Answer Tutorial 5: Week 7 - Market Structures
It is usual to divide markets into four categories. In ascending order of competitiveness these 1. are (fill in the missing three): 1.
Monopoly
2.
Oligopoly
3.
Monopolistic competition
4.
Perfect competition
To which of the above four categories do the the following apply to the member firms? (There 2. can be more than one market category in each case.) (a)
Firms face a downward sloping demand curve. Monopoly, oligopoly, monopolistic competition
(b) competition
New firms can freely enter the industry.
Perfect competition, monopolistic
(c) oligopolies
Firms produce a homogeneous product.
Perfect competition, some
(d)
Firms are price takers. Perfect competition
(e)
Firms are concerned with their rival’s actions and reactions
(f)
There is perfect knowledge on the part of consumers of price and product quality.
oligopoly
Perfect competition
In which of the four categories would you place each of the following? (It is possible in some 3. cases that part of the industry could be in one category and part in another: if so name both.)
(a)
A village post office
(b)
Restaurants in large town Monopolistic competition Monopolistic competition
(c)
UK high street banks
Oligopoly
(d)
UK energy companies
Oligopoly
(e)
Producers of barley Perfect competition (or close to it)
(f)
Water supply
Monopoly for certain people and products
Monopoly
(g)
Local buses
(h)
The market for foreign currency
Monopoly or oligopoly Perfect competition (or close to it)
Even if a firm is currently a monopoly, it may be forced to behave as if it were in a 4. competitive market if there is potential competition: i.e. if the market is contestable. (a) The threat of this competition will be greater the higher / the lower [delete as applicable] the entry costs to the industry and (b)
5.
the higher / the lower [delete as applicable] the exit costs from the industry.
A perfectly contestable market is defined as one where entry and exit costs are zero.
What would a monopolistically competitive industry have in common with a perfectly 6. competitive industry? (a)
There are no barriers to the entry of new firms into the market. Yes
(b)
Firms in the industry produce differentiated products.
(c) Yes
The industry is characterised by a mass of sellers, each with a small market share.
No
(d) A downward sloping demand curve means the firm has some control over the product's price. No
7.
(e)
In the long run only normal profits will be earned.
(f) No
Advertising plays a key role in bringing the product to the attention of the consumer.
Yes
Which of the following are characteristics of oligopoly? (a)
There are just a few firms that dominate the industry.
(b)
There are few if any barriers to the entry of new firms into the industry. No
(c)
The firms face downward sloping demand curves.
(d)
There is little point in advertising because there are so few firms.
(e)
Oligopolists tend to take into account the actions and reactions of other firms.
Yes
Yes No Yes
Assume that there are six firms in a country's carpet manufacturing industry and that they 8. collude to restrict output, thereby maintaining a high price. Under which of the following circumstances is collusion likely to break down? (a)
The government imposes higher duties on imported carpets.
No
(b)
Several new chains of discount carpet retailers enter the market Yes
(c)
One of the firms develops a new cost saving technique of producing carpets.
(d)
Three of the smaller manufacturers merge.
(e)
One of the firms becomes dominant in the industry.
(f)
The demand for carpets falls.
(g)
Legislation is passed preventing the exchange of information by producers on
Yes
No No
Yes
costs, sales and product development. Yes
9. Read the case study and discuss the questions at the end.
Case study 1
Extract from BBC News online, 22/10/2015 “The UK's competition watchdog says bank customers can save £70 a year by switching their
current account provider.
Those who go into an overdraft on a regular basis could save as much as £260 a year by switching accounts. There are 68 million active personal current accounts in the UK, but only 3% of customers switched last year. So, what does the Competition and Markets Authority (CMA) suggest to get those customers moving and, perhaps more importantly, w hat proposals does it rule out? Customers need to choose a new bank and account. If the bank or building society is part of the current account switch guarantee (and most of them are) you choose a date for the switch to start. The new bank will switch over the customer's balance and all direct debits and standing orders. The process should be complete within seven working days and, for the next 36 months, any payments made accidentally to the old account will be redirected automatically. The retail banking industry is no stranger to competition reviews, such as:
In 2002 there was a Competition Commission inquiry into the supply of banking services to small businesses by clearing banks In 2008 the Office of Fair Trading investigated the provision of personal current accounts In 2011 the Independent Commission on Banking also made recommendations aimed at promoting financial stability and competition.
All of them, in one way or another, have called for an encouragement for customers to switch.” (BBC, online, 22/10/2015)
Questions to discuss:
A. How would you describe the market structure of for high street banks operating in the UK? Oligopoly
B. Discuss the possible barriers to entry in this industry and the type of profits that can be earned.
Barriers to entry: banking licence, costs of setting up a new bank (costs of opening and operating branches), economies of scale, brand loyalty, customer inertia.
Supernormal profits can be earned in both the SR and the LR
