Theory of the Firm -unit 3 Flashcards
What is the concentration ratio
The market share controlled by the ānā largest firms
How many firms are in perfect comp?
Many small firms
How many firms are in monopolistic comp
Many small firms
How many firms are in an oligopoly
A few large firms dominate
How many firms are in a monopoly
One large firm with 100% concentration ratio
What type of product is in Perfect comp
Homogenous
Why type of product is in monopolistic comp
Similar products
Why type of product is in oligopoly market
Similar but distinct
Eg pc and mac
Samsung s4 and iPhone 6
Why type of product is in monopoly
Unique
What kind of knowledge is in perfect comp
Perfect
What kind of knowledge is in monopolistic comp
Imperfect
What kind of knowledge is in an oligopoly
Imperfect
What kind of knowledge is in monopoly
Imperfect
What kind of barriers to entry are in perfect comp
None
What kind of barriers to entry are in monopolistic comp
Low barriers to entry
What kind of barriers to entry are in oligopoly
High
What kind of barriers to entry are in monopoly
High
What price making powers do firms in perfect comp have
They are price takers
No price setting power
What price making powers do firms in monopolistic comp have?
Some degree of price setting power
Brand orientated
Eg. Dior makeup
What price making powers do firms in oligopoly markets have?
Significant price setting power
But interdependent
What price making powers do firms in monopoly markets make
Price maker
Are supernormal profits made in perfect competition?
Only in the short run
In the long run the supernormal profits are out competed by new firms entering the market.
When is the shutdown point for a perfectly competitive firm?
When the firm is not converging average variable costs.
Give some examples of firms in monopolistic competition
Hairdresser
Restaurant
Make up industry
What would happen if a price war occurred in an oligopoly market
If one firm lowers prices
The others will follow
So overall they would lose revenue
Ergo firms avoid price competition
What is collusion
An agreement between two or more firms to limit competition, set prices/output and increase welfare gains of the firms concerned.
Is collusion legal?
Collusion is illegal in most cases
OPEC is an example where collusion is not illegal.
What is overt collusion
Where firms openly fix prices, output, marketing or the sharing out of consumers
What is a cartel
A formal agreement between firms to act together
Eg. Sugar cartel in USA between 1934 and 1974 to guarantee price of sugar
What is tacit collusion
Behind the scenes collusion.
No spoken agreement.
What is a whistleblower
A firm who informs the authorities about a collusion agreement in return for immunity against prosecution.
List these in order from most competitive market, to least competitive
Perfect competition
Monopoly
Oligopoly
Monopolistic competition
Most competitive -perfect comp -monopolistic comp -oligopoly -monopoly Least competitive
What is price discrimination
Where a firm sells the same product in a different market with differing elasticises at different prices.
What three conditions will price discrimination be successful?
High barriers to entry and a degree of monopoly power
At least two separate markets with differing price elasticises of demand
The markets can be kept separate at a cost that is lower than the gain in profits.
What is a contestable market
A market with low sunk costs and therefore low barriers to entry or exit
What is monopsony power
Exits when sellers face powerful buyers
Eh big an individual wishes to work in emergency healthcare in UK, then sole buyers of such employees is NHS.
