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economics > 3.4 Market Structures > Flashcards

3.4 Market Structures Flashcards

perfect competition, monopolistic competition, oligopolies, monopolies and monopsonies

1
Q

What is an industry?

A

A group of firms that produce similar primary products

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2
Q

What are the characteristics of market structures?

A
  • number of firms and consumers within a market
  • barriers to entry and exit
  • similarity of goods
  • extent of knowledge
  • dependency of firms
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3
Q

What is market concentration?

A
  • the degree to which large firms dominate an industry
  • this is measured using the concentration ratio - which considers the market shares of leading firms in an industry
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4
Q

What are barriers to entry? And what are some examples of this?

A
  • refers to the ease or difficulty with which new firms and competitors may join the market
  • they allow incumbent firms to make supernormal profits, before new entrants come into the market to compete for these profits

Examples:
- high capital and sunk costs
- legal barriers/regulation
- marketing/brand barriers
- predatory pricing

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5
Q

What are sunk costs?

A
  • non-recoverable costs like that of marketing, staff training and r&d
  • high sunk costs will discourage firms from joining since they have more to lose from failure
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6
Q

What is predatory pricing?

A
  • incumbent firms may lower their prices to a level that new entrants cannot match to drive them out of business
  • it is better to accept low profits in the long run to preserve profits in the long run
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7
Q

What are the different types of goods in a market?

A
  • homogenous: products that are directly identical
  • heterogenous: goods that are product differentiated - different from those of their competitors
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8
Q

What are the two possible relationships between firms in an industry?

A
  • independent of each other - where the actions of any one firm will have no significant impact on any other single firm in the industry
  • interdependence - the actions of one firm will have an impact on the others
    • firms are more likely to be interdependent if there are fewer firms in the industry
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9
Q

What are the different types of market structures?

A
  • perfect competition
  • monopolistic competition
  • oligopoly
  • monopoly
  • monopsony - a monopoly of a supplier
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10
Q

What is perfect competition?

A
  • a market where there is a high degree of competition
  • a theoretical market where prices reflect a complete mobility of resources and freedom of entry and exit, full access to information by all information by all participants, homogenous products and where no buyer or seller has any advantage over one another
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11
Q

What are the key assumptions of perfect competition?

A
  • many buyers and sellers with none large enough to influence the prices
  • free entry and exit out of the market
  • homogenous goods that are all perfect substitutes of one another - hence a perfectly elastic demand curve for each individual firm
  • perfect knowledge for buyers and sellers about the price and quality of what is being sold
  • sellers must act independently - no collusion
  • profit maximisation is the objective - where MC = MR
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12
Q

What are some examples of perfect competition?

A
  • fruit sellers
  • flower sellers
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13
Q

What are the features of the firms in perfect competition?

A
  • each firm is a passive price taker
  • AR = MR = perfectly elastic demand for each firm
  • profit/loss depends on the ruling market prices and the SR costs of the seller
  • no. Of firms in the market in the LR will adjust to the kind of profits being made
  • firms are assumed to be profit maximisers
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14
Q

In the long run, why can a perfectly competitive firm only make normal profit?

A
  • they produce at the point where AR = AC
  • since they are profit maximisers, they also produce where MC = MR
  • they are also price takers, so AR = MR
    Therefore, they will produce output where: MC = MR = AC = AR
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15
Q

What is monopolistic competition?

A
  • there are a large number of relatively small buyers and sellers, no barriers to entry or exit, and firms sell non-homogeneous goods but their market power is weak
  • there is also imperfect competition because firms sell products which are not identical to rival firms
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16
Q

What are the basic assumption of monopolistic competition?

A
  • firms sell differentiated products that have some unique characteristics but can still act as substitutes for each other
  • there are many firms in the market
  • still relatively easy for firms to enter and exit the market
  • firms act independently
  • imperfect knowledge
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17
Q

How are products differentiated?

A
  • quality of the product such as the quality of ingredients, functionality and value for money
  • product performance like processing speed and reliability
  • perceived branding and packaging
  • functionality of the product
  • provenance of the product - where have the resources come from? What is the environmental footprint?
  • quality of after sales services to consumers and availability of replacement parts
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18
Q

What are some examples of close monopolistic competitions?

A
  • restaurants
  • salons
  • bars and clubs
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19
Q

What are the short run dynamics in monopolistic competition?

A
  • many producers and consumers - the industry concentration ratio is low
  • non-price competition is strong and lots of consumers switching
  • barriers to entry and exit are pretty low - allows producers to respond to profit signals
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20
Q

What happens when a firm is making a supernormal profit in the short run?

