Theme 4 - Competition and market power

  • Created by: becky.65
  • Created on: 04-01-18 20:32
What factors does market structure look at?
Number of businesses in the market, amount and type of competition, nature of the product, degree of power each business has, power of the consumer, profit levels, barriers to entry and exit, how businesses behave
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What is the spectrum of competition?
It has perfect competition at one end and pure monopoly at the other and businesses and markets are located between them
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What is a pure monopoly?
There is only one firm in the market and no competiton
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When does a legal monopoly exist?
When a firm has 25% or more of its market. The CMA can intervene in the market if the business is thought to be acting against public interest
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What is the CMA?
A government body that ensures businesses comply with the competion law
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What is monopoly power?
The ability to affect price levels, restrict output, to affect outcomes in the market and dictate what happens
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What is a natural monopoly?
It exists when it would be wasteful to have more than one business providing a service e.g. rail network or water supply
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What characteristics do monopoly markets have?
Higher prices that can be set by a monopoly, barriers to entry, consumer choice is restricted and profits will be higher
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What is a duopoly?
Two large firms dominating the market
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What is an oligopoly?
When several large firms dominate the market and compete with each other
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What characteristics to oligopolies have?
Considerable market power, non-price competition, price competition is avoided as it can be damaging to profits, likely to be many smaller firms, danger of collusion, high barriers to entry, abnormal profits
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What pricing strategy may oligopolies take and why?
Predatory pricing to undercut competitors that have higher costs so that the competitor cannot survive
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What is imperfect competition?
Situations where competition exists but it is not as strong as it might be. There are distortions to the market that prevent it from being fully competitive
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When does monopolistic competition occur?
When there are many firms in the market each offering a slightly differentiated product and competing with each other
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What are the characteristics of monopolistic competition?
Many firms producing similar products, many producers and consumers in the market that act independently, consumers are aware of price and non-price differences among the products, barriers to entry and exit are low, producers have some price control
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What is perfect competition?
It is a model that defines the greatest possible degree of competition. It implies a market with countless buyers and sellers and identical products
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What conditions must there be for perfect competition to exist?
The product is homogeneous, many buyers and sellers, firms have no control over price, no barriers to entry or exit, all have perfect knowledge and only normal profit is made
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If there is perfect competition, what pricing strategy must the market have?
Competitive pricing because if there is no product differentiation then customers will always go for the lowest price
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What pricing strategy can businesses with monopoly power choose from?
Premium pricing or price skimming if they want the highest price, penetration pricing if they are going into a larger market or predatory pricing if they want to drive competitors out
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What impact will strong competition have on consumers?
It keeps prices down so consumers can maximise the value they get from a given income
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What impact will monopolistic competition have on consumers?
Products are differentiated so consumers are happy to pay a bit more as there are still many competitors so prices are fairly reasonable
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What impact will oligopolistic markets have on consumers?
Businesses have market power to control prices so they can charge more than the product is worth
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What does non-price competition include?
Product differentiation, marketing and promotion which can create fashions
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Other cards in this set

Card 2


What is the spectrum of competition?


It has perfect competition at one end and pure monopoly at the other and businesses and markets are located between them

Card 3


What is a pure monopoly?


Preview of the front of card 3

Card 4


When does a legal monopoly exist?


Preview of the front of card 4

Card 5


What is the CMA?


Preview of the front of card 5
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