3.4 Market structures

Question 1

Name the 6 characteristics of perfect competition

Answer 1

Large numbers of buyers and sellers

Homogenous products

No/low barriers to entry

Perfect knowledge among buyers and sellers

No externalities

Profit maximising

Question 2

Name 3 examples of barriers to entry for firms

Answer 2

Patents

High sunk costs

High economies of scale

Question 3

Which of the following is the closest to a model of perfect competition: car manufacturing, foreign exchange market, supermarkets?

Answer 3

Foreign exchange market

Question 4

Name the point of allocative efficiency and define it

Answer 4

P = MC

Whether resources are used to maximise consumer welfare

Question 5

Define productive efficiency

Answer 5

When firms produce at lowest average total cost

Question 6

Define dynamic efficiencyp

Answer 6

When efficiency increases over time due to innovation

Question 7

Define X-inefficiency

Answer 7

when a firm is not producing on its lowest ATC curve possibly due to organisational slack

Question 8

In what type of efficiency are firms in oligopoly and monopoly efficient?

Answer 8

Dynamic efficiency - can reinvest supernormal profit

Question 9

Under what market structures are firms X-efficient, and in what time frame

Answer 9

Perfect and monopolistic- both long run only

Question 10

Which market structure is allocatively efficient in the short run and long run?

Answer 10

Perfect competition

Question 11

Which market structure is productively efficient in the long run?

Answer 11

Perfect competition

Question 12

When is a firm under monopolistic competition efficient?

Answer 12

X-efficiency in the long run

Question 13

Name 4 characteristic of firms in monopolistic competition

Answer 13

Lots of sellers

Differentiated product

No barriers to entry

Near perfect knowledge

Question 14

Name 2 industries that could be seen as monopolistic

Answer 14

Bars

Hairdressers

Question 15

Name 2 advantages and disadvantages of monopolistic

Answer 15

Adv: Choice for consumers, producers don’t exploit consumers

Disadv: Branding is inefficient, allocatively and productively inefficient in SR and LR

Question 16

Name 4 characteristics of oligopoly

Answer 16

High barriers to entry

High concentration ratio

Interdependence of firms

Product differentiation

Question 17

Define oligopoly

Answer 17

where a few large firms dominate a market

Question 18

Define interdependence

Answer 18

when the action of one firm have an impact on all the firms in the market.

Question 19

What market structure to use kinked demand curve

Answer 19

Oligopoly

Question 20

Why do firms use non-price competition in Oligopoly?

Answer 20

Interdependent so prices are ‘sticky’, firms don’t compete on this

Question 21

Define price leadership

Answer 21

Setting of price in market by a dominant company that others then follow

Question 22

Define marginal cost pricing

Answer 22

Firms set price equal to the extra cost of producing an extra unit of output

Question 23

Define predatory pricing

Answer 23

Anti-competitive strategy where firms set prices below AVC in attempt to force rivals out the market. It is illegal

Question 24

Define price wars

Answer 24

Where competing firms keep cutting prices in short run

Question 25

Define limit pricing

Answer 25

Less extreme strategy using highest price firm can set without enabling a new firm to enter the market and make profit.

Question 26

Define cost plus/ mark up pricing

Answer 26

Policy where firms set their price by adding a mark-up to average costs.

Question 27

Name 3 non-price strategies

Answer 27

1. Buy one get one free (BOGOF) and other ‘offers’ 2. Advertising 3. Loyalty card

Question 28

Define tacit collusion

Answer 28

when firms behave as if they have an agreement on price, but in fact they don’t

Question 29

Define overt collusion

Answer 29

when firms actually get together to agree prices

Question 30

Name a reason why firms may collude

Answer 30

Increase joint prices

Question 31

Name 3 conditions favouring collusion

Answer 31

Small number of firms Produce similar goods Some secrecy about market conditions

Question 32

Name 2 reasons cartels break down

Answer 32

Exposure by authorities Free riders

Question 33

define cartel

Answer 33

an agreement between firms on price and output with the intentin of maximising their joint profits

Question 34

define game theory

Answer 34

the study of strategies used to make decisions

Question 35

Name 2 criticisms on the kinked demand curve

Answer 35

How to determine equilibrium price Prices not always sticky in reality

Question 36

Name 5 characteristics of monopoly

Answer 36

One seller High barrier to entry Unique products Imperfect information Super normal profit in LR

Question 37

Name an advantages and 2 disadvantages of monopoly

Answer 37

For: dynamic efficiency Against: Lower consumer surplus, deadweight loss

Question 38

Define dynamic efficiency

Answer 38

Increase in efficiency over time

Question 39

Define creative destruction

Answer 39

The process whereby established monopoly businesses see their profits destroyed by new entrants into the market attracted by abnormal profits

Question 40

Define natural monopoly and give an example

Answer 40

Where economies of scale are so great that no single firm can fully exploit them - e.g London Underground

Question 41

Define price discrimination

Answer 41

When a producer charges different prices to different markets for the same product

Question 42

Name 4 conditions necessary for price discrimination

Answer 42

- Different elasticities in each market - Can distinguish between consumers - Can’t buy in cheap market and sell in expensive (arbitrage) - Firm must have market power

Question 43

What is the difference between third degree and first degree price discrimination?

Answer 43

First: different price for each customer (very rare) Third: different price for different groups of consumer

Question 44

Name 2 benefits to producers and 2 benefits to consumers from price discrimination

Answer 44

Producers: more profit, turn consumer surplus into producer surplus Consumers: pay lower price in elastic market, can provide loss making service e.g off peak trains

Question 45

Name a drawback of price discrimination

Answer 45

Loss of consumer surplus, those in inelastic market pay higher price

Question 46

Define monopsony

Answer 46

A single buyer

Question 47

Name 2 advantages and 2 disadvantages to monopsony

Answer 47

Adv: Consumers may benefit in terms of lower prices, Monopsonist benefits in terms of higher profits Disadv: Quality reduced, suppliers go out of business

Question 48

How can suppliers combat monopsonist power? (2 ways)

Answer 48

Merge to compete Make themselves indispensable to supplier

Question 49

Name 2 ways governments can intervene to reduce monopsony power

Answer 49

Encourage fair trade Regulate monopsony profit Regulation

Question 50

Name 5 characteristics of a contestable market

Answer 50

• Absence of sunk costs • Freedom of entry to the industry • Costs of exit are low • Low consumer loyalty • Perfect knowledge

Question 51

Are the number of firms relevant in assessing whether a market is contestable?

Answer 51

No

Question 52

Name 3 ways to make a market less contestable

Answer 52

Integration Marketing Legal barriers/patents

Question 53

Name 3 ways to make a market more contestable

Answer 53

• Monitor price behaviour • Monitor mergers and acquisitions • Deregulation (lower barriers to entry)

Question 54

If an industry has supernormal profit what does that mean for its contestability?

Answer 54

Low as firms are not entering the market to benefit from it

Question 55

Define contestability

Answer 55

Low/no barriers to entry and low/no sunk costs