Topic 4

• What are the four market structures discussed in the study material?

  Monopoly, oligopoly, imperfect competition, and perfect competition
• What are the characteristics of a monopoly?

  • Profit maximisation
  • Sole seller in a market
  • High barriers to entry
  • Price maker
  • Price discrimination
• How does a monopolist earn profits in both the short run and long run?

  A monopolist earns supernormal profits in both the short run and the long run
• What percentage market share indicates monopoly power in the UK?

  More than 25% market share
• Give an example of a firm that dominates its market with a high market share.

  Google, which has a 90% share of the search engine market
• What is the relationship between oligopoly and monopoly power?

  Two large firms in an oligopoly can have monopoly power if they have greater than 25% market share
• What are some factors that influence monopoly power?

  Barriers to entry, number of competitors, advertising, and degree of product differentiation
• What are examples of barriers to entry that can maintain monopoly power?

  • Economies of scale
  • Limit pricing
  • Owning a resource
  • Sunk costs
  • Brand loyalty
  • Set-up costs
• How do economies of scale contribute to monopoly power?

  They provide existing large firms with a cost advantage over new entrants
• What is limit pricing?

  Setting the price of a good below the production costs of new entrants to deter competition
• How can owning a resource establish monopoly power?

  By controlling a resource, early entrants can make it difficult for new firms to enter the market
• What are sunk costs, and how do they affect market entry?

  Sunk costs are unrecoverable costs that deter new firms from entering the market
• How does brand loyalty affect monopoly power?

  High brand loyalty makes it difficult for new firms to gain market share
• What is the impact of set-up costs on new firms entering a market?

  High set-up costs make it unlikely for new firms to enter the market
• How does the number of competitors influence monopoly power?

  The fewer the number of firms, the harder it is to gain a large market share
• How does advertising create barriers to entry?

  Advertising can increase consumer loyalty, making demand price inelastic
• What is the degree of product differentiation in an oligopoly?

  The more differentiated the product, the easier it is to gain market share
• What are the characteristics of an oligopoly?

  • High barriers to entry and exit
  • High concentration ratio
  • Interdependence of firms
  • Product differentiation
• What defines a monopolistically competitive market?

  A monopolistically competitive market has imperfect competition with non-homogeneous products
• How do firms in a monopolistically competitive market compete?

  They compete using non-price competition
• What is the market structure of perfect competition?

  A perfectly competitive market has many buyers and sellers, with homogeneous goods
• What are the characteristics of a perfectly competitive market?

  • Many buyers and sellers
  • Sellers are price takers
  • Free entry to and exit from the market
  • Perfect knowledge
  • Homogeneous goods
  • Firms are short run profit maximisers
  • Factors of production are perfectly mobile

  
• How is price determined in a perfectly competitive market?

  Price is determined by the interaction of demand and supply
• What happens to profits in a competitive market over time?

  Profits are likely to be lower than in a market with only a few large firms
• What occurs when firms in a competitive market make a profit?

  New firms enter the market due to low barriers to entry
• What is the profit-maximising equilibrium in the short run and long run for perfectly competitive markets?

  • Short run: Firms can make supernormal profits
  • Long run: Profits are competed away, leading to normal profits

  
• What is the significance of the supply curve shift in a perfectly competitive market?

  The shift in the supply curve leads to a lower price level in the market
• What is the new equilibrium in the long run for perfectly competitive markets?

  The new equilibrium occurs at P=MC, with firms producing at a new output of Q2
• What are the advantages and disadvantages of a perfectly competitive market?

  Advantages:

  • Lower price in the long run
  • Allocative efficiency (P = MC)
  • Productive efficiency

  
  

  Disadvantages:

  • Limited dynamic efficiency
  • Few or no economies of scale
  • Assumptions rarely apply in real life

  
• How do pricing strategies vary in different market structures?

  Pricing strategies depend on market structure, competition, and product differentiation
• What are the different pricing strategies mentioned in the study material?

  • Cost plus
  • Price skimming
  • Penetration
  • Predatory
  • Competitive
  • Psychological
• What is cost-plus pricing?

  Cost-plus pricing involves calculating a markup on unit cost to determine selling price
• What is price skimming?

  Price skimming is setting a high price temporarily for a new product with little competition
• What is penetration pricing?

  Penetration pricing involves setting a low initial price to attract customers
• What is predatory pricing?

  Predatory pricing involves setting low prices to drive out existing firms from the industry
• What is competitive pricing?

  Competitive pricing is when prices are set based on the prices of competitors
• What is psychological pricing?

  Psychological pricing uses emotional reactions to influence consumer purchasing decisions
• What factors determine the most appropriate pricing strategy?

  • Number of Unique Selling Points/amount of differentiation
  • Price elasticity of demand
  • Stage in the product life cycle

  
• How does the number of unique selling points affect pricing strategy?

  Unique or highly differentiated products are likely to have a premium price
• How does price elasticity of demand influence pricing strategy?

  Goods with low price elasticity are likely to have higher prices