Perfect competition and Oligopoly

• What is a characteristic of perfect competition regarding the number of buyers and sellers?

  Many buyers and sellers
• In a perfectly competitive market, what role do sellers play in pricing?

  Sellers are price takers
• What is the entry condition for firms in a perfectly competitive market?

  Free entry to and exit from the market
• What type of knowledge do participants have in a perfectly competitive market?

  Perfect knowledge
• What type of goods are produced in a perfectly competitive market?

  Homogeneous goods
• What is the profit maximization behavior of firms in the short run in perfect competition?

  Firms are short run profit maximisers
• What is the mobility of factors of production in a perfectly competitive market?

  Factors of production are perfectly mobile
• How is price determined in a perfectly competitive market?

  By the interaction of demand and supply
• Why are profits lower in a competitive market compared to a market with few large firms?

  Each firm has a very small market share
• What happens when firms in a competitive market make a profit?

  New firms will enter the market
• What effect does the entry of new firms have on supply and price in the market?

  Increases supply and lowers average price
• What type of profits do firms make in the long run of perfect competition?

  Only normal profits are made
• What does the yellow shaded rectangle in the short run equilibrium diagram represent?

  Area of supernormal profits earned
• What happens to the supply curve when new firms enter the industry?

  Shifts from S to S1
• What is the outcome of competitive pressure in the long run?

  Equilibrium is established with normal profits
• What are the advantages of a perfectly competitive market?

  • Lower price in the long run
  • Allocative efficiency (P = MC)
  • Productive efficiency (firms at bottom of AC curve)
  • Short run supernormal profits may increase dynamic efficiency
• What are the disadvantages of a perfectly competitive market?

  • Limited dynamic efficiency in the long run
  • Few or no economies of scale
  • Assumptions rarely apply in real life
  • Presence of branding and product differentiation
• How does the presence of supernormal profits affect new firms in a perfectly competitive market?

  It incentivizes new firms to enter the industry
• What is the relationship between price and marginal cost in the long run for firms in perfect competition?

  Price equals marginal cost (P=MC)
• What is the output level firms produce at in the long run equilibrium?

  At the new output of Q2
• What are the characteristics of an oligopoly?

  High barriers to entry and exit
• How do high barriers to entry affect competition in an oligopoly?

  They make the market less competitive
• What is a high concentration ratio in an oligopoly?

  Only a few firms supply the majority
• How does interdependence among firms affect their behavior in an oligopoly?

  Actions of one firm affect others' behavior
• What is product differentiation in an oligopoly?

  Firms use branding to differentiate products
• What are the two aspects of oligopoly discussed in the material?

  • Oligopoly as a market structure
  • Oligopolistic behavior of firms
• What does the concentration ratio of a market represent?

  Combined market share of top firms
• How is the 4-firm concentration ratio calculated?

  Add the market share of the 4 largest firms
• What is the 4-firm concentration ratio for the UK supermarkets?

  72.8%
• What is the 2-firm concentration ratio for the UK supermarkets?

  45.5%
• How does a higher concentration ratio affect market competition?

  It makes the market less competitive
• What is collusive behavior in an oligopoly?

  • Firms agree to work together
  • Set prices or fix output quantity
  • Minimizes competitive pressure
• What are the consequences of collusion for consumers?

  Lower consumer surplus and higher prices
• Why do firms in an oligopoly have an incentive to collude?

  To maximize benefits and restrict output
• What factors make collusion more likely in an oligopoly?

  Few firms, similar costs, high entry barriers
• What is the difference between collusion and non-collusion in an oligopoly?

  • Collusion: Firms work together, often illegally
  • Non-collusion: Firms compete independently
• What is overt collusion?

  Formal agreement between firms
• Is overt collusion legal in the EU and US?

  No, it is illegal
• What is tacit collusion?

  Implied collusion without formal agreement
• How do price wars affect supermarkets?

  They harm profits and increase competition