’t be recovered

Question 39

Static efficiency

Answer 39

Efficiency at a specific point in time