3.4 Market Structures

Cards (28)

  • What is Allocative Efficiency and when does it occur?
    When resources are allocated in such a way that consumers and producers get maximum possible benefit.
    Occurs when MC=AR
  • What is Productive Efficiency?
    When resources are allocated in such a way that avg. costs are minimised.
    Occurs when MC=AC
  • What is Dynamic Efficiency?
    Long-term efficiency as a result of innovation when firms reinvest its profits - improves manufacturing methods.
  • What is X-Inefficiency and why does it occur?
    When firm lacks incentive to control production costs - Total costs are higher than they should be.
    Often occurs due to lack in competition in a market where a firm has no consequence for making a loss.
  • What are the Characteristics of Perfect Competition?
    • Many buyers and sellers
    • Price takers
    • No barriers to entry and exit
    • Symmetric info. between buyers and sellers
    • Products are homogenous
  • What are the Characteristics of Monopolistic Markets?
    • Large no. of small firms
    • Low barriers to entry and exit
    • Products are slightly differentiated
    • Low degree of market power - have some price-setting ability
    • Profit maximisers
  • Characteristics of Oligopoly?
    • High barriers to entry and exit
    • High concentration ratio (0.6)
    • Interdependence of firms
    • Products are highly differentiated
    • Small no. of large firms
  • What is Overt Collusion?
    When firms explicitly agree to raise prices (price fixing).
  • What is Tacit Collusion?
    When firms monitor each other's behaviour and follow the firm.
  • What are the types of Price Competition used in an Oligopoly?
    • Price Wars: When competitors repeatedly lower prices to undercut each other to gain more market share.
    • Predatory Pricing: Lowering prices when a new firm joins to drive them out - illegal as it is anticompetitive
    • Limit Pricing: When firms set a limit on high the price will go in an industry - barriers to entrylimit price.
  • What are the types of Non-Price Competition used in an Oligopoly?
    • Branding
    • Customer Service
    • Packaging
    • Loyalty rewards - gift cards
  • What are the Characteristics of a Monopoly?
    • Only 1 single seller
    • High barriers to entry
    • No subsitute products
    • Price makers - control output
    • >25% market share
  • What are the Benefits and Drawbacks of Monopoly on Firms?
    + Supernormal Profit can be used for Research and Development and product innovation
    + EoS can lower avg. costs of production
    + Price discrimination can increase profits and revenue
    • Lack of competition can lead to X-Inefficiency - misallocation of resources
    • Cross subsidisation can create inefficiencies
  • What are the Benefits and Drawbacks of Monopoly on Consumers?
    + Product innovation will lead to higher quality goods
    + Cross subsidisation can lower prices on products that firm provides
    + Prices may fall if firm pass on their cost savings by lowering prices (due to Economies of Scale)

    • Little competition = higher prices since there are no substitutes
    • Product quality may worsen over-time due to lack of competition and therefore product innovation
    • Consumer surplus may fall overall
  • What are the Benefits and Drawbacks of Monopoly on Employees?
    + Supernormal Profits often result in higher wages
    • Having only 1 seller in industry limits opportunity to change employers
  • What are the Benefits and Drawbacks of Monopoly on Suppliers?
    + Increased sales volume due to supplying monopoly firm
    • Monopolies have power to dictate what price they will pay suppliers for good/service - not profitable in LR
  • What is Third Degree Price Discrimination?
    When firm charges different prices to different consumers for the same good/service.
  • What are the Conditions required for TDPD?
    • Market Power: Firm must be price makers - works best when there are little / no substitutes
    • Varying consumer price elasticity of demand: Consumers must be willing to pay at any appropriate given price point
    • Ability to prevent resales: Stop consumers from buying in low-price sub market and resell for higher prices in sub markets.
  • What are the Benefits and Drawbacks of TDPD on Consumers?
    + Other consumers will benefit as they are able to take adv. of lower prices
    • Most consumers lose out as they have to pay higher prices
  • What are the Benefits and Drawbacks of TDPD on Producers?
    + Total revenue increases due to higher profits
    • Setting up and enforcing TDPD can increase avg. costs and can be time consuming
  • What are the Characteristics of a Monopsony?
    • There is 1 dominant buyer
    • They are wage makers
    • They are profit maximisers
    • They purchase large portion of market supply from suppliers
  • What are the Benefits and Drawbacks of Monopsony Power on Firms?
    + Reduced costs of production lead to higher profits
    • May suffer from reputation damage for treatment of suppliers - unethical
    • Price pressure on suppliers often results in conflict - difficulty in managing
    • In LR, may drive suppliers out which will disrupt entire supply chain
  • What are the Benefits and Drawbacks of Monopoly on Employees?
    + Higher profits = higher wages
    • May find it difficult to reconcile with their ethics due to treatment of suppliers
  • What are the Benefits and Drawbacks of Monopoly on Consumers?
    + Lower avg. costs = lower prices
    • Quality of product may fall as suppliers attempt to cut costs in response to price pressure
  • What are the Benefits and Drawbacks of Monopoly on Suppliers?
    + Can enhance supplier's reputation - opens up new opportunities
    + Can also provide opportunity to increase sales volume
    • May seek to reallocate resources to more profitable industries - leads to fall in supply in current market
    • Suppliers may be driven out of business by monopsonists
  • What are the Characteristics of a Contestable Market?
    • No barriers to entry & exit
    • No competitive disadvantages on entry
    • Perfect information
    • Hit & Run Competition
    • No advantages on non-price factors
  • What is meant by the term 'Hit & Run' ?
    Short-run Supernormal profits acts as a profit-signalling mechanism to new firms to enter market, take as much supernormal profit as possible and leave the market.
  • How can a firm prevent 'Hit & Run' ?
    • Use Limit Pricing
    • Causes for incumbent firms to make normal profit - no SNP signal
    • Disincentivises firms from entering market