Market structures

Question 1

What are the characteristics of monopolistic competition?

Answer 1

Many buyers and sellers (small firms)
Slightly differentiated goods
Low barriers to entry and exit
Price makers
Non-prive competition

Question 2

Short run position of incumbent firms diagrammatically in monopolistic comp

Answer 2

Question 3

Long run position of incumbent firms diagrammatically in monopolistic comp

Answer 3

Question 4

Efficiency performance of a monopolistic firm in long run

Answer 4

Allocative inefficiency
Productively inefficient
Dynamically inefficient

Question 5

Why might monopolistic firms actually be dynamically efficient?

Answer 5

Firms re-invest short run supernormal profit or long run normal profit into business to stay ahead of rivals (non price comp that exists)

Question 6

Is allocative inefficiency in monopolistic firms really that bad?

Answer 6

It seems not when compared to other markets like monopolies. Monopolistic firms have less price making ability so charge lower prices than those charged by monopolies so exploit consumers less. Product quality and service better.

Question 7

Characteristics of a Monopoly market

Answer 7

One dominant firm in the market
Goods are differentiated
High barriers to entry and exit
Imperfect knowledge of market conditions
Firms are profit maximisers

Question 8

Define pure monopoly

Answer 8

when a firm has 100% share of the market

Question 9

Define a legal monopoly (monopoly power)

Answer 9

A firm has 25%+ market share in the market

Question 10

What’s an example of a firm in the UK with huge market power

Answer 10

Durex 85% market share of the condom market

Question 11

Monopoly diagram

Answer 11

Question 12

Dead weight welfare loss of consumer surplus and producer surplus diagram for a monopoly

Answer 12

Question 13

Societies welfare surplus at competitive outcomes

Answer 13

Question 14

Draw an evaluative diagram to show why monopolies may actually be better than competitive outcomes

Answer 14

Question 15

Why may monopoly outcomes be better than competitive outcomes ?

Answer 15

Larger firms, can exploit greater economies of scale than smaller competitive firms.
Cost of production lower for monopolies compared to competitive firms
Lower prices charged by monopolies
So monopolies may actually promote outcomes that benefit society.

Question 16

What are the characteristics of an Oligopoly?

Answer 16

Few large dominant firms
High barriers to entry and exit
Differentiated goods
Interdependence
Profit maximisers
Non price competition

Question 17

List 4 types of non price competition

Answer 17

Advertising
Loyalty cards
Branding
Quality of good and service

Question 18

What are collusive oligopolies?

Answer 18

When firms agree and collude to set the price

Question 19

What are non competitive Oligopolies?

Answer 19

When firms do not collude and instead compete with rivals using price competition

Question 20

Real World Example of Oligopolies using price competition

Answer 20

In 1990s, Asda and Tescos price war on baked beans prices
Dropped prices viciously to £0.03 per tin

Question 21

How do economists define an oligopoly?

Answer 21

Few dominant firms in a market with a high concentration ratio.
Max number of firms in the market is 7 with combined market share of more than 70%

Question 22

Why might firms collude?

Answer 22

To avoid price wars which negatively impact the profits made by firms

Question 23

Define collusion

Answer 23

When two or more firms agree to limit competition

Question 24

Define overt collusion

Answer 24

When firms make a formal agreement on setting price

Question 25

Define Tacit collusion

Answer 25

When there is an unspoken agreement between firms. Occurs when there is price leadership

Question 26

What is price leadership

Answer 26

there is a dominant firm in a market and other firms follow the actions of that firm

Question 27

Real world example of overt collusion

Answer 27

Airline companies, British Airways and Virgin Atlantic overtly colluded to set high ticket prices

