market structures Flashcards
(24 cards)
what do the CMA control?
-monopolies
-restrictive trade practices
-mergers/takeovers
what the features of market structures?
-number of firms
-product differentiation
-ease of entry/barriers to entry
-extent to which knowledge/information is perfect
-influence of individual firms/suppliers on price
features of perfect competition
-many small firms
-homogenous goods
-all firms are price takers
-perfect knowledge
-freedom of entry and exit
-all factors of production are variable
what are the features of monopolistic competition?
-large numbers of buyers and sellers; all act independently; low concentration ratio
-in the LR, low/no barriers to entry
-firms produce differentiated/non homogeneous goods (competition is strong, many substitutes)
-producers have some control over price
-information is widely spread but not perfect
-in the SR, barriers are high (start up costs: technology -> trials/app development, R&D)
what are the features of oligopoly?
-few large firms
-firms must be interdependent
-high barriers to entry
-non price competition(due to sticky prices/price rigidity)
what are the features of a monopoly?
-only one firm
-complete barriers to entry
-firm is a price maker
why can’t a perfectly competitive firm earn supernormal profit?
-firm makes supernormal profit through lowering AC or innovation
-any supernormal profit means other firms are incentivised to enter (perfect knowledge)
-no barriers to entry
-D moves down to D1, due to a shift in supply (normal profit)
-creates a new market price
-firm is a price taker so it stays in the market
-at normal profit, no incentive to enter the market
why is demand perfectly elastic in a perfectly competitive firm?
-no demand at another price
-addition to the revenue is just another P
why does a monopolistically competitive firm make supernormal profits in the SR?
-the firm has some market power from product differentiation
(branding, quality)
-gives firm some price setting ability
-we assume that all firms are SR profit maximisers
-AR > AC so SP is being earned
-in the SR, other firms may not offer close substitutes
-so firms can raise price & face less competition
-supernormal profit can be earned temporarily
why does the demand curve slope downwards in a monopolistically competitive firm?
-product differentiation means there is less price sensitivity
(PED is inelastic)
-so when price is raised, firm can still retain consumers
-consumers have brand loyalty so they are less likely to switch to substitutes
(because substitutes aren’t perfect)
why does a monopolistically competitive firm earn normal profits in the LR?
-information widely spread
-firms enter market and compete so supernormal profit is eroded away
what is collusion?
when firms cooperate in their pricing, marketing, R&D and/or output policies
at prices above P…?
-firms face an elastic demand curve
-consumers will go to other firms (substitutes)
-revenues would fall
at prices below P…?
-firms face an inelastic demand curve
-assuming competitors will lower their prices too (quantity demanded will increases a bit)
-revenues will fall
what are the features of contestable markets?
-number of firms
-freedom of entry/exit
-firms compete with each other
-firms may produce homogeneous goods or branded goods
-perfect knowledge in the industry
what is interdependence?
when the actions of one firm will have an effect on the sales and revenue of other large firms in the market
what are the types of barriers to entry?
-natural (start up costs): nature of the good (oil extraction)
-artificial: created by the government
-patents: prevents someone from copying a good or process
-product differentiation: already created a good that meet all the needs of consumers
what is x-inefficiency?
aka organisational slack: when a firm lacks the incentive to control costs
what are the reasons for x-inefficiency?
-wastage
-bonuses/expenses (CEO’s)
where does the price come from in a perfectly competitive firm?
price comes from the market price
what is the concentration ratio?
a ratio that indicates the total market share of a number of leading firms in a market
what are sticky prices/price rigidity?
prices that are unlikely to change
(otherwise revenue falls)
what does interdependence create?
-creates uncertainty in the actions of other firms
-unsure how other firms will respond
(if one firm redesigns, other may use new technology)