A
  • if they are making supernormal profit in the long run, then firms will be attracted by the high levels of profit
  • this will increase supply in the market
  • as a result, each firm will see a fall in demand for its product, shifting the AR curve downwards to the point where AC = AR
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21
Q

What happens when a firm is making losses in the short run?

A
  • if the firm in the industry are making losses in the short run, then firms will leave the industry
  • this will reduce supply
  • each remaining firm will see an increase in demand for their product, shifting the average revenue curve upwards to the point where AR = AC
  • MC = MR - the firm is a profit maximiser
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22
Q

What is an oligopoly?

A
  • an imperfectly competitive industry with a high level of market concentration
  • the market is dominated by a few large firms even though there may be many firms in that industry overall
  • the actions of one firm will have an effect on other firms in the market so firms are interdependent
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23
Q

What are the key characteristics of an oligopoly?

A
  • dominated by a small number of a large firms
  • firms are interdependent - their actions affect one another - so firms closely monitor and react to other’s actions
  • they have significant barriers to entry, which make it hard for new firms to enter and compete -> can include high capital requirements, economies of scale and established brand loyalty
  • most competition is non-price competition
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24
Q

What is non-price competition?

A
  • competition regarding advertising, product quality improvement, customer service etc
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25
Q

What are the effects of interdependent behaviour?

A
  • the decisions of one firm impact the decisions of other firms in the market and vice versa
  • the interdependence creates a competitive environment in an oligopoly, and can make the market more volatile than other structures
  • creates a lot of uncertainty
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26
Q

What is product differentiation?

A
  • if each firm sells slightly different products
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27
Q

What are some examples of barriers to entry in oligopolistic markets?

A
  • EoS
  • vertical integration
  • brand loyalty
  • control of important platforms
  • expertise, goodwill and reputation
  • patent protection
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28
Q

What are some examples of oligopolistic markets?

A
  • airlines
  • broadband providers
  • vehicle manufacturers
  • pharmaceutical companies
  • fizzy drink makers
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29
Q

What is market concentration? And how is it measured?

A
  • the level of domination is measured using a concentration ratio - it measures the combined market share of a leading group of businesses in a clearly defined market
  • the sum of the market share of the leading 3 or 5 firms
  • used to assess the degree of market concentration within a particular industry
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30
Q

How do you measure the concentration ratio?

A
  • an oligopoly exists when the 5-firm concentration ratio exceeds a 60% threshold
  • market concentration: s1 + s2 + sn / total industry market share x 100
31
Q

What are the different strategies that could be used to maximise profit?

A
  • collusion
  • competition
32
Q

When is collusive behaviour more likely?

A
  • the firms have similar costs
  • there are relatively few firms in the market
  • ‘brand loyalty’ means customers are less likely to buy from a different firm, even when their prices are lower
  • barriers to entry are relatively high
33
Q

When is competitive behaviour more likely?

A
  • when one firm has lower costs than the others
  • there is a relatively large numbers of bug firms in the market (making it harder to monitor each firm
  • the firms produce products that are very similar
  • the barriers to entry are relatively low
34
Q

What is collusion?

A
  • when two or more firms work together to set prices or output levels - a type of anti-competitive behaviour that is considered to be illegal
  • by working together, they can effectively set higher prices and limit output, which results in higher prices for consumers and reduced competition. In the market
35
Q

What can countries do to prevent collusion?

A
  • many countries have anti-trust laws that prohibit firms from engaging in such anti-competitive behaviour
36
Q

What is the difference between collusion and cooperation?

A
  • collusion is an illegal activity, in which firms manipulate the market, whereas cooperation is legal and firms work together towards a mutual benefit in a way that does not harm the consumers or the market
  • while collision is prohibited, cooperation is generally encouraged as it can lead to benefits for firms and consumers alike
37
Q

What is formal collusion?

A
  • exists when the firms make agreements amongst themselves to limit cooperation
  • production limits or an agreement to limit output should be agreed
38
Q

What are the main aims of price-fixing?

A
  • the aim is to increase profits for all firms involved - joint profit maximisation: trying maximize profit for the whole industry rather than individual firms’ profits
  • by working to set high prices, they can ensure that they don’t have to compete on price, which can lead to a more stable and predictable market
  • can use this to keep new entrants out of the market, as the low prices associated with competition can be difficult for new firms to match
39
Q

What is a cartel? And what is an example of a famous cartel?

A
  • a wide-ranging agreement amongst several firms in a market
  • these firms typically agree to limit output in order to raise prices
  • production limits are agreed and maintained by regular meetings

example:
- OPEC (organisation of the petroleum countries) - comprised of countries rather than companies

40
Q

What is an example of a government sanctioned cartel?

