Market structures

Explain which four conditions define perfect competition (number of firms, type of product, barriers to entry and price-setting power) and why firms in it are said to be 'price takers'. Illustrate this with the example of a fruit stall at a street market.

Explain what barriers to entry in a market are and describe three examples: an administrative licence, enormous start-up costs and a patent. State, in each case, which market structure they favour.

Explain the difference between a homogeneous product and a differentiated product and give two examples of each. Reason in which market structures each type of product is found.

Define these four market structures and give a real-life example of each, different from those covered in class: perfect competition, monopolistic competition, oligopoly and monopoly.

Classify each of these markets into its market structure and justify each decision using the criteria studied: wheat (thousands of farmers with a virtually identical product), hair salons in a city, supermarket chains (four chains account for almost all sales), and a country's mains gas network (a single pipe reaches each house).

Compare the power over the price of a vegetable farmer (thousands of producers with an almost identical product) and that of one of a country's four phone operators.

1. a) Who is a price taker and why?
2. b) Reason what would happen if the farmer raised his price by $20\ \%$.
3. c) Reason what the operator would have to weigh up before raising its tariffs by $20\ \%$.

The coffee shop market in a city has hundreds of venues, each with its own atmosphere, menu and more or less loyal clientele.

1. a) Classify the structure of this market and justify it using at least two criteria.
2. b) If a coffee shop raises the price of coffee by $10\ \%$, will it lose all its customers? Relate your answer to product differentiation.

In a city, new boutique gyms open every year (spinning, crossfit, yoga), each with its own style and timetable, and they coexist with the big chains.

1. a) Classify the structure of this market and justify it with two criteria.
2. b) Explain what role product differentiation and advertising play in this structure.
3. c) Reason what will happen to the extraordinary profits of a very successful gym in the long run if entry into the market is free.

In one country, only four mobile phone companies share practically the whole market.

1. a) Identify the structure of that market.
2. b) Point out two features that led you to that conclusion.

A country's food delivery market is dominated by three large platforms.

1. a) Classify the structure of the market.
2. b) Reason what barriers to entry make it hard for a small new platform to challenge them (already registered users, the network of riders, agreements with restaurants).

On a motorway, there are only three petrol stations in $200$ kilometres. When one of them changes its price, the other two copy it within hours.

1. a) Identify the structure of this market and explain what interdependence between firms is.
2. b) Reason why these firms might be tempted to agree on prices (collusion) and what consequences this would have for drivers.

The air route between two capital cities is operated by only two companies. When one launches a special offer, the other responds within a few days with a similar one; when one improves its schedules, the other imitates it.

1. a) Identify the market structure and explain it.

1. b) Explain what interdependence is and how it shows up in this case.

1. c) Explain why both companies may want to avoid a price war.

The world music streaming market is dominated by a few platforms that offer similar catalogues but compete with exclusive podcasts, personalised playlists and sound quality.

1. a) Classify the structure of this market.
2. b) Identify two barriers to entry that protect the current platforms.
3. c) Explain why, despite being an oligopoly, they compete more through differentiation than through price.

In a region of Ireland, four supermarket chains account for $85\,\%$ of the market share. Following a $10\,\%$ increase in energy and transport costs, the prices of the basic basket in all four chains have risen identically ($+18\,\%$) within two weeks.

1. a) The consumer association denounces that there is an illegal price-fixing agreement (cartel), while the business association argues that it is the logical and independent response of efficient firms facing identical costs. Interpret the data and analyze which signs would support the thesis of tacit or explicit collusion versus the business association's stance.
2. b) Use game theory (the prisoner's dilemma) to predict what incentives one of the four chains has to covertly break this price level through personalized discounts on its mobile app, and what strategic response it would trigger in its rivals.
3. c) Design a public intervention proposal for this market that does not consist of setting price ceilings by law (justifying why the latter measure would cause shortages) and predict its impact on effective competition in the sector.

The four major telecommunications companies in a country simultaneously raise their rates by $5\,\%$ in January for three consecutive years, claiming that they are "improving network speed and quality". The competition authority opens disciplinary proceedings.

1. a) Analyse the economic and legal viability of the sanction: distinguish the evidence that would prove explicit collusion versus the mechanisms of price leadership and tacit collusion typical of a non-cooperative oligopoly. Why can competition law not fine a company simply for matching its rival's rate increase?
2. b) The regulatory authority approves a regulation requiring network operators to lease their network to Mobile Virtual Network Operators (MVNOs) at a regulated wholesale price. Using economic reasoning, predict the impact of this measure on retail rates, oligopoly margins, and incentives to continue investing in the rollout of new networks (fibre and 5G).
3. c) If one of the four companies decides to launch an aggressive price war to gain market share, what legal strategic tools do the other three have to neutralise it without abruptly lowering their general rates for all their customers?

The figure orders the market structures according to the price-setting power of each firm, but one of the four boxes is empty.

1. a) Which market structure occupies the empty box? Reason your answer based on the features indicated below it.
2. b) Explain what the bottom arrow means and why the four structures are ordered in this way.

A city's drinking water supply is provided by a single concessionaire company.

