3.4 market structures - keywords

allocative efficiency

occurs when scarce resources are used to produce a bundle of goods which satisfies consumer preferences and maximises their welfare

productive efficiency

achieved when production is achieved at lowest average cost

technical efficiency

achieved when a given quantity of output is produced with the minimum number of inputs

dynamic efficiency

occurs when resources are allocated efficiently over time

static efficiency

occurs when resources are allocated efficiently at a point in time

x-inefficiency

inefficiency arising because a firm or other productive organisation fails to minimise its average costs of production at a given level of output

perfect competition

a market structure where there are many buyers and sellers, where there is freedom of entry and exit to the market, where there is perfect knowledge and where all firms produce a homogeneous product

monopolistic competition

a market structure where a large number of small firms produces non-homogeneous products and where there are no barriers to entry or exit

oligopoly

a market structure where there is a small number of firms in the industry and where each firm is interdependent with one another, creating uncertainty; barriers to entry are likely to exist

concentration ratio

measure the percentage of the total market that a particular number of firms have

n-firm concentration ratio formula

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

collusion

collective agreements, either formal or tacit, between firms that restrict competition

collusive oligopoly

a market with a high concentration ratio where a few interdependent firms cooperate either formally or tacitly, to restrict competition

cartel

a formal agreement between firms to limit competition in the market, e.g. by limiting output in order to raise prices

tacit or informal collusion

when firms collude without any formal agreement having been reached and where there is no explicit communication between firms and strategies; an example is price leadership

game theory

the analysis of situations in which players are interdependent

nash equilibrium

where neither player is able to improve their position and has optimised their outcome based on the other player’s expected decision

price war

a situation where several firms in a market repeatedly lower their prices to outcompete other firms; the objective may be to gain or defend market share

predatory pricing

a pricing strategy where a firm lowers its prices when a new entrant comes into the market in order to force the competitor out of the market, and then putting prices back up again once this objective has been achieved

cost plus pricing

firms simply work out their average costs and add a percentage increase

psychological pricing

firms use the non-rounded prices to give an impression that the price is cheaper than it is

market-led pricing

firms can set prices simply by looking at prices charged by competition

price skimming

when a product is initially launched, firms can set very high prices to cover research and development costs and keep demand at manageable levels

penetration pricing

when a product is first introduced, the firm will set prices low to encourage people to use it for the first time

pure monopoly

where one firm is the sole seller of a product in the market

monopsony

exists when there is only one buyer in the market

contestable market

a market where there is freedom of entry to the industry and where costs of exit are low