7.6 Market Structures Flashcards

Flashcards on Market Structures in Economics

What are the five fundamental market structures?

Perfect competition, monopoly, monopolistic competition, oligopoly, and natural monopoly.

What are the characteristics of perfect competition?

Numerous participants, homogeneous products, freedom of entry and exit, perfect knowledge, and price takers.

Why do firms in perfect competition operate at minimal profit in the long run?

Due to the ease of entry and exit, ensuring both allocative and productive efficiency.

What defines a monopoly market structure?

A single firm dominates as the sole producer with high barriers to entry and price setting power.

What are some barriers to entry in a monopoly?

Legal (patents, licenses), technological (unique expertise), or resource-based (control of a scarce resource) barriers.

What is a potential drawback of monopolies?

Inefficiencies such as higher prices and reduced consumer surplus.

What are the key features of monopolistic competition?

Many firms, differentiated products, relatively low entry barriers, and non-price competition.

How do firms in monopolistic competition differentiate their products?

Through quality, features, branding, or customer service, creating a unique selling proposition.

Why do long-term profits tend to be normal in monopolistic competition?

Due to the ease of entry and exit.

What marks an oligopoly?

A few large firms dominate the market with strategic interdependence.

What are some strategic behaviors in an oligopoly?

Price-fixing or collusion.

What are some example characteristics of prices in oligopolies?

Prices in oligopolies tend to be more rigid and change less frequently compared to more competitive markets (Price Stickiness).

What defines a natural monopoly?

A single firm can supply a product or service to an entire market more efficiently than multiple firms due to significant fixed costs.

Where are natural monopolies typically found?

In infrastructure-intensive industries like water supply, electricity, and public transport.

What are some key market structure features?

Number of buyers and sellers, product differentiation, and barriers to entry and exit.

What are some implications of a monopoly?

The monopolist has significant control over pricing, often leading to higher prices and lower output compared to more competitive markets

What are some implications of a natural monopoly?

Natural monopolies often arise in industries with significant infrastructure requirements, such as utilities.

What are some examples of Economic Barriers to Entry and Exit?

Economies of scale, high initial investment, and cost advantages established firms have over new entrants.

What are some examples of Legal Barriers to Entry and Exit?

Patents, licenses, and regulatory requirements that protect existing firms and restrict new entrants.

What are some examples of Strategic Barriers to Entry and Exit?

Actions by incumbent firms, like predatory pricing or exclusive contracts, aimed at deterring new competitors.

What are characteristics of perfect competition relating to barriers of entry?

Minimal barriers, allowing free entry and exit of firms. This feature ensures firms in the market are only earning normal profits in the long run.

What are characteristics of Monopolistic Competition relating to barriers of entry?

Some barriers exist due to the need for differentiation and brand development.

What are characteristics of an Oligopoly relating to barriers of entry?

High barriers due to the need for significant capital investment and the established market power of existing firms.

What are characteristics of Monopoly relating to barriers of entry?

Very high barriers, often insurmountable due to legal protection, control of essential resources, or significant start-up costs.

What are characteristics of Natural Monopoly relating to barriers of entry?

Extremely high barriers related to the massive infrastructure investments required.

Name some different types of barriers to exiting a market.

Sunk Costs, Contractual Obligations, or Emotional Factors.

What is the influence of market power on Market dynamics?

Firms in markets with high entry barriers often enjoy significant market power, influencing prices and output.

What are some performance values of a firm in a market structure?

Revenue curves, output, profits, efficiency, and the concept of contestable markets.

What is the concept of a Contestable Market?

A concept where markets are susceptible to 'hit and run' entry. Even if a market is dominated by a single firm, the threat of potential competition can be high if there are no barriers to entry or exit.

What are the implications for firm performance in a Contestable Market?

The possibility of new entrants forces incumbent firms to price competitively and remain efficient.

What is the revenue curve like in a Perfect Competition?

Perfectly elastic, indicating firms have no control over the market price.

What is the revenue curve like in a Monopoly and Monopolistic Competition?

Downward sloping, granting some level of price-setting power.

What is the revenue curve like in an Oligopoly?

Kinked, due to the different reactions of rivals to price changes.

What is Productivity Efficiency?

Achieved when firms produce at the lowest possible cost, commonly seen in perfectly competitive markets.

What is Allocative Efficiency?

Occurs when resources are distributed to reflect consumer preferences. Perfect competition typically leads in this aspect.

What is Dynamic Efficiency?

More likely in less competitive markets, where higher profits can fund research and development.

What is a Concentration Ratio (CR)?

A key economic metric used to assess the degree of concentration in a market. It represents the market share held collectively by the largest firms within an industry.

What is a Concentration Ratio (CR) used for?

A high concentration ratio indicates significant control by a few firms, often leading to monopolistic or oligopolistic behaviors.

What is the process of calculating the concentration ratio?

Ascertain the dominant firms in the market based on their market shares. Calculate a firm's market share by dividing its sales by the total market sales. Add the market shares of the top four firms for CR4 and the top eight firms for CR8.

What does a high CR indicate about a Market Structure?

A high CR (above 60%) usually indicates an oligopoly or near-monopoly.

What does a low CR indicate about a Market Structure?

A low CR (below 40%) is indicative of a competitive market, akin to perfect competition.

What may happen in High CR markets?

Firms might seek mergers or acquisitions to increase market share.

What are characteristics of a Telecom Industry CR?

The telecom industry often shows high concentration ratios, with few firms dominating.

How does globalisation affects Concentration Ratios?

With globalisation, concentration ratios need to be considered in an international context. A domestic CR might be low, but on a global scale, the concentration could be high.