Spectrum of competition

What are the main characteristics of a monopoly?

Profit maximisation, sole seller, high barriers to entry, price maker, and price discrimination.

What market share defines monopoly power in the UK, and give an example.

More than 25% market share. Example: Google with 90% in search engines.

List key factors that influence monopoly power.

Barriers to entry, number of competitors, advertising, and product differentiation.

Give examples of barriers to entry that maintain monopoly power.

Economies of scale, limit pricing, owning resources, sunk costs, brand loyalty, set-up costs.

What are the main characteristics of an oligopoly?

High barriers to entry/exit, high concentration ratio, interdependence of firms, product differentiation.

Give an example of an oligopoly in the UK.

The UK supermarket industry.

What does interdependence of firms mean in an oligopoly?

Actions of one firm affect the behaviour of others.

What characterises a monopolistically competitive market?

Short-run profit maximisation, non-homogeneous products, many buyers/sellers, no barriers to entry/exit.

Name two examples of monopolistic competition.

Hairdressers and regional plumbers.

What are the main characteristics of a perfectly competitive market?

Many buyers/sellers, price takers, free market entry/exit, perfect knowledge, homogeneous goods.

What happens to profits in a perfectly competitive market?

Profits are competed away as new firms enter due to low barriers, increasing supply and lowering prices.

Why is market power small in perfect competition?

Each firm has a small market share and low barriers to entry allow new firms to compete easily.

What are the advantages of a perfectly competitive market

• In the long run, there is a lower price. P =MC, so there is allocative efficiency.

• Since firms produce at the bottom of the AC curve, there is productive efficiency.

• The supernormal profits produced in the short run might increase dynamic efficiency through investment.

What are the disadvantages of a perfectly competitive market

• In the long run, dynamic efficiency might be limited due to the lack of supernormal profits.

• Since firms are small, there are few or no economies of scale.

• The assumptions of the model rarely apply in real life. In reality, branding, product differentiation, adverts and positive and negative externalities, mean that competition is imperfect.

What is cost-plus pricing and its main advantage?

Calculating markup on unit cost to ensure costs are covered, reducing profit uncertainty.

What is a major disadvantage of cost-plus pricing?

It can lead to uncompetitive prices, reducing quantity sold, revenue, profits, and market share.

When is price skimming used, and what is its key characteristic?

Used when launching a new product with little competition, setting a high initial price.

Why is price skimming a short-term strategy?

High profits attract competitors, increasing market competition.

What is the goal of penetration pricing?

Set a low initial price to attract customers and increase it later once loyalty is gained.

How does predatory pricing impact competitors?

Firms set prices below average costs to drive competitors out, reducing market contestability.

When is competitive pricing used?

When products are similar, and firms set prices based on competitors' prices.

How does psychological pricing influence consumers?

By setting prices like 99p instead of £1, appealing to emotional responses and perceived affordability.

How does the level of differentiation affect pricing strategy?

Unique or highly differentiated products can have premium prices, while similar products compete on lower prices.

How does PED influence pricing strategies?

Low PED leads to higher prices as quantity sold is less sensitive to price changes. High PED leads to lower prices since quantity sold is more sensitive.

How does brand image affect price elasticity?

Strong brand image makes goods more price inelastic, allowing businesses to charge premium prices.

Which pricing strategies might be used when launching a new product?

Penetration pricing if competition is high, or price skimming if there’s little competition and high initial demand.

What pricing strategy is common during the growth and maturity stages?

Competitive pricing to maintain market position.

What pricing strategy is used during the decline stage?

Lower pricing to sell off remaining stock.

What is product differentiation, and how does it impact demand?

Differentiating through branding, packaging, advertising, and placement can shift the demand curve right or make it more price inelastic by increasing consumer loyalty.

What happens to the demand curve if product differentiation is successful?

The demand curve shifts to the right, indicating increased demand, or becomes more price inelastic due to higher consumer loyalty.

How does advertising affect market equilibrium?

It increases demand, leading to a higher equilibrium price and quantity.

What is a risk associated with advertising and promotional spending?

It may be ineffective, leading to large sunk costs that are unrecoverable.

How does brand loyalty affect price elasticity?

Strong brand loyalty makes demand more price inelastic, allowing firms to charge higher prices and retain customers.

How do distribution methods impact pricing strategy?

They make demand more price inelastic, enabling firms to charge higher prices or pass on higher costs without losing revenue.

How is the digital economy influencing distribution methods?

It is rapidly changing traditional distribution methods, enhancing firms' ability to reach consumers and maintain inelastic demand.