Market structures! Flashcards
What are the characteristics for perfect competition?
Many firm and no firm has any influence over market ruling price.
There’s no barriers to entry/exit.
The products are homogenous.
The firm is a price taker.
They make normal profits in the long run but can make supernormal profits in the short run.
There’s perfect knowledge.
Firms are productively and allocatively efficient, making them x-efficient.
There’s a perfectly elastic demand / AR curve.
What are the characteristics of monopolistic competition?
Many suppliers, each with an insignificant market share.
Each firm has SLIGHT PRICE SETTING POWER.
Products are SLIGHTLY DIFFERENTIATED.
Consumers have perfect information on prices.
All firms have equal access to resources.
No barriers to entry/exit in the long run.
No externalities in production or consumption.
What are the characteristics of an oligopoly?
Dominated by a few firms with a high concentration ratio.
The firms have highly branded, differentiated products, with high customer loyalty.
They can make supernormal profits in the short run and in the long run.
They’re productively and allocatively inefficient, making them x-inefficient.
They’re a price maker.
They have PRICE AND NON-PRICE COMPETITION.
There’s INTERDEPENDENCE AND UNCERTAINTY.
What’s game theory?
Game theory suggests that the best option is the second best option.
What’s collusion?
Where firms recognise their interdependence and uncertainty and come together, rather than compete and undertake profit maximisation.
What’s are examples of collusion?
OPEC, independent schools, energy companies.
What conditions are needed for collusion to occur?
There must be an imperfect market, and firms must have control over supply. The product must be inelastic in demand.
What’s tacit collusion?
Where you get price leadership e.g, Tesco’s.
What’s overt collusion?
Where firms undertake price fixing (illegal). There are two types of overt collusion: horizontal and vertical.
What are the pros of collusion for producers?
Profit maximisation.
External growth.
Avoiding PAP.
What are the cons of collusion for producers?
Attention from the CMA.
Attention from governments.
Potential for new entrants in the market.
What are the pros of collusion for consumers?
Guaranteed supply.
R+D e.g, covid vaccines.
What are the cons of collusion for consumers?
High prices.
Less choice.
Poor quality.
Why are collusion agreements inherently unstable?
New entrants e.g, South American coffee and Vietnam.
Economic downturns and excess demand and supply can break collusion down.
The CMA could intervene.
Game theory (British Airways vs Virgin Airlines).
What are the types of price competition?
Price wars.
Predatory pricing.
Limit pricing.
What are the types of non-price competition?
Advertising.
Loyalty cards.
Branding.
Quality.
Customer service.
Product development.
What’s price discrimination?
Where different consumers are charged a different price which doesn’t account for the cost of production. It involves extracting consumer surplus and turning that into revenue and profit.
What are the conditions for price discrimination?
The firm must have some price setting power, operating in an imperfect market. There must be at least two different consumer groups with different PED’s. The firm must have perfect information and perfectly segmented customers. The firm must prevent customers in one group from selling to those in the other.
What’s first degree price discrimination?
There’s perfect segmentation of the market by the supplier. Every customer is charged their ‘willingness to pay’, meaning there’s no consumer surplus in the transaction. The monopolists demand curve becomes the marginal revenue curve. More goods are sold in total but the price is higher to some customers. Total output is higher than profit maximisation.
What’s second degree price discrimination?
Occurs in an imperfect market. There’s different types of PED, peak and off peak. An off peak customer will be elastic.
What’s third degree price discrimination?
Different consumers are charged different prices of the same product at the same time but they have different characteristics e.g, nightclubs, cinemas.
What are the pros of price discrimination for consumers?
Can bring low income consumers into the marketplace.
Research and development.
Higher quality.
Cross subsidisation.
What are the cons of price discrimination for consumers?
High prices.
Poor quality.
Discrimination.
Price fixing.
What are pros of price discrimination for producers?
Profit maximisation.
Avoiding PAP.
