The Four Market Structures

Question 1

What are the features of a perfect competition market?

Answer 1

Very many firms (so there is limited market power)
Unrestricted entry
Undifferentiated products- perfect substitutes
Horizontal demand curve

Question 2

What are the features of a monpolisitc competition market?

Answer 2

Many/serveal firms
Unrestricted entry
Products are differentiated - consumer wont always switch provider
Downward sloping relatively elastic demand curve

Question 3

What are the features of a oligopoly market?

Answer 3

A few firms(handful)
Restricted entry
Undifferentiated or differentiated product
Downward sloping relatively inelastic demand curve

Question 4

What are the features of a monopoly market?

Answer 4

One firm
Restricted or blocked entry
Unique product
Downward sloping inelastic curve

Question 5

How does price work in perfect compeition market

Answer 5

Price is dictated by market supply and demand which sets an equilibrium price - prices are fixed and everyone is a price taker

Question 6

What is the output for a perfect competition firm

Answer 6

Profit maximisation occurs where marginal revenue = marginal costs = Price = AR. Output is at this level usuallyu just sell as much as possible

Question 7

What is the formula for profit for a perfect competition firm

Answer 7

Profit = (AR-AC) X Q

Question 8

What are the normal/supernormal profits made for a perfect competition firm

Answer 8

Normal profit is made : (AR-AC) X Q
Supernormal profits are possible but not longterm because it is very easy to enter the market and so they are competed away in the long run

Question 9

What would be the reason for leaving the market because of losses for a perfect competition firm

Answer 9

In the long run, your average costs will be just covered by revenue. If LRAC

Question 10

What are the barriers to entry in a monopoly structure

Answer 10

Economies of Scale
Economies of scope
Product differentiation and brand loyalty
Lower costs for established firms
Control of factors
Legal protection
Mergers
Aggressive tactics

Question 11

Compare monopoly structure to perfect market structure

Answer 11

The monopoly structure has a lower output at a higher price

Question 12

What are the profits and output of a monopoly firm dependent on?

Answer 12

The level of profit is dependent on AC and AR or on Q and P

Firm can choose how much to produce at what price

Question 13

What are the main featurs of monpolistic competition firms to understand

Answer 13

Independent - When the decision of one firm in a market will not have a significant effect on the demand curves of its rivals
Product differentiation - When one firm’s product is sufficiently different from its rivals to allow it to raise the price

Question 14

What is the situation with long run and short run profits in a monopolistic competition market

Answer 14

Short run you can make supernormal profits

But new entrants make these disappear over the long term

Question 15

Compare monopolistic competition market to a perfect competition market

Answer 15

The opportunity cost of product choice in Monopolistic Competition is the price is higher and less quantity is produced

Question 16

What are the limitation to monopolistic competition

Answer 16

Imperfect information/information asymmetries - assumption that people outside the market will recognise scope for profit and join
Difficulty in identifying an industry demand curve
Entry may not be totally free
Indivisibilities- Economies of scope/ economies of scale (certain things have to be at a certain level regardless of how much you want to produce ex: retail store)
Importance of non-price competition

Question 17

Compare monopolistic competition to monopoly market

Answer 17

The market keeps prices down but there are fewer economies of scale and less R and D than Monopoly

Question 18

Explain interdependence and its role in a oligopoly

Answer 18

Interdependence - Each firm will be affected by the decisions of its rivals. Likewise, its decisions will affect its rivals
Rivals are much more important in this market structure

Question 19

Explain idea of collusion and compare it to competition

Answer 19

Often there is a focus by firms in the oligopoly to look at the industry and maximise industry profit as a whole
Colluding means they maximise industry profits
Competing means they get a larger share of industry profits

Question 20

Define collusive oligopoly

Answer 20

Where oligopolists agree (formally or informally) to limit competition between themselves

Question 21

Define cartel

Answer 21

A formula collusive agreement

Question 22

Define quota

Answer 22

Output that a given member of a cartel is allowed to produce or sell

Question 23

What are factors in favour of collusion in an oligopoly

Answer 23

Few firms
Open with each other
Similar cost structure - if one can produce for lower amount collusion wouldn’t work as one firm would have an advantage
Similar products
There is a dominant firm
Significant barriers to entry
Stable market conditions
No government's measures to curb collusion

Question 24

Define tacit collusion and name three main concepts of it

Answer 24

Tacit collusion occurs where firms choose actions that are likely to minimize a response from another firm

1. Dominant firm price leadership
2. Barometric firm price leadership
3. Average cot pricing or benchmark

Question 25

Explain the Dominant firm price leadership form of tacit collusion

Answer 25

Firms within the market are dominant and other firms copy them. This is not a formal method of collusion but is well known

Question 26

Explain the Barometric firm price leadership form of tacit collusion

Answer 26

There is always one firm that moves price first. This collusion means everyone copies that firm

Question 27

Explain the Average cot pricing or benchmark form of tacit collusion

Answer 27

Average cost pricing - Scaling of this sets the price
Price benchmark - Number is agreed across the industry that is fair. Ex: 20% margin on AC is agreed and all prices should be the same sticking to that

Question 28

In a non collusive oligopoly explain the three models that can be used to determine how likely rivals are to retaliate

Answer 28

Cournot - Assume rivals produce a given quantity (fixed production)
Bertrand - Assume rivals set a particular price
Kinked demand curve - Assume rivals follow price decreases but not price increases

Question 29

What are the two assumptions of the kinked demand curve diagram

Answer 29

If the firm raises its price rivals will not

If the firm lowers its price rivals will feel forced to lower theirs too

Question 30

What are the arguments for oligopolies as something in interest of the public

Answer 30

Countervailing power
Supernormal prodits leading to R and D
Greater consumer choice
However there is a risk of extensive collusion which is a downside