3.4 - Market structures Flashcards

Question

Diagram for game theory

Answer 1

- shows price rigidity - nash equilibrium (cell with two underlined numbers) - irrational equilibrium that can last in the LR - dominant strategy (firm should always charge the lower price regardless of the behaviour of the other firm) - shows temptation to collude - shows that there is an incentive to break from the collusion agreement to gain greater profits (may not be the most optimal in the LR as other firm will reduce price, may engage in price wars, leading to further drop in TR)

Answer 2

1. Price war 2. Predatory pricing - drastically reduce the price in order erode competition, immediately raise prices after gaining the market share due to lack of competition 3. Limit pricing - lower prices to a degree that would deter new firms from entering the market

Answer 3

1. Product differentiation 2. Advertising 3. Innovation 4. Customer service 5. Distribution services

Answer 4

Evaluation for interdependence - firms do not NEED and WANT to engage in price reduction -> suggests that price rigidity in oligopoly - strengthens the argument for collusion

Answer 5

A form of market structure where there is one dominant seller in the industry

Answer 6

1. Single seller - one firm that dominates the whole market, there are no other substitutes 2. High barriers to entry / exit - they are able to maintain market share due to economies of scale, control over essential resources, government regulation and patents 3. Firm is price maker - they influence the price of the market due to possessing majority of market share 4. Unique product - this allows firm for significant control over price due to lack of substitutes 5. Market power - influence market conditions, restrict output and set higher prices compared to competitive market 6. LR profitability - earn long run profits becuase of their ability to set prices above production costs

Answer 7

Selling the same good to consumers at a different price

Answer 8

1. Market segmentation - firm must segment market into distinctive groups with different PED 2. Price segmentation - ability to change different prices to each segment, those with high PED (elastic) would be charged lower 3. No resale - discourage reselling of products

Answer 9

Occurs when a firm can serve the entire market due to economies of scale

Answer 10

1. High fixed cost 2. Enormous potential for economies of scale 3. It would be rational to have one firm supplying the entire market since competition will be undesirable 4. Competition would result to a wasteful duplication of resources and non exploitation of full economies of scale - this would lead to allocative and productive inefficiency -> any firms entering the market would be at a disadvantage due to not exploiting the economies of scale

Answer 11

-> the subsidy provided would be AB in order for the natural monopolist to be gaining normal profit (as they would be making subnormal profits if operating at allocative efficiency) -> high opportunity cost for the government as they have to pay for the subsidy and impose regulation

Answer 12

As an evaluation tool for monopoly -> natural monopoly is desirable because it is allocative and productive efficient if it is regulated

Answer 13

A form of market structure where there is only a single buyer - controls significant market power and share of total demand for a specific product or labour

Answer 14

1. Single buyer - limited options for sellers to find alternative customers 2. Price makers - ability to set a price at which the firm is willing to pay for the good (monopsonist's demand affects market price) 3. High barriers to entry - high sunk costs, regulatory restrictions and lack of economies of scale 4. Downward sloping supply curve - sellers are willing to provide good / services at lower price, giving power to negotiate lower prices for monopsonist

Answer 15

S = ACL D = MRP Qc > Qm Wc > Wm - workers are getting tougher deal under monopsony employer rather than from competitive firm

Answer 16

Trade union will help increase wage and quantity of workers to a more competitive labour market outcome Qm -> QTU Wm -> WTU STU = ACL instead of S = ACL

Answer 17

1. Workers productivity may decline due to lower pay (this causes incentive to work to decrease) 2. Producer surplus falls for farmers - monopsony power of supermarkets causes them to negotiate lower prices from farmers - this is done to lower their own prices against other supermarkets to stay more competitive 3. Labour exploitation may occur as workers may have little choice / alternative over employment opportunities and therefore wages - however, this is now not the case due to well established trade unions who help negotiate better wage and good working conditions

Answer 18

1. E.g. NHS has monopsonist power over pharmaceutical companies meaning they are able to purchase drugs cheaper - the saved money can be used to invest into other aspects (e.g. R&D) and/or use the budget for more treatment in hospitals 2. Monpsony power = better negotiation of lower prices = lower cost of production = lower prices for consumers = higher consumer surplus

Answer 19

A form of market structure where there is a threat of competition that will affect the behaviour of the firm

Answer 20

1. Low barriers to entry / exit 2. Perfect information 3. Incumbent firms will experience "hit and run" competition

Answer 21

The rise in technology has positively affected the contestability in the market through 3 things: 1. Reduced barriers to entry - firms do not need physical space which reduces high sunk cost, cost of labour and experience less government regulation (technical economies of scale made easier and advertising made easier which reduces brand loyalty) 2. Increased pool of new entrants - increased innovation means firms can come up with something brand new and have cheaper cost of production = disrupting the market 3. Improved information - they gain greater information on the costs in the market + communication has improved which means key information discovery of the market is going to be easier

Answer 22

Firm will engage in limit pricing to deter new firms from entering the market This is done by reducing their profit margin (from supernormal profits to normal profits) - this will reduce the incentive for new entrants as they are less attracted by the profits being made Operation will shift from MC = MR to AC = AR - this will reduce the price and increase output

Answer 23

1. Deter new firms from entering the market - by reducing profit margins it makes it less attractive for new entrants as their incentive will fall due to not seeing supernormal profits being made, but rather normal profits 2. Increase preparedness if the competition actually takes place due to lower prices and higher quantity - this will make it more competitive among other firms in the market

Answer 24

1. Allocative efficiency - due to a fall in price, consumer surplus will rise as well as choice and quality due to being more competitive 2. Productive efficiency - due to competition, greater exploitation of economies of scale means that there will be a fall in costs (which may lead to a fall in price = rise in consumer surplus) 3. X efficiency 4. Job creation - increased quantity means the demand of labour will rise (due to derived demand)

Answer 25

1. Length of contestability - if firms use anti competitive strategies then market will not be contestable over time (e.g. engage in predatory pricing, limit pricing and mergers) 2. Role of technology - patents and copyright will decrease contestability - increased information = increased information on consumers = increased first and third degree price discrimination due to better segmentation of distinctive groups = reduce static efficiency = reduce effect of contestability 3. Regulation - this will prevent firms from cutting costs from dangerous areas (e.g. health and safety, environmental standards and product safety) - this will also prevent anti competitive strategies from offering - these will allow static efficiencies to be taking place which will preserve its positive effect on consumers

3.4 - Market structures Flashcards

(50 cards)