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Theme 3 > 4. Market Structure > Flashcards

4. Market Structure Flashcards

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1
Q

What is efficiency

A

Used to judge how well a market allocated resources, and the relationship between scarce inputs and outputs

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2
Q

What are the types of efficiency

A

Allocative, productive, x and dynamic

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3
Q

What is allocative efficiency

A

When resources are used to produce what consumers want and value most highly, social welfare is maximised. P=MC

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4
Q

What is productive efficiency

A

Products are produced at the lowest average cost so the fewest resources are used to produce each product.
Production at lowest point of AC

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5
Q

Dynamic efficiency

A

Resources are allocated efficiently over time. Investment and bringing new products and production techniques into the firm. Supernormal profit is required.

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6
Q

What is X-inefficiency

A

Failing to minimise average cost at a given level of output.not producing on the ac curve. (very similar to productive efficiency)

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7
Q

What is an example of perfect completion

A

Agriculture

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8
Q

What are the characteristics of perfect comp

A

1)many buyers and sellers
2)freedom of entry + exit
3)perfect knowledge
4)products are homogenous
5)no price setting power

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9
Q

Why do firms only make normal profit in the long run of perfect comp

A

When snp is being made in the sr, firms will join the market which increases supply and lowers price for normal profit

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10
Q

Perfect comp efficiency

A

-productively efficient
-allocatively efficient
-static efficiency (not dynamic due to not enough research or development)
-no economies of scale

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11
Q

What is monopolistic completion

A

It is between the two extremes of perfect comp and monopoly

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12
Q

Examples of monopolistic comp

A

Hair dressers, estate agents, restaurants

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13
Q

Monopolistic comp characteristics

A

-large number of buyers and sellers
-no barriers to entry or exit
-normal profit in the lr
-non-homogenous goods (some price setting power)

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14
Q

Why does monopolistic comp have snp in the sr

A

Due to the differentiated products allowing them to make snp

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15
Q

Monopolistic comp efficiency

A

-non allocatively efficient
-non productively efficient
-likely dynamically efficient (different products let’s then have advantage)

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16
Q

What is an oligopoly

A

When a few firms dominate the industry and hold majority market share

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17
Q

What are the characteristics of an oligopoly

A

-a few firms dominate
-products are differentiated
-high concentration ratio
-firms are interdependent
-barriers to entry

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18
Q

What does the kinked demand curve show

A

If a firm rises prices, they lose their competitiveness. If they drop prices, other firms will follow to stay competitive. This is why I’m oligopolies price usually stays stable

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19
Q

What is collusive and non collusive behaviour

A

-working together to maximise profits
-collusion reduces uncertainty firms face and increases security
-however it is illegal and risky
-firms with strong business models won’t collude

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20
Q

Where does collusion work best

A

-when firms are well know with eachother
-where costs and production methods are not secret
-where products are similar
-when there is a dominant firm for others to follow
-where there are high barriers
-fewer firms

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21
Q

How may firms collude

A

Prices, market share or advertising expenditure

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22
Q

What is overt collusion

A

Firms come to a formal agreement

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23
Q

What is tacit collusion

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A

No formal agreement to collude

24
Q

What is a cartel

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A

A formal collusive agreement where a group of firms who enter an agreement mutually set prices

25
What two ways can cartels operate
1) Agree on a price and compete with non-price factors 2) agree to divide up the market
26
Cons of cartels
-no firm wants their price/output at a level they would not initially choose -constant temptation to break the cartel -the kore successful cartels are more likely to be broken as no firm wants to be the last one left
27
What is game theory
An insight into interdependent decision making. It explore the reactions of one player to the changes in strategy by another player
28
Maximin policy
Firms working out the strategy where the worst possible outcome is least bad
29
Maximax strategy
Firms working out the policy with the best possible outcome
30
What is the dominant strategy
If the maximax and maximin strategies have the same solution. (This is very rare)
31
What is the best strategy for a firm
It depends on what the other firm does
32
How does game theory demonstrate why firms in oligopoly have stable prices
Raising prices is a maximax strategy however may lead to losing money depending on the other firm. The safest thing to do is go with the maximin strategy and keep prices the same as money won’t be lost.
33
Types of price competition
Price wars, predatory pricing and limit pricing
34
What is price wars
Lowering prices lower than competition
35
What is predatory pricing
Setting prices low enough to drive firms out of the market (illegal)
36
What is limit pricing
Setting prices low enough to discourage new entrants. Firm must be able to make normal profit
37
Types of non-price competition
Advertising Loyalty cards Branding Quality Customer service Product development
38
What is a monopoly
A market with one dominant firm. >25% marker share
39
What are monopoly characteristics
Profit maximise Perfect market knowledge High barriers to entry Economies of scale
40
Third degree price discrimination
Monopolists charge different prices to different people for the same good or service
41
Where does price discrimination occur
Different times of day (peak and off peak) Different places (city vs town) Different incomes (elderly discounts)
42
What are the conditions for price discrimination
-Firm must be able to clearly separate the market into groups of buyers -those buyers must have different elasticities of demand -must be able to control supply
43
Pros of price discrimination
-Firms can increase profit -Those in the elastic market pay lower prices -economies of scale -dynamic efficiency
44
Cons of price discrimination
-Increased inequality -Loss of consumer surplus -anti-competitive pricing
45
What is a natural monopoly
A monopoly which occurs naturally. There is almost no competition as fixed costs and barriers are so high it is pointless to compete and will only raise AC.
46
Pros of natural monopolies
Large profits Dynamically efficient Build up profit reserves Compete with abroad companies Higher wages due to inefficiencies Large range of goods
47
Cons of natural monopolies
Firms can become complacent Few workers due to less LR output Possible higher prices Possible low quality
48
what is a monopsony
Where there is only one buyer in the market
49
What is an example of a natural monopoly
Rail industry, Royal Mail
50
What are the characteristics of a monopsony
Same as a monoploy
51
What is an example of a monopsony
The NHS
52
What is an example of a contestable market
Hotels, fast food
53
Characteristics of contestable markets
Perfect knowledge Freedom of entry Relatively low sunk costs Best available tech Low product loyalty SR profit maximisation Should be productively and allocatively efficient
54
Types of barriers to entry
Legal barriers Marketing barriers Pricing decisions Startup costs
55
Why should a Natural monopoly have one firm
-huge fixed costs -enormous potential for economies of scale -rational for one form to supply the market (competition is undesirable) -competition would result in wasteful duplication of resources and non exploitation of full economies of scale
56
why should natural monopolies be heavily regulated
they often provide the good or service for a necessity. this means that without regulation, the firm will profit maximise and consumers will be paying huge prices at an allocatively inefficient level. regulation at AR=MC will mean the firm is allocatively efficient with a low price and can be subsidised to make normal profit
57
why are natural monopolies likely state run
as there is limited profit potential due to high levels of regulation

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