5.0 Perfect Competition, Imperfectly Competitive Markets and Monopoly (All in 1)

Which factors distinguish different market structures?

Number of firms, degree of product differentiation, and ease of entry.

What are the two extremes on the spectrum of market structures?

Perfect competition and pure monopoly.

What are the 4 Market Structures

Perfect Competition, Monopolistic Competition, Oligopoly, Monopoly

What is a market structure

The Characteristic of a market

What does the 'divorce of ownership from control' refer to?

The separation between a firm's owners (shareholders) and its managers, which may lead to differing objectives.

List alternative objectives firms might pursue.

Survival, growth, quality improvement, sales revenue maximization, and market share increase.

What is the traditional assumption about a firm's objective?

Firms aim to maximize profits.

What is the satisfying principle?

Managers aim for satisfactory rather than maximum profits to meet various stakeholder objectives.

What is the profit-maximising rule?

Marginal Cost (MC) = Marginal Revenue (MR).

What are the characteristics of a perfectly competitive market?

Many buyers and sellers, no barriers to entry, homogenous goods, price takers, perfect information

What efficiencies does perfect competition have and why

Allocative efficiency: firms produce where price equals marginal cost (P = MC)

Productive efficiency: means goods are made using the fewest resources possible, and perfect competition ensures this happens in the long run.

X-efficiency: firms can't afford to waste any goods or services, and perfect competition forces them not to waste anything

Are firms in perfect competition price makers or price takers?

Price takers

Why are firms not dynamic efficient in perfect competition

Firms do not make super-normal profits in the long run, therefore are unable to reinvest into R&D and innovate, leading to a lack of dynamic efficiency.

What defines monopolistic competitive market?

Many firms, differentiated products, and relativley free entry and exit

Why is monopolistic competition subject to non-price competition?

Due to firms selling differentiated products, and is a key way for firms to attract customers without triggering destructive price wars

Advantages of monopolistic competition

Product variety

Consumer choice

Low barriers to enter and exit

Disadvantage of monopolistic competition

No efficiencies achieved

Excess capacity

Higher prices than perfect

Excessive spending on advertisement

Advantages of oligopoly

Economies of Scale

Dynamic efficiency

Product differentiation

Price Stability

Disadvantages of oligopoly

Reduced competition

Collusion risk

Barriers to entry

Potential for inefficiency

What is the significance of interdependence in oligopoly?

Firms must consider rival's potential reaction when making decisions

Difference between cooperation and collusion

Cooperation is legal collaboration between firms 

Collusion is secretive, often illegal coordination between firms to reduce competition, such as fixing prices of limiting output

Differentiate between collusive and non-collusive oligopoly

Collusive oligopoly involves firms cooperating on prices/output

Non-Collusive oligopoly involves independent decision-making

What are the characteristics of oligopolistic competition

Few firms, slight product differentiation, significant barriers to entry/exit

What is concentration ratio

A measure of the market share of the largest 4 firms in an industry

Why is non-price competition significant in oligopolies

Firms compete through advertising, branding, and product features to avoid price wars

What does the kinked demand curve model illustrate?

Price rigidity due to firm's interdependence in an oligopoly

Are monopolies price makers or takers?

Price makers

List disadvantages of a monopoly

Higher prices,

Reduced output

Lack of efficiency

List advantages of monopolies

Economies of scale

Dynamic efficiency - innvoation

Consistent service to customers

What factors influence monopoly power

Barriers to entry, number of competitors, advertising and the degree of product diffferentiation

What is price discrimination

Where a firm charges different prices to different consumers for an indentical good/service with no differences in costs of production

Provide an example of price discrimination

Student discount on software or transportation fares

What conditions are necessary for price discrimination

Market power, ability to segment markets, and prevention of resale

Benefits of price discrimination to Firms

Increases revenue and profit by capturing more consumer surplus; helps cover fixed costs.

Benefits of price discrimination to consumers

Access to lower prices for certain groups, which can increase consumer surplus.

What is creative destruction

The process where new innovations replace outdated industries, driving economic growth

What are the short-run benefits of competition

Lower prices and increased efficiency

What are the long-run benefits of competition

Innovation, improved products, and technological advancement

Disadvantages of competition

Wasteful spending e.g advertising

Lower profits

Less dynamic efficiency

What defines a contestable market

A market with low or no barrier to entry and exit, allowing potential competition to discipline incumbent firms

What are sunk costs and how do they affect market contestability

Sunk costs are non-recoverable expenditures

High sunk costs deter new entrants, reducing market contestability

What defines a non-contestable market

The threat to new entrants is low due to high barrier to entry and exit

What is "hit and run" competition

When new firms enter a market to exploit short-term SNPs and exit once profits normalize

What is allocative efficiency and where is it found

When the goods and services produced are exactly what consumers want and need in the right quantities and is found when P=MC

What is X-efficiency and where is it found

When a firm minimises waste and uses it resources efficiently and is found anywhere on the AC curve

What is productive efficiency and when is it achieved

When a firm is producing goods or services at the lowest possible cost and is found at the lowest point on their average cost curve, minimising costs

What is dynamic efficiency 

When a firm makes SNPs and reinvests those extra profits into R&D

What is static efficiency

Efficiency at a specific point in time, encompassing both productive and allocative efficiency

How are consumer and producer surplus represented graphically

Consumer surplus lies below the demand curve and above the price level

Producer surplus lies above the supply curve and below the price level

What is this significance of total surplus 

Total surplus (consumer + producer surplus) measures the overall welfare or efficiency in a market

What is producer surplus

The difference between the market price and the minimum price producers are willing to accept

What is consumer surplus

The difference between what consumers are willing to pay for a good and the market price they actually pay.

How does monopoly affect consumer and producer surplus

Monopolies can reduce consumer surplus through higher prices and may increase producer surplus, potentially leading to deadweight loss