S2 - analysis of markets Flashcards
what are the perfect competition assumptions
large number of firms each of which has no market power
Homogenous products
Implies that LRAC is small in relation to market demand
Al firms are price takers - demand curve facing an individual firm is perfectly elastic
Perfect information among consumers and producers - consumers will only purchase from lowest cost supplier
Exit and entry are costless
Firms maximise profits subject to given cost conditions
No competition
what are the outcomes of perfectly competitive industries
P = MC —> Allocative efficiency
Maximises social welfare
A fundamental requirement of Pareto efficiency (maximum level of efficiency in terms of resources allocated)
Only perfectly competitive industries automatically generate this outcome
Only earn normal profits - no economic rent (payment made that exceeds what is economically necessary or expected from the seller)
Lerner index
what is the Lerner index
fundamental concept fir analysing industries
P - MC / P = 1/n
1/n = inverse of price elasticity of demand
n = dQ/dP x P/Q
Slope only partly determines n
Price cost markup is a function of price elasticity of demand
L = 0 for perfectly competitive as P = MC
what is SCP
Structure conduct performance paradigm
S —> C —> P
Uni directional causality
Structure - how concentrated is the industry - MES, product differentiation, capital intensity of operations and advertising intensity
Conduct - profit maximisation
Performance - measure is P = MC - consider allocative and productive efficiency
what is SCP simple model
clear guidance to policy makers
Competitive industries are good while concentrated industries are bad for social welfare
what are SCP other models
not clear guidance - involves trade offs between allocative efficiency and productive efficiency
Government intervention on pricing
what is reverse causality
P —> C —> S
Different assumptions about conduct = P <— C —> S
Simple model only makes sense when causation is unidirectional
what are concentration measures
CR^5 would measure the market share of the face biggest firms
Only includes the biggest firms and doesn’t take account of differences in the shares of N biggest firms
Suitable measure needs to account for number of firms and inequality in market shares
C = c(N,I)
dC/dN < 0, dC/dI > 0
Concentration ratios - adds up market shares of largest n sellers
More competitive if firms have equal market shares
what is HHI
HH = sum of market shares ^2
Pure monopoly has HHI = 1 because their market share is 1
Minimum value is 1/N and all firms have equal market share
HHI increases as market shares become more unequal
Requires firm level data for all firms which is difficult to obtain