A
  • Federation of Quebec Maple Syrup (FPAQ) is a Canadian gov. sanctioned private cartel - accounts for 3/4 of the world’s production of maple syrup
  • sets production quotas and prices for maple syrup
  • allows producers to maintain their power in the market
41
Q

What does a cartel need to be successful?

A
  • agreement must be reached = easier when few firms dominate, market is stable and not experiencing rapid growth
  • potential comp. restricted = cartel could increase barriers to entry to prevent the attraction of new entrants and also cooperate to drive competitors out
  • cheating - by undercutting other firms - has to prevented
42
Q

What is the main reason that cartel collapse?

A
  • if a firm in the cartel decides to increase their own profits by expanding output anf undercutting the cartel price by a small margin
  • if all the firms follow, market price will eventually fall to free market levels and the firms will lose the privilege oearning a supernormal profit
43
Q

What is tacit collusion?

A
  • a type of collusion that occurs when firms don’t explicitly agree to collude, but instead act in ways that suggest that they are colluding
  • firms monitor each other’s behaviour closely and try to discreetly match each other’s price
  • hard to prove but can have a significant effect on the market
44
Q

What is price leadership? And how does it work?

A

a specific type of tacit collusion in which one firm takes the lead in setting prices, and the others firms follow suit
- the PRICE LEADER is often the most dominate in the market and the price followers are the smaller firms
- the price leader sets a price that allows it to earn supernormal profit but also allows price followers to earn a higher profit than in competition

45
Q

What is game theory?

A
  • considers what would be the outcome if two or more players were interdependent and made certain choices
  • used to predict how firms will behave in an oligopoly
46
Q

What is the prisoner’s dilemma?

A
  • demonstrates the conflict between self- interest and co-operation
  • shows how rational actors may not act in the most socially optimal way despite picking their dominant strategies
  • eventually they reach an equilibrium where they are worse off than they could’ve been if they agreed on a different strategy
47
Q

What is a dominant strategy?

A
  • the single strategy that is best for a player regardless of what strategy other palyers use
48
Q

what is the nash equilibrium?

A

any situation where all the participants in a game are pursuing their best possible strategies given all other participants - when both choose their dominant strategies

49
Q

What are the different types of price competition in oligopolies?

A
  • price wars
  • limit pricing
  • predatory pricing
50
Q

What is predatory pricing? And why may this take place?

A
  • it is the practice is setting prices for a product so unrealistically low in order to eliminate the competition
  • if one firm judges that the other firm is gaining too much of a competitive advantage then it may defend its share by cutting prices
  • this will then take away market share from the other firm or even drive it out of the market
51
Q

What is limit pricing?

A
  • occurs when firms set a low enough price to deter her entrants from coming into the market
52
Q

What are price wars?

A
  • the repeated undercutting of prices below those of competitors
  • tends to drive prices down to levels where firms are frequently making losses
53
Q

What can cause price wars to happen?

A
  • collapse of an existing price-fixing cartel agreement
  • perception that some existing firms are pricing too high or making high supernormal profits
  • desire to win market share off rivals - zero-sum game
  • entry of new firms / challenger brands into the market
  • managerial motive - if price cuts increase total revenue - managers willing to sacrifice market share at expense of operating profits
  • response to the external factors such as falling demand in a recession
54
Q

What is efficiency in Economics?

A

Society making the best use of scarce resources to help satisfying changing what’s and needs

55
Q

What is the difference between static and dynamic efficiency?

A
  • static efficiency exists at certain point in time,w Nile dynamic efficiency is concerned with how resources are allocated over a period
56
Q

What kind of efficiencies are static?

A
  • productive efficiency
  • Allocative efficiency
57
Q

What is productive efficiency?

A
  • refers to a state where a company os producing goods and services at the lowest possible AC, using the fewest possible resources
  • So a company can produce max. Output at the given inputs, without any waste or inefficiencies
  • Achieved when AC is minimised
58
Q

What is productive efficiency?

A
  • refers to a state where a company os producing goods and services at the lowest possible AC, using the fewest possible resources
  • So a company can produce max. Output at the given inputs, without any waste or inefficiencies
  • Achieved when AC is minimised
59
Q

What is X-inefficiency?

A
  • A type of productive inefficiency where the firm is not producing at the lowest possible cost for a given level of output
  • Lack of efficiency may be due to poor management, lack of motivation etc. -> could be doing better but is held back
  • On a graph: when a firm is performing within the AC curve, rather than on it
60
Q

Why may X-inefficiencies occur?

