4.1: Competition And Market Power Flashcards
(27 cards)
List the 4 types of market structures
Monopoly
Oligopoly
Perfect competition
Imperfect competition
What is the main goal of a monopoly
Profit maximisation
Do monopolies face high or low barriers to entry
High barriers to entry
How much of the market share must a firm have in order to gain monopoly power
25%
How do economies of scale help monopolies maintain their market share
It gives incumbents a cost advantage, so they can offer consumers lower prices, thus deterring new entrants
How does limit pricing work
Firms will offer their goods at prices below the production costs, so new entrants cannot enter the market & gain a profit
How does an oligopoly differ from a monopoly based on the number of firms
A monopoly usually has 1 firm in the market, whereas an oligopoly has more than 1
What does it mean if firms are interdependent
The actions of one affect the actions of all others
How high are barriers to entry in an imperfectly competitive market
Low barriers to entry
Do firms have market power in imperfectly competitive markets
Firms have relatively low market power in these markets
Are firms price makers or takers in perfect competition
Price takers
Is there a degree of product differentiation in perfect competition
No products are homogenous
What is the main objective of perfectly competitive firms
Short-run profit maximisers
What happens to market saturation as firms start to make more profit in perfect competition
New entrants start joining the market due to the new profit motive, thus making the market more saturated
Why is this supernormal profit only in the short run
New entrants will join the market, attracted by the extra profit, thus shifting supply outwards and reducing that supernormal profit
Are there any economies of scale in perfectly competitive markets
No
Describe price skimming
This is when a new, unique product enters the market, so the price of it is set high before new entrants create their own versions of the product
Describe price penetration
This is when goods are initially given a low price in order to attract consumers & boost customer loyalty
What price is a good with a high PED most likely to have
A low price, because qty demanded is more sensitive to price changes
What is a contestable market
These are markets that face actual and potential competition
What is productive efficiency
This is when firms operate on the lowest point of their average cost curve
What is hit- and - run competition
This occurs when firms enter the market, take up the supermodel profits, and then exit
Why are firms in contestable markets constantly innovating
This is so they don’t lost market share or profit with the arrival of new firms into the market
How does low barriers to entry affect contestability
Low barriers to entry increase contestability
