T3 MARKET STRUCTURES Flashcards
an N-firm concentration ratios measures:
An N-firm concentration ratio measures how much market share the N largest firms in a market have.
when price discriminating a firm will charge:
Elastic consumers a lower price and inelastic consumers a higher price
What are the 3 conditions required for price discrimination
Market Power
Information
Limit reselling
What is the definition of price discrimination
Price discrimination is when a firm charges different groups of consumers different prices, for the same good.
What is meant by market power in the context of a condition for price discrimination
The firm must have market power: it must be able to change their prices without losing the majority of its consumers to rival firms
What information is required for price discrimination
The firm must be able to identify which consumers are elastic and which are inelastic.
What is meant by limit reselling in the context of a condition for price discrimination
The firm must be able to limit reselling: it must be able to limit elastic consumers from selling cheaper goods to inelastic consumers
What are the six types of economies of scale
Risk-bearing, managerial, financial, purchasing, technical and marketing.
natural monopolies are when:
where it’s naturally most efficient to have just one firm in the market.
A normal firm’s LRAC curve will go down and then up because of:
Internal economies of scale followed by internal diseconomies of scale
What are the four measures of efficiency?
Allocative
dynamic
X
productive
productive efficiency is when
MC = AC
allocative efficiency is when:
MC = AR
What is x inefficieny
X-inefficiency is when a firm is producing above its average cost curve for a given level of output.
Dynamic efficiency occurs when:
AR > ATC
which efficiencies does a monopoly achieve
Productively inefficient, allocatively inefficient, possibly dynamically inefficient, X-inefficient
Why does MC decrease and then increase?
output increases, spread costs but then diminishing marginal returns
NO barriers to entry or exit means:
no economies of scale, no patents, no sunk costs
What are the characteristics of perfect competition
Many small buyers and sellers
No barriers to entry or exit
Homogenous goods
Perfect information
What is a legal monopoly
a firm with over 25% market share.
what are the 3 assumptions made about monopolies
Firstly, there’s only one firm in the market
Secondly, they want to maximise profit
Thirdly, there are high barriers to entry
why TFL is considered a natural monopoly. (4 marks)
firstly, high sunk costs;
TFL has high sunk costs like railways, Oyster card tech development and training staff
secondly, huge economies of scale.
TFL has huge economies of scale like purchasing economies, which it can use to buy fuel in bulk to power its trains and buses at very low long run average costs.
why do natural monopolies exist (2 reasons)
high sunk costs
huge economies of scale.
What is Constant marginal cost simplification
When MC is constant, MC will be a straight line and MC = AC.
why are high sunk costs a reason for natural monopolies
Very high sunk costs mean it would be inefficient if a second firm entered the market and also had to incur those sunk costs - so one firm is most efficient.
why are high eos a reason for natural monooploies
If a new firm tries to enter the market, it starts at a much higher average cost than the established firm.
The incumbent firm can price lower and still be profitable, driving out competition.
Describe a perfect competition diagram
2 diagrams:
1: supply and demand diagram
- Cost revenuye diagram -
MC crosses AC at its lowest point, D = AR = MR in a perfectly horizontal line because demand is perfectly elastic
Explain how a perfectly competitive market moves to its long run equilibrium
In the long run, perfect information means potential sellers outside the market will see the opportunity to make supernormal profit by entering the market.
There are no barriers to entry, so new firms will enter the market, increasing supply and decreasing price until AR touches the bottom of the firm’s AC and all the supernormal profit is gone.
What can be said about demand in a perfectly competitive market
Perfectly elastic demand
What is monopolistic competition(3)
A market structure where there is
There are many small buyers and sellers
Low barriers to entry or exit
Differentiated goods
Describe the monopolistic competition diagram in the long run
Cost revenue diagram were firm is making normal profit
In the long run perfectly competitive firms only make
normal profit
Explain what happens as a monopolistically competitive market moves to its long run equilibrium. (4 marks)
In the short run, if a monopolistically competitive firm is making supernormal profit, it will incentivise new firms to enter the market.
There are low barriers to entry, so new firms will enter the market, stealing customers
This will decrease their demand, shifting AR and MR down, until AR just touches the firm’s AC curve so only normal profit will be left
Potential suppliers outside the market will no longer enter the market because they can no longer make supernormal profit, so we have reached the long run equilibrium.
What are price wars
Price wars are when firms try to undercut each other with lower prices to steal the other firms’ consumers.
Price wars are when firms try to undercut each other with lower prices to steal the other firms’ consumers.
Where AVC = AR
What is meant by predatory pricing
when a firm aggressively cuts its prices below AVC to force out competitors from the market.
