Market structures Flashcards
(33 cards)
What are the key characteristics of perfect competition?
- industry is made up of a large number of small firms
- firms are producing exactly the same products (no differentiation; ease of substitution)
- there are no barriers to enter or exit the industry (cheap..)
- one firm can´t change the supply curve of the industry
- demand curve perfectly elastic, because the firms are price takers
- producers and cosnumers have the full knowledge
What are examples of industries with something close to perfect competition?
Farming/ Agriculture (wheat market in the European Union)
Gas Station
Compare identical products e.g. on ebay
Why is perfect competition only a theoretical model?
- assumed that there are no barriers to enter nor to exit the industry
–> In the real world, costs need to be considered - its difficult and unlikely that produers as well as consumers have the perfect/full knowledge about the product
How much market power do firms have in perfect competition?
Firms have no market power in a perfect competition.
- they are price takers, so they need to sell at whatever price is set in the industry
- all firms have nearly the same market share (no brand names, aren´t trying to sell more through ads)
Why was the theory of monopolistic competition created?
Before, there were only two extreme theories, perfect competition and monopolies. Chamberlaine wanted a theory that could be found between theses two extremes. A model where there are many competing firms (each firm has a small market share). Firms are price makers (set their selling price).
What are the key characteristics of monopolistic competition?
- many competing firms (non price factors are important e.g. quality, reputation)
- producing slightly different products
- the actions of one firm has no effect on other firms in the industry (all firms are relatively small)
- no barriers to enter or exit the industry
- imperfect knowledge
- some degree of market power (influence price by differentiation)
What distinguishes (sets apart) monopolistic competition from perfect competition?
–> product differentiation
A good or service is in some way different to another (packaging, brand name, color..)
How elastic is demand under monopolistic competition?
Highly elastic because consumers will change from one sticky note firm to another. Its solely dependend on the lowest price.
How much market power is there in monopolistic competition?
Firms have little market power, because they are small in comparison to the size of the industry. But they have some market power since they are price makers and can set their own prices due to product differntiation.
What are some examples of a monopolistic competition?
- All kinds of services (nail salon, hair salon..)
- Bakeries
- Restaurants (taste, quality, location, clear differentiation, easy to enter and leave)
- Clothes (jackets, shoes)
What is price discimination?
When two differnt prices are charged for the same product.
What is first degree price discrimination?
- company charges the maximum possible price for each unit consumed based on their assumption of the maximum price that each consumer will pay
Example: Second-Hand Cars in the United States
What is second degree price discrimination?
- companies essentially offer different prices based on the quantities purchased (e.g. volume discount)
Example: Grocery stores, buy two and get one free actions
What is third degree price discrimination?
- companies charge different prices to different consumer groups (e.g., one price for seniors, another price for children, etc.)
Example: Movie theatres, fun parks
What are the characteristics of a monopoly?
- only one firm producing the product, so that one firm is the industry (sole supplier of that good/service)
- businesses have no real competitors
- huge barriers to entry the industry
- may make abnormal profits in the long run
- no close substitutes
- price setters and not price takers
What are economies of scale?
When firms experince lower long run average costs as they grow in size. For example: buying economies (discounts), selling economies (transportation)
What is the market concentration ratio?
The combined percentage of total industry output accounted for by the largest producers in the industry.
Top five concentration ratio
What percentage of sales do the 5 largest firms have?
Calculating:
Industry makes 100 billion USD per year
Firms A,B,C,D,E - make together 95%
Rest of the firms make 5%
–> Oligopolies because a small number of firms control most of the market
Who cares about the market concentration ratio?
- consumers because they have less selection
- firms because they can set the prices if they belong to the top producers
What does the government do when there is a high concentration ratio?
When the government notices that there is to much concentration, they want the companies to split up into smaller companies. The government might be concerned that the price is too high, so they are probably going to set a price ceiling.
An industry where the government might step in if the concentration ratio is to high?
They might intervene if the prices are to high in the health care sector because everyone should have access to health care.
Advantages of perfect competition
- Low barriers to enter/exit
- Customer focus
- companies compete by lowering prices to be profitable (strive to omptimize costs and reduce waste)
Disadvantages of perfect competition
- usually exists only in theory
- Lack of innovation (companies offerings are almost identical)
- Break-even point of businesses i less than 0 (lower profits)
- High competition (customers have many choises)
Benefits of monopolistic competition
- relatively few barriers
- broad differntiation (great deal of utility, diversity and choice)
- markets are more efficient than in real monopolies
