Market structure

What is a market structure?

A market structure describes the organizational characteristics of a market, determining the nature of competition and pricing.

What are the four main types of market structures?

The four main types are perfect competition, monopolistic competition, oligopoly, and monopoly.

Define perfect competition.

A market structure where many firms offer identical products, and no single firm can influence the market price.

What are the characteristics of perfect competition?

Many buyers and sellers, identical products, no barriers to entry, and perfect information available.

What is monopolistic competition?

A market structure featuring many firms selling similar but not identical products.

List the characteristics of monopolistic competition.

Many firms, product differentiation, free entry and exit, some control over price.

What is an oligopoly?

A market structure dominated by a few large firms, where each firm's decisions affect the others.

What characterizes an oligopoly?

Few firms, high barriers to entry, product differentiation or homogeneity, interdependent pricing.

Define monopoly.

A market structure where a single firm controls the entire supply of a product or service.

List the characteristics of a monopoly.

Single seller, unique product with no close substitutes, high barriers to entry, price maker.

What is market power?

The ability of a firm to influence the price of its product or service in the market.

What is price elasticity of demand?

A measure of how much the quantity demanded of a good responds to a change in price.

What does a perfectly elastic demand curve look like?

It is a horizontal line that represents infinite sensitivity to price changes.

Define price inelastic demand.

A situation where quantity demanded changes less than proportionally with price changes.

What is consumer surplus?

The difference between what consumers are willing to pay and what they actually pay.

Define producer surplus.

The difference between what producers are willing to accept for a good and the actual price they receive.

What is a price taker?

A firm that must accept the prevailing market price for its product as it cannot influence it.

What is a price maker?

A firm that has the power to influence or set the market price of its product.

What is the purpose of barriers to entry?

To prevent new firms from entering a market and competing with existing firms.

List some examples of barriers to entry.

High startup costs, strong brand loyalty, patents, and government regulations.

What is the Herfindahl-Hirschman Index (HHI)?

A measure of market concentration, calculated by squaring the market share of each firm and summing the results.

What signifies a highly concentrated market according to HHI?

An HHI above 2500 indicates a highly concentrated market.

What is a collusive oligopoly?

An oligopoly where firms work together to set prices and output levels.

Define cartels.

Formal agreements among firms in an oligopoly to fix prices or limit production.

What is price discrimination?

The practice of charging different prices to different consumers for the same good or service.

Mention the conditions necessary for price discrimination.

Market power, identifiable and separable consumer groups, and preventing resale.

What is a natural monopoly?

A situation where a single firm can supply the entire market demand at a lower cost than multiple firms.

What is a dominant firm model in oligopoly?

A model where one firm has a large market share and influences the price for the industry.

Define game theory in the context of oligopoly.

A mathematical approach to modeling the strategic interactions between firms in an oligopoly.

What is 'demand-pull' inflation?

Inflation caused by an increase in aggregate demand, leading to higher prices.

What is 'cost-push' inflation?

Inflation that results from a decrease in the supply of goods, often due to increased production costs.

How does the demand curve shift in a monopolistic market?

The demand curve is downward sloping because a monopolist can set its price above marginal cost.

What is the significance of the marginal cost curve?

It represents the additional cost incurred from producing one more unit of output.

What is a kinked demand curve?

A demand curve that shows a firm’s price will remain stable despite cost changes due to inter-firm pricing strategies.

Explain the concept of 'limit pricing.'

Setting the price low enough to deter entry by potential competitors.

What is product differentiation?

The process of distinguishing a product or offering from others to make it more attractive.

What is anti-competitive behavior?

Practices that reduce competition in a market, often leading to higher prices and reduced outputs.

What are price wars?

Competitive exchanges where firms continuously lower prices to undercut each other.

Define non-price competition.

Competition based on other factors than price, such as product quality, branding, and customer service.

What is allocative efficiency?

When resources are distributed in a way that maximizes the overall benefit to society.

Define productive efficiency.

Occurs when firms produce at the lowest possible cost, using all resources optimally.

What is the significance of the profit-maximizing output level?

It occurs where marginal cost equals marginal revenue, maximizing a firm's profit.

What is residual demand?

The quantity demanded for a firm’s product at various prices, less the quantity supplied by other firms.

What is a natural monopoly?

A market structure where a single firm can supply the entire market demand at a lower cost than multiple firms.

What characteristics define a natural monopoly?

High fixed costs and low marginal costs, leading to economies of scale.

What is an example of a natural monopoly?

Public utilities, such as water or electricity providers.

Why can a natural monopoly result in cost savings?

Because a single firm can serve the entire market more efficiently than several firms could.

What is a key factor that leads to the emergence of a natural monopoly?

Significant barriers to entry due to huge startup costs.

How do natural monopolies affect competition in a market?

They limit competition because new firms cannot enter the market profitably.

Why are natural monopolies often regulated by governments?

To protect consumers from potential price gouging and ensure fair access.

What is the impact of regulation on a natural monopoly?

Regulation can limit prices and set service standards to protect consumers.

What does 'averaging costs' mean in the context of natural monopolies?

Spreading the fixed costs of production over a large number of goods sold.

