3.1.4.1 MARKET STRUCTURES

Define market structure

Refers to the way a market is organized based on the characteristics of firms within it and how they compete

Give examples of some features in a market structure?

• number of firms

• type of products

• barriers to enter/exit

• level of competition

Define entry barriers

Obstacles that make it difficult for new firms to enter a market

What are some examples of entry barriers?

High start up costs, strong brand loyalty, legal restrictions, economies of scale

Define exit barriers

Obstacles that make it difficult or costly for a firm to leave a market

What are some examples of exit barriers?

Long-term contracts, specialized equipment that can't be reused, high redundancy costs, government regulations

Define product differentiation

The process by which firms make their products distinct from competitors products

What are some things product differentiation is based on?

Quality, branding, features, design, customer service

What are some features of perfect competition?

• lots of small firms

• small market share of large firms

• price takers

• low barriers

• perfect information

• homogenous products

What are some features of monopolistically?

• many firms

• small market share of large firms

• low barriers

• good but imperfect information

• high product differentiation

• price makers (some control)

What are some features of oligopoly?

• few large firms

• large market share for dominant firms

• high barriers

• limited information

• some product differentiation

• price makers

What are some features of duopoly?

• 2 firms

• market share shared between 2 firms

• high FC

• high barriers

• limited information

• some product differentiation

• price makers

What are some features of monopoly?

• 1 firm

• 100% market share

• strong economies of scale

• very high barriers

• asymmetric information

• no product differentiation (unique products)

• price makers

Must there be high or low barriers to entry and exits in a contesable market?

Low - so that new suppliers can come into a market to provide fresh competition

Is there such thing as perfectly contestable market?

No market is perfectly contestable, every market is contestable to some degree

In a perfectly contestable market, is there high or low costs in order to enter and exit?

Entry and exit must be cost less

Define sunk costs

Costs that have already been spent and cannot be recovered, no meter what a firm decides to do in the future

If sunk costs are high, are the barriers low or high? Why?

High - as they discourage entry because firms risk loosing money they can't recover

What are some examples of sunk costs?

• money spent on advertising campaigns

• investment in specialized machinery that cannot be resold

• research and development costs

• staff training costs

For a market to be perfectly contestable, what must the sunk costs be?

Low or zero

Technology has increased contestability in banks, give 3 reasons why?

1. Reduced entry barbers (bank shifting online - new entrants can set up and offer services)

2. Improved customer aces (technology allows branches to reach customers quickly)

3. Innovation in products (technology allows banks to offer mor targeted services)

So is the banking industry low or high contestability?

High

Does low contestability mean there is high or low regulation?

Low contestability = high regulation

Does high contestability mean there is high or low regulation?

High contestability = low regulation

What are "natural barriers" to enter and exit and market?

Entry and exit because of the inherent structure or economies of the market

What are "artificial barriers" to enter and exit a market?

Created deliberately by firms, governments, or regulations to limit competition

What are some example of "natural barriers"?

High startup costs

Economies of scale

Network effect

Monopolization of resources

Significant resource and development costs

What are some examples of "artificial barriers"?

Licenses and patents

Predatory pricing

Brand recognition

Advertising

What are profits like in a competitive market?

• price competition is strong so firms often lower prices to attract customers

• profit margins are squeezed as firms cannot set prices above costs for long

• SO profits tend to be low and normal

What are profits like in an oligopoly?

• few firms have significant market power

• less intense price competition so firms can keep prices down

• profits are generally higher and more stable

What is pure monopoly power?

A market where a single from is the only supplier of a product or service

• no close substitutes

• the firm controls the entire market supply

• very high barriers

What is an example of pure monopoly power?

A local water utility in a town

What is the phrase to remember for pure monopoly power?

"The only player in the game"

What is monopoly power?

The ability of a firm to set prices above competitive levels, even if other firms exist

• the firm faces some competition

• strong brand loyalty

• so can control price

What is an example of monopoly power?

Apple - many competitors exist but strong brand loyalty gives it pricing power

What is the phrase to remember for monopoly power?

"Having control over the price, but not necessarily the only player"

What are concentration ratios?

Measures the market share held by the largest firms in the market

Is the ratio is high, how many firms are there? And what does this mean for competition?

Few firms dominate - low competition

If the ratio is low, how many firms are there? And what does this mean for competition?

Many small firms - high competition

How do you calculate concentration ratios?

Add up the percentages of the specific firms

What % determine low, medium and high concentration of a market?

0-50% = low

50-80% = medium

80-100% = high

In a competitive market, are firms price takers or makers?

Price takers

In a monopoly, are firms price takers or makers?

Price markers

Are resources used efficiently in a competitive market?

Yes

Are resources used efficiently in a monopoly? Why?

Resources are wasted/misused as not everyone who wants the product, can get it

What does deadweight loss mean?

Money and resource that don't benefit anyone

Example of deadweight loss?

Factories - producing small amount of goods, or not used at all (shut down)

Condition of perfect competition?

• large numbers of buyers and sellers

• perfect information

• sellers are price takers

• homogenous goods

• low barriers to enter and exit

Perfect competition is described as an abstract or theoretical concept

What does this mean?

This is because a violation of one of the conditions will render the market imperfect

Is perfect competition real?

No - no real market meets all the strict condition of perfect competition (this is just how economists are helped to describe markets)

Why/How do economists use the term "imperfectly competitive markets"?

Economists use this term to cover all market structures lying between the 2 extremes of perfect competition and pure monopoly