Week 6 Lecture 1

Question 1

What does the concept of competitive markets fail to explain?

Answer 1

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

Question 2

Do product characteristics differ across markets and what are the two categories?

Answer 2

Product characteristics differ across markets: homogenous and heterogenous

Question 3

What are the other costly activities that firms are involved in not related to production?

Answer 3

Firms are involved in other costly activities not related to production such as:
- Advertising, product differentiation, R&D and technological and product innovations

Question 4

What does the market conduct of firms depend on?

Answer 4

The market conduct of firms is strategic and depends on the actions taken by buyers, rivals, suppliers and the government

Question 5

Do governments regulate the conduct of firms?

Answer 5

Governments control and regulate the conduct of firms in some industries

Question 6

What are the four different market structures?

Answer 6

1- Perfect competition
2- Monopolistic competition
3- Oligopoly
4- Monopoly

Question 7

State the features of the perfect competition market structure

Answer 7

• Large number of identical firms
• No barriers to entry
• Homogenous products
• Zero profit in the long run

Question 8

State the features of the monopolistic competition market structure

Answer 8

• There are many firms
• There are small/moderate barriers to entry
• Products are highly differentiated
• There is zero profits in the long run

Question 9

State the features of the oligopoly market structure

Answer 9

• There are a few firms
• There are high barriers to entry
• Products are homogenous/heterogenous
• There are positive long run profits

Question 10

State the features of the monopoly market structure

Answer 10

• There is one firm in the market
• Impassable barriers to entry
• There is absolute product differentiation
• There is huge long run profits

Question 11

What is the SCP paradigm?

Answer 11

The Structure-Conduct-Performance (SCP) paradigm suggests that market structure influences how firms behave (their conduct), which in turn affects their overall performance

Question 12

What is market power?

Answer 12

• 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

Question 13

What are the three different types of barriers to entry/exit in markets

Answer 13

• Institutional barriers
• Strategic barriers
• Non-strategic barriers

Question 14

State the different types of institutional barriers

Answer 14

• 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

Question 15

State the different types of strategic barriers

Answer 15

• 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

Question 16

State the different types of non-strategic barriers

Answer 16

• 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