Module 6 - Market Structure

barriers to entry

something that blocks the entry of new firms in a monopoly or oligopoly market

Examples of natural barriers to entry

1. The need for capital

2. Economies of scale

3. Ownership of natural resources

Examples of legal or artificial barriers to entry

1. Patents

2. Regulations

3. Licensing or education requirements

4. Brand loyalty

Which market structure has easy entry and exit and identical products?

Perfect competition

Which two market structures have no barriers to entry?

Perfect competition and monopolistic competition

Which market structure is most efficient?

Perfect competition

Which market structure is most competitive?

Perfect competition

What happens to price and quantity as markets become more concentrated?

Product price increases and quantity decreases

Which market structure includes few firms and has barriers to entry?

Oligopoly

cartel

a group of firms that overtly collude to act like a monopoly (reduce output and drive up prices)

Which market structure includes only one firm producing a unique product?

Monopoly

What is the difference between perfect competition and monopolistic competition?

Firms in monopolistic competition produce differentiated products. Firms in perfect competition produce identical products.

4 firm concentration ratio

the sum of the market shares of the largest four firms in an industry

What market structure describes the fast food industry?

Monopolistic competition

Profit Maximizing Rule

All firms maximize profit by producing where MR = MC

What characteristic leads to zero economic profits in the long run for firms in perfectly competitive markets?

Easy entry and exit

Market structure most likely to advertise

Monopolistic competition

Market structure most likely to have collusion

Oligopoly

efficient

Resources have been allocated to maximize the net benefits of all economic activities. The "right" quantity is being produced.

Herfindahl-Hirschman Index (HHI)

a measure of market concentration calculated by squaring the market share (after dropping the % sign) of each firm in an industry, then summing these squared market shares.

Marginal Cost (MC)

the additional cost associated with making one extra unit of output.

marginal revenue

the additional revenue earned when an extra unit of output is sold

monopolistic competition

a model characterized by many firms producing similar but differentiated products in a market with easy entry and exit

monopoly

a firm that is the only producer of a good or service for which there are no close substitutes and barriers to entry exist

monopoly power

the ability to act as a price setter

natural monopoly

when one large firm can produce a product for a lower cost than many small firms could - this is due to having economies of scale and high fixed costs (water utilities, for example)

Rent-seeking

Large firms use profits to lobby for rules or legislation that make it more difficult for other firms to compete in the market.

oligopoly

a market that is dominated by a few firms, each of which recognizes that its own actions will produce a response from its rivals and that those responses will affect it

Collusion

when firms openly agree on price, output, and other decisions aimed at achieving monopoly profits (the goal is to work together to restrict quantity and drive up prices - like a monopoly firm would)

perfect competition

a market where a large number of firms produce identical goods consumed by a large number of buyers, firms are price takers, and there is easy entry and exit in the long run

price setter

a firm that sets or picks price based on its output decision and what its customers are willing to pay

price takers

individuals or firms who must take the market price as given

substitutes

two goods for which an increase in price of one increases the demand for the other

tacit collusion

an unwritten, unspoken understanding through which firms agree to limit their competition