The Four Market Structures Flashcards
What are the features of a perfect competition market?
Very many firms (so there is limited market power)
Unrestricted entry
Undifferentiated products- perfect substitutes
Horizontal demand curve
What are the features of a monpolisitc competition market?
Many/serveal firms
Unrestricted entry
Products are differentiated - consumer wont always switch provider
Downward sloping relatively elastic demand curve
What are the features of a oligopoly market?
A few firms(handful)
Restricted entry
Undifferentiated or differentiated product
Downward sloping relatively inelastic demand curve
What are the features of a monopoly market?
One firm
Restricted or blocked entry
Unique product
Downward sloping inelastic curve
How does price work in perfect compeition market
Price is dictated by market supply and demand which sets an equilibrium price - prices are fixed and everyone is a price taker
What is the output for a perfect competition firm
Profit maximisation occurs where marginal revenue = marginal costs = Price = AR. Output is at this level usuallyu just sell as much as possible
What is the formula for profit for a perfect competition firm
Profit = (AR-AC) X Q
What are the normal/supernormal profits made for a perfect competition firm
Normal profit is made : (AR-AC) X Q
Supernormal profits are possible but not longterm because it is very easy to enter the market and so they are competed away in the long run
What would be the reason for leaving the market because of losses for a perfect competition firm
In the long run, your average costs will be just covered by revenue. If LRAC
What are the barriers to entry in a monopoly structure
Economies of Scale Economies of scope Product differentiation and brand loyalty Lower costs for established firms Control of factors Legal protection Mergers Aggressive tactics
Compare monopoly structure to perfect market structure
The monopoly structure has a lower output at a higher price
What are the profits and output of a monopoly firm dependent on?
The level of profit is dependent on AC and AR or on Q and P
Firm can choose how much to produce at what price
What are the main featurs of monpolistic competition firms to understand
Independent - When the decision of one firm in a market will not have a significant effect on the demand curves of its rivals
Product differentiation - When one firm’s product is sufficiently different from its rivals to allow it to raise the price
What is the situation with long run and short run profits in a monopolistic competition market
Short run you can make supernormal profits
But new entrants make these disappear over the long term
Compare monopolistic competition market to a perfect competition market
The opportunity cost of product choice in Monopolistic Competition is the price is higher and less quantity is produced
What are the limitation to monopolistic competition
Imperfect information/information asymmetries - assumption that people outside the market will recognise scope for profit and join
Difficulty in identifying an industry demand curve
Entry may not be totally free
Indivisibilities- Economies of scope/ economies of scale (certain things have to be at a certain level regardless of how much you want to produce ex: retail store)
Importance of non-price competition
Compare monopolistic competition to monopoly market
The market keeps prices down but there are fewer economies of scale and less R and D than Monopoly
Explain interdependence and its role in a oligopoly
Interdependence - Each firm will be affected by the decisions of its rivals. Likewise, its decisions will affect its rivals
Rivals are much more important in this market structure
Explain idea of collusion and compare it to competition
Often there is a focus by firms in the oligopoly to look at the industry and maximise industry profit as a whole
Colluding means they maximise industry profits
Competing means they get a larger share of industry profits
Define collusive oligopoly
Where oligopolists agree (formally or informally) to limit competition between themselves
Define cartel
A formula collusive agreement
Define quota
Output that a given member of a cartel is allowed to produce or sell
What are factors in favour of collusion in an oligopoly
Few firms Open with each other Similar cost structure - if one can produce for lower amount collusion wouldn’t work as one firm would have an advantage Similar products There is a dominant firm Significant barriers to entry Stable market conditions No government's measures to curb collusion
Define tacit collusion and name three main concepts of it
Tacit collusion occurs where firms choose actions that are likely to minimize a response from another firm
- Dominant firm price leadership
- Barometric firm price leadership
- Average cot pricing or benchmark
Explain the Dominant firm price leadership form of tacit collusion
Firms within the market are dominant and other firms copy them. This is not a formal method of collusion but is well known
Explain the Barometric firm price leadership form of tacit collusion
There is always one firm that moves price first. This collusion means everyone copies that firm
Explain the Average cot pricing or benchmark form of tacit collusion
Average cost pricing - Scaling of this sets the price
Price benchmark - Number is agreed across the industry that is fair. Ex: 20% margin on AC is agreed and all prices should be the same sticking to that
In a non collusive oligopoly explain the three models that can be used to determine how likely rivals are to retaliate
Cournot - Assume rivals produce a given quantity (fixed production)
Bertrand - Assume rivals set a particular price
Kinked demand curve - Assume rivals follow price decreases but not price increases
What are the two assumptions of the kinked demand curve diagram
If the firm raises its price rivals will not
If the firm lowers its price rivals will feel forced to lower theirs too
What are the arguments for oligopolies as something in interest of the public
Countervailing power
Supernormal prodits leading to R and D
Greater consumer choice
However there is a risk of extensive collusion which is a downside