1. a) What market structure is this? Justify your answer.
2. b) Explain why the firm in this structure is said to have power over the price, unlike a farmer in perfect competition.

A pharmaceutical laboratory is the only seller of a drug thanks to the patent. When it expires, several generic manufacturers enter the market and the price falls by $60\ \%$.

1. a) What market structure existed while the patent lasted and what type of barrier to entry is it?
2. b) How does the market structure change when the patent expires?
3. c) Explain why the State grants patents (and therefore temporary monopolies) even though monopolies make products more expensive.

The state public rail infrastructure manager retains exclusive ownership of the tracks and stations, but has liberalized passenger transport by allowing the entry of new private operators that pay a toll to run on them.

1. a) Economically justify, based on the behavior of fixed costs, average costs, and economies of scale, why it makes sense to maintain a natural monopoly in the physical infrastructure (tracks), but it is viable and efficient to introduce competition in the provision of the transport service (trains).
2. b) Following the entry of competitors, tickets on the busiest high-speed line have fallen by $35\,\%$, but medium-distance and rural lines still fail to attract private operators and accumulate losses. Explain this phenomenon using the concept of "cross-subsidization" and predict what territorial consequences applying solely free-market logic across the entire network would have.
3. c) Design an economic regulation mechanism that makes it possible to finance the maintenance of unprofitable but socially necessary lines without resorting to raising general taxes or driving new high-speed competitors out.

An analyst states in a debate: "To maximize consumer welfare, the state should intervene and force all economic sectors (from the automotive industry and telecommunications to pharmaceuticals) to be broken up into thousands of identical small firms that compete under perfect competition."

1. a) Economically refute this statement by demonstrating why pure perfect competition is unfeasible and inefficient in capital-intensive sectors with high fixed R&D costs and strong economies of scale.
2. b) Compare the surplus that consumers obtain under monopolistic competition (such as fashion or dining, where they pay a markup over marginal cost due to differentiation and branding) with a hypothetical scenario of perfect competition with a homogeneous product and no variety. Justify whether this markup necessarily constitutes waste or a deadweight loss.
3. c) Determine what trade-off economic policy faces between static efficiency (prices tightly aligned in the short run through price competition) and dynamic efficiency (innovation, quality improvements, and long-term technological development).

Consider two markets in an economy:

• Market A (wholesale wheat): hundreds of farmers offer identical grain; the price is set on the international commodity exchange and equals the minimum long-run average cost ($0.22\ \text{€/kg}$).

• Market B (piped natural gas distribution): a single company manages the city's underground pipelines; its marginal cost of distribution is $0.05\ \text{€/kWh}$, but it sets the rate at $0.14\ \text{€/kWh}$ taking advantage of the inelasticity of domestic demand.

1. a) Comparatively analyse the equilibrium in both markets and explain why Market B generates a "deadweight loss" for society, detailing how consumer surplus is redistributed.
2. b) Suppose that the Government forces the monopoly in Market B to set a rate equal to its marginal cost ($0.05\ \text{€/kWh}$). Predict what financial problem the gas company will face if its fixed installation costs are very high and why this conventional measure would lead to its shutdown.
3. c) Design an alternative tariff regulation (such as a two-part tariff: fixed access fee plus a variable fee per consumption) that allows the gas company to cover all of its costs without distorting efficient consumption by users.

A digital home delivery platform enters a city backed by a powerful capital fund. For two years, it charges minimal commissions of $5\,\%$ to restaurants and offers free delivery to customers, losing $\text{€}\ 3.50$ on every order. After driving local delivery companies out of business and capturing $90\,\%$ of the market, it raises the commission for restaurants to $30\,\%$ and adds a service fee of $\text{€}\ 2.50$ per order for customers.

1. a) Economically justify why a predatory pricing strategy is only profitable for the company if long-lasting barriers to entry exist once competitors have been driven out. What would happen if barriers to entry into the sector were low when the platform attempts to recoup its losses?
2. b) As a member of the investigation team of the National Commission on Markets and Competition (CNMC), the platform claims that its initial rates were merely "loyalty promotions and network economies". Propose three objective economic indicators that you should analyse to prove that this was an abuse of a dominant position through predatory pricing.
3. c) Analyse the distributive impact of this outcome on the three affected groups (restaurants, couriers, and consumers) and predict what incentives independent restaurants have to organise and respond to this market power.

A business conglomerate controls the 10 best-selling sunglasses frame brands, the leading national retail opticians chain, and the country's largest private vision health insurer. A frame whose direct manufacturing cost is $\text{€}\ 12$ is sold in stores at an average price of $\text{€}\ 180$.

1. a) Explain how this group uses its vertical integration to execute a margin squeeze or channel-blocking strategy against independent designers who want to distribute their glasses in the retail market.
2. b) A new company selling frames online for $\text{€}\ 35$ tries to challenge the market. Analyse what non-technical barriers to entry (brand reputation, consumer habits, convenience, and agreements with insurers) this emerging competitor faces.
3. c) The competition authorities are evaluating two measures: 1) forcing the structural separation of the company (divestment and requiring the sale of either the brands or the retail opticians); or 2) setting a price ceiling on frames. