Efficiency & Market Structures

T3 CC2 (keywords)

Perfect competition

Market structure where firms are price takers and face a horizontal AR=MR curve

Monopolistic competition

Market structure where firms still face intense competition, but due to a differentiated product face a downward-sloping AR=D curve

Oligopoly

Market structure where a handful of large firms dominate

Monopoly

Market structure where only one seller exists

Monopsony

Market structure where only one buyer exists

Homogeneous product

Identical product

Heterogeneous product

Differentiated product

Barriers to entry

Factors that make it difficult or costly to join an industry

Barriers to exit

Factors that make it difficult or costly to leave an industry

Innocent/structural barriers to entry/exit

Not deliberately set up by the firm e.g. EoS

Strategic/behavioural barriers to entry/exit

Deliberately set up by the firm e.g. limit pricing

Predatory pricing

Firm lowers prices so low (even below cost) to drive existing firms out of an industry

Limit pricing

Firm lowers prices so low (even below cost) to deter potential firms from joining an industry

Sunk costs

Irrecoverable costs e.g. advertising or the loss made on selling equipment second-hand

Interdependency

Actions of one firm impact those of another

Price taker

Firm in perfect competition has to accept the going market rate

Price maker

Firm in imperfect competition is able to set the price (to varying degrees)

Supernormal (abnormal or economic) profit

Profit over and above normal (AR>AC)

Subnormal profit (loss)

Profit below normal (AR<AC)

Normal profit or ‘break-even’

Firm just covers both financial and opportunity cost (AR=AC) OR the profit that would be made in the next best alternative industry