Topic 5 - Market Types Flashcards
(29 cards)
What does the spectrum of types of Competition consists of:
Perfect competition - uninfluenced market price
Imperfect competition:
- Monopolistic competition
- Oligopoly
- Duopoly
Monopoly — 1 firm which controls 100% of the market output
What assumptions do we make in a perfectly competitive market?
- Many Buyers and sellers
- Perfect information for both buyers and sellers
- No barriers to entry or exit
- Homogeneous goods (same product is being sold)
- Firms are profit maximisers
What is the definition of a market
A place where economic agents can exchange goods for money
Where is the exact point of profit maximisation in. A market
MC = MR
WHAT are the different types of efficiencies and how are they achieved
- X efficiency: minimise wastage of resources
- allocative efficacy: where AR meets MC
- productive efficiency : minimising wastage of factors of production (LOWEST POINT OF AC curve)
- Dynamic efficiency - reinvesting profits into business
What are the assumptions we make in a Monopoly market
- Profit maximising firm
- High barriers to entry/exit
— patents on products
— copyrights - imperfect information
- One firm which controls the market power :
— Monopoly power : over 25% of market share
— Pure monopoly : one single firm controlling entire market - Firm is price setter
What are examples of barriers to entry
- Economies of scale : must produce at high MES in order to be efficient
- Sunk costs : the costs that the firm will face if it decides to leave the business
- Patents
- Prodcut differentiation
- predatory pricing from incumbants
define the term incumbants
An incumbent firm is an existing firm in the market which already benefits from customer loyalty to that firm.
How do you find the consumer surplus
Area below MR curve but above the price
Howe do you find the producer surplus?
Above the supply curve but below the price
What are the assumptions we make in a monopoolistically competitive market
- many buyers and sellers
- slightly differentiated goods
- low barriers to entry/exit (low costs)
- good information
- Non price competition -
— compete through quality of goods, advertising, branding - Firms are profit maximisers
What allows non price competition
Product differentiation - meaning that each type of sweater for example will have different qualities, branding and advertising
Where is the point of revenue maximisation
MR = 0
Any more marginal revenue will actually start to decrease revenue rather than increase it.
What are contestable markets
— what conditions must there be for a constebale market
Markets in which there is very low or no barriers to entry/exit and therefore entrant firms can come into the market and easily compete with others
THERE ARE NO SUNK COSTS (costs that cannot be recovered after leaving market)
- weak brand loyalty
- Equal access to technology
- Absence of sunk costs
What is predatory pricing and how does it work
Incumbent firms set prices really low (sometimes even at a loss) to gain a large market share which consequently pushes small entrant firms out of businesses due to lack of demand and not being able to set prices as low as the incumbent firm.
Case study of a Contestable market example:
“Hit and Run” firm:
The people express airline : 1981 - 1987
- low cost airline that challenged companies such as American Airlines or united airlines.
- the firm chose profitable routes with very low prices gaining market share very quickly.
- They eventually sold themselves to Continental airlines in ‘87
This was a successful hit and run because it managed to maximise profits in the short term.
What are the assumptions made in an Oligopoly market?
- Few dominant sellers (2 < x < 6)
- assymetric information
- High barriers to entry
- Non homogenous goods
- Non price competition
- Interdependant decision making
Advantages/disadvantages of monopoly markets.
Adv -
— economies of scale allow them to work at the lowest possible Long Run average costs.
— Dynamic efficiency opportunity due to supernormal prof.
Disadvantages -
— Allocative Inefficiency
— Productive inefficiency
Why do prices tend to stay fixed in oligopoly markets
Firms in oligopoly markets are interdependent.
Increasing prices leads to a lose in market share while decreasing prices leads to unnecessary harm to every firm in the market (They would need to drop prices too and lose revenue)
What is the concentration ratio in a market
The combined market share of the top “n” firms in the market
What does the CMA do and why.
CMA controls whether firms are allowed to collude or not. They prevent the instance where colluded firm would gain too much of the market share and therefore reduce the number of substitutes.
What does the Kinked demand diagram show
Shows the impact of interdependance in oligopolistic markets
A small increase of price can lead to a huge loss of demand.
Which loses lots of market share.
On the other hand a larger drop in price has very small increase in demand which therefore decreases profits.
What are the advantages and disadvantages of oligopolies…
Advantages:
- Work at economies of scale which allows for profitability.
- interdependency allows for pricing to be kept high and not dropped (boosts firms profit)
- non price competition leads to firms aiming to better quality of their products to gain market share (brand loyalty is formed)
- high barriers to entry and exit lead to higher profitability for firm
Disadvantages
- high prices for consumers due to few firms and sticky pricing
- reduced choice
What kind of cooperative behaviour is there in the oligopolistic markets
Formal collusion - forms what is known as a cartel
Covert collusion - price fixing relationship between firms
Tacit collusion - implicit understanding between firms whilst no explicit agreement is made. They recognise if nobody participates in price competition is is better for all of them.
