Perfect competition, imperfectly competitive markets and monopoly Flashcards
(41 cards)
What are the factors affecting market structures
- Number of firms
- Barriers to entry
- Economies of scale
- Capital investment
- Sunk costs
- Level of differentiation
- Price takers/makers
- Information availability
What is a competitive market
Where firms strive to outdo rival and gain competitive advantage (price, marketing, reputation, brand loyalty, customer services)
What is imperfect competition
A market positioned between perfect competition and monopoly
What is monopoly power
The power of firms to act as price makers rather than price takers
Describe the objectives of firms
- Profit max (MC=MR) = produce while additional revenue is greater than additional cost as would lost money otherwise
- Revenue max (MR=0) = produce until no additional revenue is made from extra unit
- Sales max (AC=AR) = produce while AC is greater than AR for max units financially feasible
- Survival = hyper competitive markets, short run objectives, focus on awareness and brand presence
- Public sector = social welfare, meet demand, S=D
- CSR = people, environment, morals
Evaluate profit maximisation
Pros
- Potential to reinvest
- Greater shareholder dividends
- Incentivises reduced costs (less waste)
- Reward/incentive
Cons
- Subject to scrutiny
- May harm some stakeholders (suppliers)
Evaluate revenue maximisation
Pros
- Economies of scale
- Increase market share
Cons
- Principle agent problem
- Unsustainable
- Predatory pricing
Evaluate sales maximisation
Pros
- More demand
- Increase market share
- Economies of scale
- Push out competition
- Flood the market
Cons
- Principle agent problem
- Limit pricing
- Potential oversaturation
- Reduce competition (bad for consumers)
What are the characteristics of a perfectly competitive market
- Lots of buyers and sellers
- Low sunk costs
- Price takers
- Homogenous products
- No barriers to entry
- Impossible in real world markets
Explain perfect competition in the SR and LR
- SR = achieve supernormal profit
- LR = supernormal profits are competed away as more firms enter the market
What are the characteristics of a monopolistically competitive market
- Lots of firms
- Low barriers
- Similar products
- Degree of monopoly power
- Profit maximising
- Good info
- Price elastic demand
- Supernormal profits in the SR, competed away in LR due to competition
Explain the efficiency of monopolistically competitive firms
- Relatively inefficient in SR+LR (PCF = SR eff, MF = LR eff)
- All ineff = ↓£ than MF, ↑ diff than PCF
- Prod ineff = ↓ EoS than MF, ↑ EoS than PCF
- Dyn eff/ineff = ↓ profit than MF but more likely to reinvest due to comp
- X eff = still face comp pressures
What are the characteristics of oligopolies
- Few dominant firms
- Interdependence
- High barriers to entry
- High differentiation
- Very competitive
What kind of industries are oligopolies
- Car brands
- Supermarkets
- Petrol stations
- Pharmaceuticals
- Coffee chains
- News outlets
- Airlines
Explain price leadership
Dominant firm makes decision and other firms follow (creates price stability)
Evaluate oligopolies
Pros
- Drives R&D
- Increased competitive pressure
- Economies of scale
Cons
- Less consumer choice due to high barriers
- Collusion (acts against consumer interests)
- Abuse behavioural economics theory
- Allocatively and productively inefficient
- Lost social welfare
Explain concentration ratios
- Proportion of market share held by the largest firms
- X-firm ratio = Y%
- X firms: Y share
Explain the kinked demand curve
- Price stability/rigidity in oligopolies caused by interdependence of firms
- Assumed aversion to price wars
- Respond to ↓£ to remain competitive but not ↑£
- Shift in MC not effect £ due to comp pressure
What are collusion and cartels
- Collusion = firms act together against the interests of consumers to maximise joint profit
- Tacit = suggestive
- Explicit = agreed
- Cartels = formal illegal agreements
Why do firms have incentive to cheat on collusive agreements and practices
Cartels and collusion to raise prices increases joint profits but undercutting cartel prices can massively boost individual margins
- Pros = hard to prove, cartels are illegal and so can’t take legal action to enforce, can rat out cartel
- Cons = cartels are dangerous to mess with
Explain game theory
- Decisions based on predictions of competitors actions
- Prisoners dilemma
- Dominant strategy = companies make same choice regardless of each others actions
- Nash equilibrium = firms pick the same choice even if not best for either
What are the characteristics of monopoly power
- Price maker
- Profit max
- High barriers to entry
- Economies of scale
- Low consumer choice
- Low substitutes
- Statically inefficient
- Dynamically efficient
- Supernormal profit in LR + SR
What are some barriers to entry/exit
- Economies of scale
- Geographic factors
- Brand loyalty
- High capital investment
- Limit pricing (stop entrants)
- Predatory pricing (force competitors out)
- Vertical integration
- Patents/knowledge/ expertise
What are the 5 main objectives of monopoly firms
- Profit max (MR=MC)
- Productive eff (MC=AC)
- Allocative eff (MC=AR)
- Revenue max (MC=0)
- Sales max (AC=AR)
