4.1 Competition and market power

Question 1

barrier to entry def

Answer 1

Any obstacle that prevents firms entering a market

Question 2

Legal barriers to entry

Answer 2

patents
licences/permits
redtape
Insurance

Question 3

Patents

Answer 3

if there are lots of patents in a market, it can be difficult to differentiate a product

Question 4

How do licences/permits create barriers to entry

Answer 4

my be needed to operate in a market
expensive to obtain
if all have been given out, cant enter market

Question 5

Redtape

Answer 5

Excessive bureaucracy/standards/regs
-time consuming + expensive

Question 6

Technical barriers to entry (3)

Answer 6

start up costs
sunk costs -advertising, specialist machinery
econs of scale for current firms

Question 7

Strategic barriers to entry

Answer 7

predatory pricing
limit pricing
heavy advertising

Question 8

what is predatory pricing

Answer 8

firm charges very low prices to drive out firms

Question 8

limit pricing

Answer 8

firms operate at break even point so theres no incentuve for new firms to join

Question 9

Brand loyalty

Answer 9

new firms may not be able to compete with loyalty - inelastic goods

Question 10

when is there a threat of entry in the market (4)

Answer 10

low barriers to entry
large no. of potential entrants
good info about market e.g. costs/tech
‘hit and run’ competition

Question 11

hit and run competition

Answer 11

firms enter market, gain supernormal profits and exit market before current firms can react/change price

Question 12

how does technology impact barriers to entry

Answer 12

dont need to be physical store - no sunk costs
don’t need as many workers
advertising is easier –> easier brand loyalty

Question 13

how does tech affect contestability (3)

Answer 13

increased no. of entrants
-more innovation
-cheaper production

Question 14

how does technology affect information of markets

Answer 14

more information accessible easily
-internet
-communication has increased

Question 15

monopoly characteristics (4)

Answer 15

differentiated products
high barriers to entry
profit maximisers
price setter

Question 16

monopoly power

Answer 16

1 firm has market share > 25%

Question 17

why are monopolies not allocatively efficient

Answer 17

price is set higehr than marginal cost
-overcharging consumers - they are paying more than originally willing to
- restricting output

Question 18

why do monopolies not achieve productive efficiency

Answer 18

producing at higher costs than minimum AC