So in the short run, by pricing below shutdown point, a firm incurs a loss. but by forcing out competitors they can make snp in lr
What are the three ways firm can compete on price
Price wars
predatory pricing
Limit pricing
What is limit pricing
when an incumbent firm uses its economies of scale to set a price low enough to limit new firms from entering.
Small new firms without any economies of scale, won’t be able to compete or make a profit so they’ll stay out of the market.
What is an oligoploy
A market with:
The market is dominated by a few large sellers
High barriers to entry/exit
Differentiated goods
Interdependence between firms
What is collusion
When two firms work together to limit competition
What is overt collusion
When there’s a formal agreement between firms to limit competition
What is tacit collusion
When there’s an unspoken agreement between firms to limit competition.
Is collusion a legal
overt collusion - yes
tacit collusion - no
What is non price competition and what are the 4 ways of achieving it
When firms compete without changing price, e.g:
Advertising
Loyalty cards
Branding
Quality
What is a contestable market
a market with low barriers to entry and exit.
what is abnormal profit
another word for supernormal profit
what is meant by hit and run competition
If an incumbent firm is making supernormal profit in the short run
its open to “hit and run competition”
where new firms New firms will therefore enter (or “hit”) the industry.
They’ll undercut the incumbent firm to steal away its consumers and make supernormal profit.
Incumbent firm then set price = AC
New firm will then leave the market (“run”) because supernormal profit is gone.
What is meant by contestability
How easy it is to enter a market.
What are the six internal economies of scale
Risk bearing
Managerial
Financial
Technical
Marketing
Purchasing
What are some common sunk costs
advertising
specialist machinery
What are some legal barriers to entry
Patents, trademarks and copyrights
prevent other firms from stealing ideas to enter the market
Why are sunk costs a barrier to entry? (3)
Sunk costs are costs that cannot be recovered
High sunk costs are a barrier to entry they deter new firms from entering
because firms know that if they fail, they won’t be able to recover any of their sunk costs.
What are sunk costs
Sunk costs are costs that cannot be recovered
What is a monopsony
When there is only one firm that is a buyer of a good
why might consumers may be better off in a market controlled by a monopoly firm
Monopolies achieve large supernormal profits.
They can use this to invest in their capital and achieve dynamic efficiency, lowering their costs.
In addition, monopolies are large enough to access economies of scale.
This process will also lower average costs in the long run.
Therefore, firms may be able to reduce their prices and provide consumers with lower cost,
What are the benefits of perfect competition (3)
consumers enjoy lower prices, quality and choice
firms are productively and allocatively efficient (static)
What are the disadvantages of perfect competition (3)
firms only make normal profits in long run
cant achieve dynamic efficiency
firms cannot access economies of scale may lead to higher prices and worse quality for consumers
what happens in oligopolies if firms compete
prices for consumers will decrease and quantity supplied will increase maximising consumer surplus
What happens if oligopolies collude
Market functions like a monopoly
What type of efficiencies do firms achieve in perfect competition in the long run?
static efficiency
allocative efficiency
productive efficiency
Why can perfect competition be a good thing for consumers?
Perfectly competitive markets are allocatively efficient; they therefore maximise consumer surplus. In addition, consumers enjoy high quality products, lots of choice and low prices.
What benefits do perfectly competitive firms gain in the short run?
supernormal profit
Advantages of monopolies for consumers (3)
Monopolies are able to achieve dynamic efficiency which may lead to
higher quality
lower prices
advantages of monopolies for firms (4)
economies of scale,
dynamic efficiency due to large super normal profits
keep out competitors
price makers
How does dynamic efficiency affect the market position of a monopoly?
Dynamic efficiency enables firms to drive down prices and keep new firms from joining the market.
reinvesting large profits can lead to a strengthening of a firm’s monopoly position.
Disadvantages of monopolies for consumers
produce at profit maximising point which leads to loss in consumer surplus
Disadvantages of monopolies for firms
X- inefficiency may cause lrac to rise bringing in more competitiors who are intrigued by the higher prices
less investment in long run innovation as there is no competition
complacency
Disadvantages of perfect competition
In the long run, firms in a perfectly competitive market only make normal profits.
As a result, firms have no money to re-invest and can’t achieve dynamic efficiency.
cant access economies of scale may lead to higher prices and worse quality for consumers as firms cut costs
What is static efficiency
when firms achieve both allocative and productive efficiency
What are the effects on consumers if firms in a oligopoly choose to collude
If firms in an oligopoly collude, then consumers will lose out due to higher prices and an exploitation of consumer surplus.
What are the effects on consumers if firms in a oligopoly choose to compete
if firms in an oligopoly compete, then prices will fall and consumer surplus will increase.