A
  • management may be bad at controlling costs e.g doesn’t het the cheapest possible prices on supplies or employs too workers
  • Or stakeholders may be gaining more than they’re meant to be in the form of excess bonuses
  • May be due to principle-agent problem between managers and shareholders
  • Business ay be happier satisfying profits rather than optimise
  • Some state-owned organisations may if they are set politically motivated targets
61
Q

What is allocative efficiency?

A
  • Measures whether resources are allocated to those goods and services demanded by consumers
  • Occurs when the value that consumers place on a product equals the MC cost of resources used up in production
  • PRICE (AR) = marginal cost of supply
  • Occurs where welfare is maximised. At the market equilibrium, CS and PS is maximised
62
Q

What is dynamic efficiency?

A
  • Concerned with how resources are allocated over a period of time to maximise welfare
  • It is about long term growth and development of a company -> adaptation of products to meet the changing market demands. Mainly the ability of the company to respond to these changes to remain competitive
  • Goal is to create sustainable growth and value for the company
63
Q

What are some examples of dynamically efficient industries?

A
  • technology industry is always adapting -> emergence of AI and cloud computing, leading to increased efficiency and productivity
  • Healthcare -> improvements by using tech like wearable health devices and electronic health records
  • Renewable energy like solar and wind = efficiency improvements in the energy industry
64
Q

Are firms efficient in perfect competition?

A
  • in both the LR and SR, P = MC and therefore ALLOCATIVE EFFICIENCY is achieved. A Pareto optimum allocation of resources
  • PRODUCTIVE EFFICIENCY occurs when the eq. Output is supplied at a minimum average cost - attained in the LR
  • However, there is little chance for dynamic efficiency because products sold in perfect competition are homogenous, so there is little scope for innovation.
65
Q

Are firms efficient in monopolistic competition?

A
  • prices are above MC = equilibrium not allocatively efficient
  • Saturation of the market may lead to the businesses not being able to exploit EoS - causing the AC to be higher so not productively efficiently
  • Monopolistic competition associated with extensive consumer choice and innovation - good for dynamic efficiency
  • firms may not achieve allocative or productive efficiency but they can compete on product differentiation and this may make them operate at less than minimum AC
66
Q

Are firms efficient in an oligopoly?

A
  • they can engage in price competition, leading to allocative inefficiency
  • However, they may invest in r&d, contributing to dynamic efficiency
  • Productive efficiency is dependent on the industry
67
Q

Are firms efficient in a monopoly?

A
  • may lead to allocative inefficiency because they can set prices above the MC, resulting in deadweight loss
  • But a monopoly can be productively efficient if it operates at the minimum point of its AC curve
68
Q

What is a monopsony?

A
  • exists when there is only one buyer in the market. Markets where one buyer dominates
  • Example: Network Rail dominates the market for the purchase of rail track maintenance
69
Q

What are the characteristics of a monopsonistic market?

A
  • It must possess the same characteristics as a monopolistic market
  • Sellers must not sell their product to other firms outside the market
  • Assumed to be profit maximisers
70
Q

How does a monopsony power lead to reduced cost?

A
  • Firms with monopsony power are able to set the market price -> means that a monopsony can exploit bargaining power with a supplier to negotiate lower prices, because their suppliers have nowhere else to sell to (only one buyer)
  • Reduced costs = increases their profit margins
71
Q

What are some examples of monopsony firms?

A
  • NHS
  • supermarkets
  • Amazon
    (Monopsonies are often monopolies)
72
Q

What are the benefits to firms having monopsony power?

A
  • allows firms to achieve purchasing EoS leading to lower LRAC
  • Lower purchase costs bring about higher supernormal profits and ultimately increased returns for shareholders
  • Extra profit (producer surplus) might then be used to fund investment or research and development to improvement dynamic efficiency
73
Q

What are the potential benefits of a monopsony to consumers?

A
  • consumers gain lower prices e.g supermarkets can negotiate better prices from manufacturers that are then perhaps passed to consumers - increases their real incomes and consumer surplus
  • Improved value for money - NHS can use bargaining power to cut the prices of drugs used in treatments. Cost savings = more people are treated within the NHS budget
74
Q

How may a monopsony damage consumer welfare?

A
  • businesses may use their buying power to squeeze lower prices out of suppliers. This then reduces profits of firms in the industry supply chain and nay cause lower incomes for those employed
  • Consumers might be faced less choice or higher prices in the LR if other suppliers leave the industry. Also a chance of supply-chain disruptions
    • firms with monopsony power often also have monopoly power sp consumers are unlikely to benefit from the lower prices passed on

economics (21 decks)

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