Question 28

how much were British Airways fined for colluding

Answer 28

£250 million

Question 29

List 3 types of price competitive strategies

Answer 29

Price Wars Predatory pricing Limit pricing

Question 30

What is limit pricing

Answer 30

Firms set their prices low enough to stop other firms from joining the market

Question 31

What is predatory pricing

Answer 31

When firm ferociously drops their prices below its AVC below its competitors. Short run loss Long run steal consumers, pushing rivals out of the market and gain market share

Question 32

What is a price war

Answer 32

When firms undercut each other with lower prices to try steal consumers and gain more market share

Question 33

What is a cartel

Answer 33

A collusive oligopoly is considered to be a cartel as firms collude together to set manipulate prices

Question 34

What are some of the performance outcomes of cartels

Answer 34

Allocative inefficiency Productive inefficiency

Question 35

Diagram of comparison between cartel and competitive outcomes

Answer 35

Question 36

Could cartels be considered a market failure??

Answer 36

Yes. Quantity in the market is restricted, lower than quantity at competitive outputs, moving away from allocative efficiency outcomes. This indicted a misallocation of resources, allocative inefficiency and a welfare loss to the rest of society

Question 37

Why are oligopolies productively inefficient?

Answer 37

Don't produce at the lowest point on the AC curve, therefore voluntarily forgoing economies of scale. Output could be increased further with lower average costs, but as this does not correspond to profit max then they instead charge higher prices and restrict output , so productive inefficiency prevails.

Question 38

Diagram showing interdependence and price rigidity of an oligopoly

Answer 38

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Question 39

What is cheating

Answer 39

When a colluding firm, breaks the collusion agreement, slashing its prices to try undercut the other firm and gain the other firms consumers

Question 40

What are 2 reasons why cheating in collusive agreements won't work

Answer 40

Consumer loyalty Consumer inertia

Question 41

What is consumer inertia

Answer 41

Concerned with behavioural economics Consumers have a tendency to choose the same products from the same firm due laziness or habitual behaviour so consumers unlikely to switch suppliers

Question 42

What is a natural monopoly

Answer 42

A special market structure where a single firm can produce at lower costs to all other firms. Making logical sense for this firm to be the sole provider of specific good due to economies of scale

Question 43

Do governments regulate natural monopolies

Answer 43

Singular supplier in the market and therefore potential for monopolistic abuse in natural monopolies, there is therefore a rationale for regulation to protect public interest

Question 44

What do the economies of scale mean for a natural monopoly

Answer 44

The internal economies of scale available to the largest firms mean that there is a tendency for one business to dominate the market in the long run

Question 45

Natural monopoly diagram, with labelled regulation and subsidies given to firms

Answer 45

Question 46

Why is there a rationale for just one firms to be the sole supplier in a natural monopoly?

Answer 46

Competition is undesirable because it will result in a wasteful duplication of resources

Question 47

Cons of monopoly

Answer 47

Allocatively inefficient Productively inefficient X-inefficient

Question 48

Pros of monopoly

Answer 48

Dynamically efficient Exploit large economies of scale - however risk of diseconomies of scale

Question 49

What is meant by being X-inefficient?

Answer 49

Firms become complacent and lazy Excess waste to creep in (cost in excess to AC) Consumers suffer from high prices Minimising waste can be time consuming and sometimes against the objectives of managers as it may require changing the whole system of work which could be costly

Question 50

Evaluation points for monopoly

Answer 50

No guarantee profits from dynamic efficiency will be used to reinvest Profit maximisation is not the objective of all firms Should be regulated

Question 51

What is a monopsony product market

Answer 51

One single dominant buyer with price making power exists Drives down prices of suppliers High barriers to entry and exit

Question 52

Impact of monopsony on consumers

Answer 52

+ Benefit from low prices However no guarantee + Affordability of potential necessity goods increases, improving equity - However could suffer from lower quantity - Consequently excess demand and allocative inefficiency

Question 53

Why do monopsonists needs to be careful

Answer 53

Careful not to abuse their market power too much otherwise they run the risk of competition authorities investigating their business which could ruin their reputation and objectives being achieved.