Week 3 - market structure Flashcards
What is market structure
refers to the amount of competition that exists in a market between producers
What does market structure depend on (competition)
- number of firms
- size of firms
- demand
- supply conditions
- ease of entry and exit
Benefits of competition
- lower prices
- greater quality of goods and services
- greater variety
- research and development improves innovation
- better information
Perfect competition - price
One unitary price for all alike goods
perfect competition - barriers to entry
no barriers to entry, nothing to prevent a new firm setting up production in the industry
perfect competition - knowledge
producers have perfect knowledge of prices and costs of other producers, consumers know the prices charged by all firms
Perfect competition - homogenous product
All units of the good are identical to one another
perfect competition - mobility
people, machine and land can be used for any purpose and consumers are free to purchase the good from a producer
Perfect competition - many buyers and sellers
no single seller has monopoly of the market and therefore cannot influence the price
What is normal profit
The minimum level of profit
Abnormal profit
any profit on top of or over the minimum (normal) level
Is abnormal profit sustainable in the long term
No, the low barriers to entry allows other firm to enter the market and also earn abnormal profit
What is a monopoly
A market where the is no competition, there is a single producer supplying the whole market
Factors affecting the power of the monopolist
Availability of substitutes, height of barriers to entry
Example of a monopoly
British rail have monopoly power in the rail travel industry
What is an oligopolistic business
Where a small number of producers supply a market in which the product is differentiated in some way
Price competition with oligopolies
Little price competition as firms would be reluctant to raise prices in case their competitors do not and they price themselves out of competition
What is collusion
A cooperative agreement between competing firms to influence market outcomes to achieve market outcomes and get higher profits at the expense of competition
Examples of oligopoly products
Tabaco ,soap power
What is monopolistic competition
When all the conditions of the perfect competition are met other then the existence of a single good, so each firm has a monopoly over their own good but there is high competition from other suppliers
Example of a monopolistic firm
AkzoNobel is the only producer of Dulux paint, but there are other paint sellers in the market
Examples of barriers to entry
- cost advantage
- aggressive tactics e.g price wars and intimidation
- control over access to customers
- mergers and takeovers
- legal protection
Porters 5 forces - current competition
Looks at the degree of competition among existing firms in the industry
p5f - current competition impact on market structure
Firms positioned in a highly competition market may be unhappy with their position and change their lack of power through pricing changes
P5F - potential competition
Examines the ease or difficulty at which a new competitor can enter a market
P5F - threat of substitutes
The likelihood of a customer finding a different way of doing what you do.
The threat of substitutes depends on the nature of the good and the extent of product differentiation
P5F - power of buyers
Analyses the influence customers have on the pricing and quality of goods and services
P5F- Power of sellers
Assesses how much power suppliers have over the pricing and supply of goods and services
What does the power of a seller dependent on
If the product is specialised, if there is a similar product elsewhere, how important a product is in the production process
What is a transaction cost economy concerned with
If a firm can produce the components it needs in the production process
(if it can the power of supply greatly reduces)
Reason for highly concentrated markets
Minimum efficient scale - the point at which all economies of scale have been achieved by the firm and the point at which firms that want to maximise efficiency must operate
