Week 6 Lecture 1 Flashcards
(16 cards)
What does the concept of competitive markets fail to explain?
The concept of competitive markets fails to explain:
- Why the number of firms differs across industries
- Why firms in different industries have different sizes
- Why profitability differs across industries
Do product characteristics differ across markets and what are the two categories?
Product characteristics differ across markets: homogenous and heterogenous
What are the other costly activities that firms are involved in not related to production?
Firms are involved in other costly activities not related to production such as:
- Advertising, product differentiation, R&D and technological and product innovations
What does the market conduct of firms depend on?
The market conduct of firms is strategic and depends on the actions taken by buyers, rivals, suppliers and the government
Do governments regulate the conduct of firms?
Governments control and regulate the conduct of firms in some industries
What are the four different market structures?
1- Perfect competition
2- Monopolistic competition
3- Oligopoly
4- Monopoly
State the features of the perfect competition market structure
- Large number of identical firms
- No barriers to entry
- Homogenous products
- Zero profit in the long run
State the features of the monopolistic competition market structure
- There are many firms
- There are small/moderate barriers to entry
- Products are highly differentiated
- There is zero profits in the long run
State the features of the oligopoly market structure
- There are a few firms
- There are high barriers to entry
- Products are homogenous/heterogenous
- There are positive long run profits
State the features of the monopoly market structure
- There is one firm in the market
- Impassable barriers to entry
- There is absolute product differentiation
- There is huge long run profits
What is the SCP paradigm?
The Structure-Conduct-Performance (SCP) paradigm suggests that market structure influences how firms behave (their conduct), which in turn affects their overall performance
What is market power?
- Market Power is the ability of a firm to profitably raise
the market price above marginal costs - Market power decreases as the number of competing firms
increases
What are the three different types of barriers to entry/exit in markets
- Institutional barriers
- Strategic barriers
- Non-strategic barriers
State the different types of institutional barriers
- Zoning: Government allows certain economic activity in specified areas but not others
- Licensing: Govt regulation where you need a license to pursue a particular profession
- Patents and copyrights
- Tariffs
State the different types of strategic barriers
- Limit pricing: Incumbent firms lowers its prices deterring new firms from entering due to lack of profit margins
- Tying: Selling a good or service as a mandatory addition to purchasing another good or service
- Collusion
- Price discrimination: Selling the same good at different prices to different consumer groups
- Advertising
- Reputation
State the different types of non-strategic barriers
- Absolute cost advantage: A producer can provide a good or service in greater quantity for the same cost or the same quantity at a lower cost than its competitors
- Sunk (start up) costs
- Scale economies - One firm can serve the entire market