market structures Flashcards
(22 cards)
Perfect competition
a theoretical market structure where many firms sell identical products, there are no barriers to entry or exit, and all buyers and sellers have complete information
Allocative efficiency
occurs when a goods price is equal to what consumers want to pay for it
Productive efficiency
ensuring the costs of production are as low as they can be
Dynamic efficiency
the ability to improve efficiency or products over time
x in-efficiency
Poor management practices, such as overstaffing or inefficient processes leading to costs being above AC
Barriers to entry
potential difficulties or expenses a firm might face if it wants to enter a market.
What are the reasons for barriers to entry with examples?
1)incumbent firms actions eg patents/branding/predatory pricing
2)the nature of the industry eg capital intensive/EOS/high sunk costs
3)govt regulation eg taxi licences/planning permissions.
predatory pricing
when a firm sells a good or service at a price below cost with the intention of forcing rival firms out of business and deterring new entrants.
Monopoly
A monopoly in its purest form is when one single business dominates the whole market – it has 100% concentration. The UK Competition and Markets Authority (CMA) describes a working monopoly as any firm with more than 25% of industry sales.
What are the advantages of monopoly?
1)dynamic efficiency
2)EOS
3)international competitiveness
4) cross subsidisation (allocative efficiency in LR)
what are the disadvantages of monopoly?
1)productive and allocative ineffiency (consumer exploitation)
2)no incentive to innovate
3) decreased consumer choice and
Natural monopoly
when one seller in the market is more efficient than having lots of firms competing such as if the industry has high fixed costs or continuous economies of scale
What are the advantages of perfect competition?
1)productive efficiency-inefficacy of price as a tool means that prodcuers focus on reducing cost
2) allocative efficiency and consumer surplus (no consumer exploitation)
What are the disadvantages of perfect competition?
1)dynamically inefficiency
2)productive inefficiency as small firms cannot produce enough output to exploit economies of scale
Price discrimination
When firms charge different prices to different people for the exact same product. It is not due to a diffference in cost of production, rather its a deliberate attempt to reduce consumer surplus
conditions for price discrimination
-seller must have price making power
-firm must be able to distinguish separate groups of customers who have different PEDs
-must be able to prevent seepage (reselling)
first degree price discrimination
where each individual customer is charged the maximum they’d be willing to pay. This turns all the consumer suplus into revenue for the seller
why is first degree price discrimination unlikely?
the cost of gathering information and the difficulty in preventing seepage
second degree price discrimnation
often used in whole sale markets, where lower prices are charged to people who purhcase large quantities. This turns some of the consumer surplus into revenue for the seller
third degree price discrimination
when a firm charges different prices for the same product to different segments of the market eg differnet ages or peak hours
why is price discrimination good for consumers?
1)cross subsidisation
2)consumers with the more elastic ped get a lower price
3)dynamic efficiency
