Imperfect Markets Flashcards

Flashcards covering key concepts of imperfect markets including monopolies, oligopolies and monopolistic competition.

What are the three types of imperfect markets?

Monopoly, Oligopoly, and Monopolistic competition

Define a monopoly.

A market structure with only one supplier of a product or service, featuring a unique product with no close substitutes and completely blocked market entry.

What determines the price and level of production in a monopoly?

The monopolist decides, but they are still exposed to market forces and potential substitutes.

How can monopolies potentially exploit consumers?

By limiting production levels and excessively increasing prices.

What are the differences between natural and artificial monopolies?

Natural monopolies arise due to economic costs (e.g., high set-up costs), while artificial monopolies arise from non-economic barriers (e.g., licenses, patents).

Define an oligopoly.

A market structure dominated by a few sellers who are interdependent.

What are some characteristics of an oligopoly regarding products?

Products can be very similar (e.g., steel) or differentiated (e.g., cars, newspapers), and there are near substitutes.

What is collusion in the context of an oligopoly?

Conspiracy between businesses to reduce uncertainty, either through cartels or price leadership.

Give an example of collusion

Cartel and Price Leadership

Why do business in an oligopolistic market collude with one another?

To reduce uncertainty

Why firms prefer price stability

A slight increase price can shrink their market share while Reduction in price may lead to a price war

What is the primary characteristic of monopolistic competition?

Many buyers and sellers, easy entry, and differentiated products.

How is product differentiation achieved in monopolistic competition?

Through advertising, better service, uniqueness, or even imaginary differences in name or packaging.

In monopolistic competition, why is collusion not possible?

Because there are many producers

Give an example of non-price competition

Competition is based on product differentiation by means of advertising and good service rather than price.

Market Information on Perfect market

Buyers and sellers have perfect information regarding current market conditions

Market Information on Monopoly

Sellers and buyers have full knowledge of market conditions

Market Information on Oligopoly

Incomplete information exists between buyers and sellers

Market Information on Monopolistic competition

Information for buyers and sellers is incomplete