2. Market Structure and Performance Flashcards Preview

ECON2010 Industrial Economics > 2. Market Structure and Performance > Flashcards

Flashcards in 2. Market Structure and Performance Deck (26)
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1
Q

What are the two dimensions of any market?

A

Product market definition

Geographic market definition

2
Q

Describe the SSNIP test

A

Small but significant non- transitory increase in price. Start with a narrow market definition, would a hypothetical monopolist benefit from a small price increase? If no include the closest substitute and repeat. If yes this collection of products in the area is the market

3
Q

What is the most commonly used characteristic of market structure?

A

Seller concentration

4
Q

Seller concentration

A

It reflects the implications of structure on nature of competition in a relatively simple numericsl indicator. It illustrates both nunber of firms and size distribution

5
Q

Concentration curve

A

Plots the cumulative market share of an industry starting with the largest

6
Q

CRm

A

A figure allowing for comparison of the market share of the largest m number of firms in a market

7
Q

Advantages of CRm

A

It only uses the data of the largest firns so this may be practical

8
Q

Disadvantages of CRm

A
  • it only uses data of large firms
  • a merger doesnt necessarily increase CRm
  • doesnt take into account size distribution
  • result might depend on m chosen
9
Q

Herfindahl- Hirschman index

A

H is the value of the sum of the squares of each firms market share

10
Q

What does H=1 mean?

A

There is a monopoly

11
Q

Limitations to concentration measures

A
  • market definitions might be questionable
  • vertical relationships not reflected
  • seller concentration is only one characteristic of structure, doesnt consider entry and exit
12
Q

Lerner index

A

L=(P-MC)/P

The larger the index the greater the market power

13
Q

What does a lerner index of 0 mean?

A

There is perfect competition

14
Q

What is the inverse elasticity rule?

A

1/elasticity= (P-MC)/P

15
Q

Limitations to lerner index

A
  • in reality firms dont have the same cost structure
  • requires an estimate of firms MC
  • despite this lerner index remains important to measure market power
16
Q

Most important characteristics of structure

A
  • number of firms
  • barriers to entry
  • degree of product differentiation
17
Q

Assumptions of perfect competition

A
  • lots of firms
  • no barriers to entry or exit
  • homogenous product
  • no informational problems
  • firms are price takers
  • firms can sell at any q
  • firms market share is so small that varying it doesnt affect total output or price
  • firms produce where P=MC
18
Q

Characteristics of monopoly

A
  • one seller
  • strong barriers
  • unique product
  • maybe information problems and transportation costs
19
Q

Why does a monopolist produce on the elastic part of the demand curve?

A

If they were producing on the inelastic part then increasing price would increase revenue so they wouldnt produce here

20
Q

When does allocative efficiency occur?

A

When P=MC

21
Q

What is productive efficiency?

A

Given factors of input, the max output level is produced and costs are minimised

22
Q

Characteristics of monopolistic competition

A
  • lots of buyers and sellers
  • no barriers
  • similar products
  • maybe info problems, transportation costs
23
Q

What is the demand function for a monopolistic firm like?

A

Downward sloping but more elastic than a monopolist’s

24
Q

Why cant monopolistic firms make LR profit?

A

In SR they make abnormal profits. New firms enter which shifts each firm’s individual demand curve left, reducing their AR until AR=AC when MC=MR so firms make zero profits

25
Q

Characteristics of dominant firm and competitive fringe

A
  • a dominant price setter
  • a fringe of small price taking firms
  • dominance usually justified through cost advantage
26
Q

Coase conjecture

A

Durability might greatly reduce, if not eliminate, the ability of the monopolist to set prices above the efficient level.