Market structure

Question 1

Monopolist

Answer 1

The sole supplier of an industry’s product; the only potential supplier.
Protected by some form of barrier to entry.
Firm is a price maker.
Higher prices/less output

Question 2

A natural monopoly

Answer 2

Firm enjoys substantial economies of scale relative to market demand.
Largest firm always enjoys cost leadership

Question 3

Discriminating monopoly

Answer 3

When a monopolist supplies two separate groups of customers with differing elasticities of demand e.g. airlines with business travellers and tourists.
Monopolist may charge higher prices for the businessmen.

Question 4

Perfect competition

Answer 4

Lots of competitors.
Goods are homogenous.
Entry/exit is easy (LR)
Firms are price takers

Question 5

Minimum efficient scale

Answer 5

The output at which a firm’s LRAC curve stops falling

Question 6

Monopolistic competition

Answer 6

Many firms.
No barriers to entry.
Product differentiation.

Question 7

Oligopoly

Answer 7

Has a few sellers.
May be characterised by collusion or non-co-operation

Question 8

Collusion

Answer 8

Explicit/implicit agreement between existing firms to avoid/limit competition

Question 9

Cartel

Answer 9

Situation in which formal agreements between firms are legally permitted.

Question 10

The Prisoner’s dilemma

Answer 10

Each firm has a dominant strategy to produce high, so they make 1 unit of profit each.
Both would be better off producing low, as long as they agree to both produce low.
This is where collusion can be beneficial, but can also bring temptation to cheat.

Question 11

Contestable markets

Answer 11

Characterised by free entry and exit.
No sunk costs
Allows hit-and-run entry.