Theme 3: Market Structures

Question 1

What are the 4 factors that affect a market structure?

Answer 1

1) number of buyers & sellers
2) barriers to entry and exit
3) Similarity of product
4) Knowledge

Question 2

What are the 5 market structures?

Answer 2

1) Monopoly
2) Perfect competition
3) Monopolistic competition
4) Oligopoly
5) Monopsony

Question 3

What is the N-firm concentration ratio?

Answer 3

A measurement how much market share the N largest firms in a market have

Question 4

How do you work out the N-firm concentration ratio in 2 steps?

Answer 4

1) work out the largest number of firms in the market
2) add their numbers up together

Question 5

What is a monopoly?

Answer 5

When there’s only one dominant firm in a market.

Question 6

How do economists define a legal monopoly?

Answer 6

When a firm owns over 25% of market share

Question 7

What are the 3 assumptions when modeling a monopoly graph?

Answer 7

1) only one firm
2) they are profit maximisers
3) high barriers to entry

Question 8

How do economists define a pure monopoly?

Answer 8

When a firm owns 100% of market share (all of it)

Question 9

Can you give an example of a monopoly?

Answer 9

Microsoft, who owned 90% of the operating system market.

Question 10

What are the 5 types of barriers to entry?

Answer 10

1) legal barriers
2) sunk costs
3) economies of scale
4) brand loyalty
5) anti-competitive practices

Question 11

What are legal barriers?

Answer 11

they allow firms to legally prevent other firms from stealing their ideas and entering their market.

Question 12

What are the 3 examples of legal barriers?

Answer 12

Patents, trademarks and copyright

Question 13

What are sunk costs?

Answer 13

costs that cannot be recovered (e.g. advertising).

Question 14

How are high sunk costs a barrier to entry?

Answer 14

they deter new firms from entering because firms know that if they fail, they won’t be able to recover any of their sunk costs.

Question 15

What are anti-competitive practices?

Answer 15

Include anything a firm might do to reduce or restrict competition?

Question 16

What is an incumbent firm?

Answer 16

A firm currently in the market

Question 17

How does large economies of scale cause barriers to entry?

Answer 17

Economies of scale mean incumbent firms can keep their costs and prices low, creating a barrier to entry because smaller new firms without economies of scale can’t compete on price.

Question 18

How does brand loyalty increase barriers to entry?

Answer 18

Strong branding from incumbent firms makes it hard for new entrants, with weaker branding, to make any sales.

Question 19

Give an example of anti-competitive practices (hint: type of inorganic growth)

Answer 19

E.g. vertical integration: firms can vertically integrate to take control of scarce resources (like the power grid); and then refuse to let new firms use these scarce resources, stopping them from entering the market.

Question 20

Draw a monopoly diagram

Answer 20

Question 21

What are the 4 types of efficiency?

Answer 21

1) productive
2) allocative
3) dynamic
4) X

Question 22

What is productive efficiency?

Answer 22

When average total cost is at its lowest, where MC = AC

Question 23

What is allocative efficiency?

Answer 23

When welfare is maximized, MC = AR

Question 24

What is X-inefficiency?

Answer 24

when a firm is producing above its average cost curve for a given level of output.

Question 25

Where does dynamic efficiency occur in?

Answer 25

When AR > AC

Question 26

What is the efficiency of a monopoly?

Answer 26

- not productively efficient - not allocatively efficient - possibly Dynamically efficient - not X-efficient It’s can be dynamically efficient

Question 27

What is a natural monopoly?

Answer 27

when it’s naturally most efficient if only one firm is in the market.

Question 28

Give 2 reasons why do natural monopolies exist?

Answer 28

1) high sunk costs 2) huge economies of scale

Question 29

Draw a natural monopoly diagram?

Answer 29

Question 30

Give an example of a natural monopoly having a high sunk cost?

Answer 30

E.g. TFL’ sunk costs have been estimated as high as £129bn - it would completely inefficient for a second firm to waste £129bn to enter the market, too.

