5.1

• Market structure definition

  The organisational and other characteristics of a market
• what are the important features of market structures?

  • number of firms in the market
  • market share of the larger firms
  • nature of the costs incurred by the firms in the market
  • barriers to entry and exit
  • ease of access to information about whats going on in the market
  • degree of product differentiation
  • how firms affects by buyers behaviours
• what are the different market structures?

  Perfect Competition, Monopoly, Oligopoly, Monopolistic Competition, Duopoly
• what are the various forms of imperfect competition ?

  monopolistic competition, oligopoly, duopoly
• which market structure is the most contestable?

  perfectly competitive market
• which market structure is the least contestable/high barriers to entry?

  Monopoly
• which market structure has the most market power?

  Monopoly
• which market structure is the least efficient?

  monopoly
• which market structure has the least market power?

  Perfect competition
• which market structure has the most efficiency?

  Perfect competition
• perfectly competitive firms are price-takers
• monopoly’s are price-makers
• characteristics of perfect competition market structure

  • large number of buyers and sellers
  • perfect market information
  • able to buy/sell as much as they wish at the ruling market price
  • unable to influence the ruling market price
  • uniform product
  • no barriers to entry or exit in the long run
  • price takers
• what is a monopoly ?

  one firm producing 100% of market output - price maker
• What are the short-run and long-run outcomes in perfect competition?

  • short run: supernormal profits/losses possible
  • Long run: only normal profits due to entry/exit
  • allocatively efficient (P=MC)
  • Productively efficient (lowest AC)
• what are the characteristics of monopolistic competition?

  • many sellers
  • slightly differentiated products
  • some price-making power
  • low barriers to entry/exit
  • non-price competition (branding, packaging)
• what are the short-run and long-run outcomes in monopolistic competition?

  • short run: supernormal profits possible
  • long run: normal profit only (due to new forms entering)
  • not productively or allocatively efficient
• what are the characteristics on an oligopoly ?

  • few large firms dominate
  • high barriers to entry
  • interdependence of firms
  • price rigidity (kinked demand curve)
  • non-price competition is common
  • potential for collusion/cartels
• what are the characteristics of monopoly ?

  • one dominate firm (>25% market share in UK)
  • Price maker
  • High barriers to entry
  • Abnormal profits in long run
  • May lead to productive and allocative inefficiency
• entry barriers definition

  obstacles that make it difficult for a new firm to enter a market
• Incumbent firms definition

  A business with an established position in the market which often benefits from consumer loyalty and economies of scale
• natural barriers/innocent barriers definition

  barriers to market entry which are not caused by deliberate actions of firms in the industry
• sunk costs definition

  costs that have already been incurred and cannot be recovered
• artificial barriers definition

  man-made barriers to market entry (e.g patent protection)
• what are the two main types of entry barriers?

  natural and artificial
• natural barriers include:

  • economies of scale - large firms produce at lower long run average cost and are more productively efficient than smaller new entrants who become stranded on high-cost short-run average cost curves
  • Indivisibilities - example of technical economies of scale, prevent certain goods and services being produced in plants below a certain size
  • Sunk cost - cannot be recovered if firm decides to leave market which increases risk of entry
• artificial/strategic entry barriers include:

  • patents
  • product differentiation
  • high levels of expenditure on advertising and marketing
  • benefiting from ‘first mover’ advantage
  • limit pricing and predatory pricing
• how are patents artificial barriers ?

  provide legal protection for an invention and for all the variety of a product that develop from it. grants the holder the sole right, legal monopoly, which can last up to 20 years in the UK
• how can product differentiation be a artificial barrier?

  • differentiated products become protected by intellectual property and trade mark legislation
  • firms protect themselves from copy-cat market entrants
• how can high levels of expenditure of advertising and marketing act as artificial barriers?

  • established firms can spend heavily on advertising and marketing, which are irrecoverable expenditures and a form of sunk costs if a firm decides to leave the market
• how can benefiting from ‘first mover‘ advantage be an artificial barrier?

  • can establish themselves, build a customer base and make it difficult for later arrivals to compete
• how can limit pricing and predatory pricing act as artificial barriers?

  • limit pricing occurs when firms already in the market reduce prices so that they only just make normal profit to deter or limit the entry of new competitors
  • Predatory pricing occurs when an established or incumbent firm deliberately sets price below costs to force new market entrants out of business
• exit barriers definition

  obstacles that make it difficult for an established firm to leave a market
• product differentiation definition

  the marketing of generally similar products with minor variations or the marketing of a range of different products
• market structures provide the framework in which businesses exist
• different market structures display different degrees of competitiveness
• firms of all sizes undertake varying degrees of product differentiation