3.4 Market Structures

allocative efficiency

• when resources are used to produce goods which consumers want and value most highly

• P=MC

productive efficiency

• when firms produce at the lowest point on the AC curve

• MC=AC

Dynamic efficiency

• when resources are allocated efficiently over time.

• Related to the rate on innovation

• concerned with investment

• firms must have SNP

x-efficiency

• when a firm is producing at any given output on the AC curve

characteristics of perfect competition

• many buyers and sellers

• sellers are price takers

• no barriers to entry or exit

• perfect knowledge

• homogeneous goods

perfect competition

• productive and allocative efficiency (MC=AC=MR=P)

• cannot benefit from economies of scale

• LR normal profit

characteristics of monopolistic competition

• many small buyers and sellers sellers

• low barriers to entry and exit perfect

• imperfect information

• heterogeneous goods

• SOME price setting power

monopolistic competition

• assumed to be SR profit maximisers

• can only make normal profit in the long run

• produce at AC=AR and MC=MR

characteristics of oligopoly

• high concentration

• interdependence

• high barriers to entry and exit

• non-price competition

• differentiated goods

n-firm concentration

(total sales of N firms/total size of market) x 100

advantages of collusion

• maximise industry profits

• reduce uncertainty

disadvantages of collusion

• illegal

• fear of others firms breaking agreements

• market share has to be divided

overt collusion

when there is a formal agreement on either price or market divide (cartel)

• an agreement must be reached

• potential competition must be restricted

• ways of preventing cheating must be enforced

tacit collusion

no formal agreement

• price leadership

• barometric firm price leadership

• unwritten rules

price competition

• price wars: repeated undercutting of competitors prices

• predatory pricing: when large firms set price bellow AC so smaller firms cannot make profit (illegal)

• limit pricing: when firms set price bellow profit maximising point to discourage new firms from entering market but must be making normal profit

non price competition

• advertising

• loyalty cards

• beading

• quality

• customer service

• product development

game theory table

game theory

used to examine the best strategy a firm can adapt for each assumption about its rivals

nash equilibrium

where both firms use dominant strategy

dominant strategy

the best option regardless of what the other player chooses

characteristics of a monopoly

• profit maximisation

• one sole seller

• high barriers to entry

• price setters

• price discrimination

third degree price discrimination

• when the monopolist decides to charge different groups of consumers different prices for the same good or service

advantages of price discrimination

consumer:

• may benefit from net welfare gain due to cross subsidisation

producers:

• better use of spare capacity

• higher SNP can stimulate investment

costs of price discrimination

consumers:

• loss of consumer welfare

• loss of allocative efficiency

• higher prices

Producers:

• firms may be regulated by competition and market authorities

• firm may have to divide the market

• may cause inefficiency as there is higher profit

• lack of consumer choice

natural monopoly

when one firm naturally becomes the most efficient firms due to high fixed costs

characteristics of monopsony

• single buyer in the market

• assumed monopsonists are profit maximisers

• price setters

costs of monopsony

• firms providing loose profit

• risk of labour exploitation

• lower productivity if wages are too low

benefits of monopsony

• NHS can negotiate lower prices for healthcare services

• consumers may receive lower prices as cost of production is low

characteristics of contestable markets

• actual and potential competition

• entrants have free access to production techniques and technology

• no barriers to entry or exit (no sunk cost)

• low consumer loyalty

• no of firms in market varies

implications of contestable market for the behaviour of firms

• firms are more likely to be allocatively and productively efficient

• threat of hit and run firms

• firms can earn SNP in short run but only NP in long run

types of barriers to entry and exit

• economies of scale

• legal barriers

• customer loyalty & branding

• predatory pricing/limit pricing

• anti-competitive practices

• vertical integration

• cost of making workers redundant