Question 31

Draw MC and AC (assuming that MC is constant)

Answer 31

Question 32

What is price discrimination?

Answer 32

when a firm charges different groups of consumer different prices, but for the same good.

Question 33

What are the 3 conditions required for price discrimination?

Answer 33

1) Market Power 2) Information on elasticities 3) Limit Reselling

Question 34

Why must a firm have market power for price discrimination?

Answer 34

it must be able to change their prices.

Question 35

Why must a firm have information on elasticities for price discrimination?

Answer 35

The firm must be able to identify which consumers are elastic and which are inelastic.

Question 36

Why must a firm have limited reselling for price discrimination?

Answer 36

it must be able to limit elastic consumers from selling cheap tickets to inelastic consumers

Question 37

What are the 3 price discrimination diagrams?

Answer 37

1) elastic consumers 2) inelastic consumers 3) overall market

Question 38

What are the 4 features of perfect competition?

Answer 38

1) Many small buyers and sellers 2) No barriers to entry or exit 3) Homogeneous products 4) Perfect Information

Question 39

What are the 2 types of perfect competition diagrams?

Answer 39

1) market diagram 2) firm diagram

Question 40

Draw a perfect competition diagrams

Answer 40

Question 41

Sketch a diagram showing what will happen between the short run and long run, if a firm is making supernormal profit in the short run:

Answer 41

Question 42

Perfectly competitive firms will only make what in the long run?

Answer 42

Normal profit

Question 43

What are the 3 key features of monopolistic competition?

Answer 43

1) Many small buyers and sellers 2) Low barriers to entry or exit 3) Differentiated goods

Question 44

What does differentiated goods mean?

Answer 44

Goods must be similar or slightly different

Question 45

Draw a monopolistic competition diagram in the long run

Answer 45

Question 46

Draw a monopolistic competition diagram in the short run

Answer 46

Question 47

What are the 4 key features of an oligopoly?

Answer 47

1) A few large sellers 2) High barriers 3) Differentiated goods 4) Interdependence

Question 48

What does it mean for an oligopoly to be interdependent?

Answer 48

one firm’s actions will directly affect another firm.

Question 49

Draw a payoff matrix of Coca Cola and Pepsi

Answer 49

Question 50

How can firms avoid price wars?

Answer 50

By both of them agreeing to collude and fix their prices at a high price

Question 51

What is collusion?

Answer 51

When two or more firms agree to limit competition

Question 52

What are the 2 types of collusion?

Answer 52

1) Overt 2) Tacit

Question 53

What is overt collusion?

Answer 53

A formal agreement between firms to collude

Question 54

What is tacit collusion?

Answer 54

An unspoken agreement between firms to collude

Question 55

What will these formal agreements typically be and why?

Answer 55

They would be kept hidden, because the CMA fines companies who are found overtly colluding

Question 56

What type of collusion is considered illegal?

Answer 56

Overt collusion

Question 57

What are the 3 types of price competition

Answer 57

1) price wars 2) predatory pricing 3) limit pricing

Question 58

What are price wars?

Answer 58

when firms try to undercut each other with lower prices to steal the other firms’ consumers.

Question 59

What is predatory pricing?

Answer 59

when a firm aggressively cuts its prices below AVC to force out competitors from the market.

Question 60

What is limit pricing?

Answer 60

when an incumbent firm uses its economies of scale to set a price low enough to limit new firms from entering.

Question 61

What are the 4 types of non-price competition?

Answer 61

1) advertising 2) loyalty cards 3) branding 4) quality

Question 62

What is non-price competition?

Answer 62

When firms compete without changing price

Question 63

What is a competition?

Answer 63

The number of firms competing in a market

Question 64

What are contestable markets?

Answer 64

markets with low barriers to entry and exit.

Question 65

Draw an X-inefficiency diagram

Answer 65

Question 66

What is dynamic efficiency?

Answer 66

how changing technology improves a firm's output potential over time.

Question 67

What is a monopsony?

Answer 67

Where there is only one buyer in the market