Theme 3: Market Structures Flashcards
What are the 4 factors that affect a market structure?
1) number of buyers & sellers
2) barriers to entry and exit
3) Similarity of product
4) Knowledge
What are the 5 market structures?
1) Monopoly
2) Perfect competition
3) Monopolistic competition
4) Oligopoly
5) Monopsony
What is the N-firm concentration ratio?
A measurement how much market share the N largest firms in a market have
How do you work out the N-firm concentration ratio in 2 steps?
1) work out the largest number of firms in the market
2) add their numbers up together
What is a monopoly?
When there’s only one dominant firm in a market.
How do economists define a legal monopoly?
When a firm owns over 25% of market share
What are the 3 assumptions when modeling a monopoly graph?
1) only one firm
2) they are profit maximisers
3) high barriers to entry
How do economists define a pure monopoly?
When a firm owns 100% of market share (all of it)
Can you give an example of a monopoly?
Microsoft, who owned 90% of the operating system market.
What are the 5 types of barriers to entry?
1) legal barriers
2) sunk costs
3) economies of scale
4) brand loyalty
5) anti-competitive practices
What are legal barriers?
they allow firms to legally prevent other firms from stealing their ideas and entering their market.
What are the 3 examples of legal barriers?
Patents, trademarks and copyright
What are sunk costs?
costs that cannot be recovered (e.g. advertising).
How are high sunk costs 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 anti-competitive practices?
Include anything a firm might do to reduce or restrict competition?
What is an incumbent firm?
A firm currently in the market
How does large economies of scale cause barriers to entry?
Economies of scale mean incumbent firms can keep their costs and prices low, creating a barrier to entry because smaller new firms without economies of scale can’t compete on price.
How does brand loyalty increase barriers to entry?
Strong branding from incumbent firms makes it hard for new entrants, with weaker branding, to make any sales.
Give an example of anti-competitive practices (hint: type of inorganic growth)
E.g. vertical integration: firms can vertically integrate to take control of scarce resources (like the power grid); and then refuse to let new firms use these scarce resources, stopping them from entering the market.
Draw a monopoly diagram
What are the 4 types of efficiency?
1) productive
2) allocative
3) dynamic
4) X
What is productive efficiency?
When average total cost is at its lowest, where MC = AC
What is allocative efficiency?
When welfare is maximized, MC = AR
What is X-inefficiency?
when a firm is producing above its average cost curve for a given level of output.
Where does dynamic efficiency occur in?
When AR > AC
What is the efficiency of a monopoly?
- not productively efficient
- not allocatively efficient
- possibly Dynamically efficient
- not X-efficient
It’s can be dynamically efficient
What is a natural monopoly?
when it’s naturally most efficient if only one firm is in the market.
Give 2 reasons why do natural monopolies exist?
1) high sunk costs
2) huge economies of scale
Draw a natural monopoly diagram?
Give an example of a natural monopoly having a high sunk cost?
E.g. TFL’ sunk costs have been estimated as high as £129bn - it would completely inefficient for a second firm to waste £129bn to enter the market, too.
Draw MC and AC (assuming that MC is constant)
What is price discrimination?
when a firm charges different groups of consumer different prices, but for the same good.
What are the 3 conditions required for price discrimination?
1) Market Power
2) Information on elasticities
3) Limit Reselling
Why must a firm have market power for price discrimination?
it must be able to change their prices.
Why must a firm have information on elasticities for price discrimination?
The firm must be able to identify which consumers are elastic and which are inelastic.
Why must a firm have limited reselling for price discrimination?
it must be able to limit elastic consumers from selling cheap tickets to inelastic consumers
What are the 3 price discrimination diagrams?
1) elastic consumers
2) inelastic consumers
3) overall market
What are the 4 features of perfect competition?
1) Many small buyers and sellers
2) No barriers to entry or exit
3) Homogeneous products
4) Perfect Information
What are the 2 types of perfect competition diagrams?
1) market diagram
2) firm diagram
Draw a perfect competition diagrams
Sketch a diagram showing what will happen between the short run and long run, if a firm is making supernormal profit in the short run:
Perfectly competitive firms will only make what in the long run?
Normal profit
What are the 3 key features of monopolistic competition?
1) Many small buyers and sellers
2) Low barriers to entry or exit
3) Differentiated goods
What does differentiated goods mean?
Goods must be similar or slightly different
Draw a monopolistic competition diagram in the long run
Draw a monopolistic competition diagram in the short run
What are the 4 key features of an oligopoly?
1) A few large sellers
2) High barriers
3) Differentiated goods
4) Interdependence
What does it mean for an oligopoly to be interdependent?
one firm’s actions will directly affect another firm.
Draw a payoff matrix of Coca Cola and Pepsi
How can firms avoid price wars?
By both of them agreeing to collude and fix their prices at a high price
What is collusion?
When two or more firms agree to limit competition
What are the 2 types of collusion?
1) Overt
2) Tacit
What is overt collusion?
A formal agreement between firms to collude
What is tacit collusion?
An unspoken agreement between firms to collude
What will these formal agreements typically be and why?
They would be kept hidden, because the CMA fines companies who are found overtly colluding
What type of collusion is considered illegal?
Overt collusion
What are the 3 types of price competition
1) price wars
2) predatory pricing
3) limit pricing
What are price wars?
when firms try to undercut each other with lower prices to steal the other firms’ consumers.
What is predatory pricing?
when a firm aggressively cuts its prices below AVC to force out competitors from the market.
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.
What are the 4 types of non-price competition?
1) advertising
2) loyalty cards
3) branding
4) quality
What is non-price competition?
When firms compete without changing price
What is a competition?
The number of firms competing in a market
What are contestable markets?
markets with low barriers to entry and exit.
Draw an X-inefficiency diagram
What is dynamic efficiency?
how changing technology improves a firm’s output potential over time.
What is a monopsony?
Where there is only one buyer in the market
