Market stucturws

• Contestable markets


  Markets that face actual and potential competition
• Characteristics of contestable markets


  • Entrants have free access to production techniques and technology
  • No significant entry or exit barriers
  • Low consumer loyalty
  • Number of firms in the market varies
• Allocative efficiency


  Firms operate at the bottom of the average cost curve in the long run
• Perfect competition


  A market with many buyers and sellers selling homogenous goods with perfect information and freedom of entry and exit
• Productive efficiency


  Firms are productively efficient in the long run
• Monopoly


  A single seller in the market
• Dynamic efficiency


  Efficiency in the long run; concerned with new technology and increases in productivity which causes efficiency to increase over a period of time
• Threat of new entrants

  Affects firms just as much as existing competitors
• 1. inefficiency


  When firms produce at a cost above the AC curve
• Perfectly contestable markets are akin to a perfectly competitive market
• Natural monopoly


  Where economies of scale are so large that not even a single producer is able to fully exploit them; it is more efficient for there to be a monopoly than many sellers
• Firms can only earn normal profits in the short run in a contestable market
• Price discrimination


  When a monopolist charges different groups of consumers different prices for the same good or service
• Barriers to entry and exit

  • Legal barriers
  • Consumer loyalty and branding
  • Predatory pricing
  • Limit pricing
  • Anti-competitive practices
  • Vertical integration
  • Brand proliferation
  • Cost to write off assets and pay leases
  • Losing brand and consumer loyalty
  • Cost of making workers redundant
• Monopolistic competition


  Where there are a large number of buyers and sellers who are relatively small and act independently, selling non-homogenous goods
• Sunk costs


  Costs which cannot be recovered once they have been spent
• Oligopoly


  Where a few firms dominate the market and have the majority of market share, they act interdependently
• Non-price competition


  When firms compete on factors other than price, for example customer service or quality; they aim to increase the loyalty to the brand which makes demand more inelastic
• High sunk costs are likely to push a market towards a price and output that is similar to a monopoly
• Interdependent


  The actions of one firm directly affects another firm
• Collusion


  Occurs when firms agree to work together, for example by setting a price or fixing the quantity they produce
• Advantages of contestable markets

  • May lead to lower prices for consumers
  • Higher levels of competition may reduce the need for government intervention
• Overt collusion


  Collusion where firms come to a formal agreement, for example a cartel
• Tacit collusion


  Collusion where there is no formal agreement, such as price leadership
• Disadvantages of contestable markets

  • Less likely to benefit from dynamic efficiency as firms will not earn supernormal profits
• Non-collusive oligopoly


  When firms in an oligopoly compete against each other, rather than making agreements to reduce competition
• Concentration ratio


  The combined market share of the few top firms in a market
• Game theory


  Used to predict the outcome of a decision made by one firm, which is has incomplete information about the other firm
• Contestable market


  When there is the threat of new entrants into the market, forcing firms to be efficient
• Perfectly contestable market


  A market with no barriers to entry, where a new firm can easily enter and compete against incumbent firms completely equally