How does a natural monopoly set its prices compared to a competitive market?

A natural monopoly often sets prices higher than marginal costs.

What is an allocative inefficiency in natural monopolies?

When the price exceeds marginal cost, leading to under-consumption of the product.

What role does the government play in natural monopolies?

The government can impose regulations on prices and service quality.

What are social costs associated with natural monopolies?

Costs that affect society at large, such as service disruptions or unavailability.

How does a natural monopoly achieve universal service?

By providing access to a service for all consumers, regardless of profitability.

What is 'price cap regulation'?

A regulatory mechanism where prices are capped for a set period to control costs.

What are some disadvantages of having a natural monopoly?

Limited choices for consumers and potential for higher prices.

What is 'franchise monopoly'?

A situation where a single firm has exclusive rights to operate in a certain geographic area.

How can consumer surplus be impacted by a natural monopoly?

Consumer surplus may decrease if prices are set above marginal costs.

What is the difference between a natural monopoly and a regular monopoly?

A natural monopoly occurs due to cost efficiencies, while a regular monopoly may arise from market power.

What is 'regulatory capture' in natural monopolies?

When the firm influences the regulatory agency to act in its interest instead of the public's.

What is a public ownership model in the context of natural monopolies?

When a government entity owns and operates the monopoly to provide public services.

How do economies of scale affect natural monopolies?

As production increases, the average cost per unit decreases, favoring a single provider.

What is a 'weighted average cost of capital' (WACC) in natural monopolies?

The average rate that a company expects to pay to finance its assets.

What are the long-term effects of allowing natural monopolies to operate without regulation?

Potential for price hikes, decreased service quality, and reduced innovation.

What is a 'cost-plus pricing' strategy?

A pricing method where a fixed percentage is added to the cost of producing a product.

How can technology influence natural monopolies?

Advancements in technology may reduce costs and allow new firms to compete.

What is 'Pareto efficiency' in the context of natural monopolies?

A situation where resources cannot be reallocated to improve one party without harming another.

What is the potential consequence of breaking up a natural monopoly?

Higher costs and inefficiencies due to loss of economies of scale.

What role does consumer advocacy play in natural monopolies?

Consumer advocacy groups work to represent public interests and push for fair regulations.

How may technological advancements lead to the decline of a natural monopoly?

New, cost-effective technologies may allow multiple firms to serve the market profitably.

What is a 'spectrum auction'?

A process through which government sells rights to use a portion of the electromagnetic spectrum, potentially impacting monopolies in telecommunications.

What happens when competition is introduced into a natural monopoly market?

It can lead to inefficiencies and increased costs if not carefully regulated.

What is 'social pricing' in the context of natural monopoly practice?

Pricing the good based on natural cost and social welfare rather than a profit maximization.

What is 'cross-subsidization' in utility services of natural monopolies?

Charging different prices to different consumers or consumer groups to cover costs.

How can public-private partnerships (PPPs) impact natural monopolies?

PPPs can improve service delivery and infrastructure development while retaining public interest.

What is the 'incentive regulation'?

A regulatory scheme designed to provide firms with financial incentives to reduce costs.

How does a natural monopoly maintain service quality?

Through regulatory oversight and monitoring of performance metrics.

What are the challenges in determining fair pricing strategies for natural monopolies?

Balancing profitability with the need for accessibility and fair consumer pricing.

What is 'cost allocation' in relation to natural monopolies?

The process of assigning costs to different aspects of operations to ensure fairness.

Why do critics argue against the existence of natural monopolies?

They claim it stifles innovation and leads to complacency without competitive pressures.

How do subsidies impact natural monopolies?

Subsidies can lower consumer costs and encourage more equitable access to services.

What is the significance of 'tariff setting' in regulated monopolies?

Setting tariffs ensures that consumers pay fair prices for services while allowing for reasonable profit.

What is one advantage of perfect competition?

Firms can enter and exit the market freely, promoting efficiency.

What is a disadvantage of perfect competition?

Firms cannot earn long-term profits due to price setting by the market.

What is one advantage of monopolistic competition?

Firms have some degree of market power to set prices.

What is a disadvantage of monopolistic competition?

Product differentiation can lead to excess capacity and inefficiency.

What is one advantage of oligopoly?

Firms can achieve economies of scale due to large market shares.

What is a disadvantage of oligopoly?

Collusion among firms can lead to higher prices and lower outputs.

What is one advantage of monopoly?

Monopolies can invest in research and development due to large profits.

What is a disadvantage of monopoly?

They can lead to higher prices and reduced consumer choice.

What is one advantage of a natural monopoly?

Can provide services at a lower cost due to economies of scale.

What is a disadvantage of a natural monopoly?

Limited competition can lead to inefficiencies and higher prices.

What is one advantage of regulated monopolies?

Regulation can ensure fair pricing and consumer protection.

What is a disadvantage of regulated monopolies?

Regulation may reduce the incentive for innovation and efficiency.

What is one advantage of competition among firms?

Encourages innovation and improved product quality.

What is a disadvantage of excessive competition?

Can lead to price wars, harming profitability for all firms.

What is one advantage of price discrimination in monopolistic markets?

Increased revenue from different consumer segments.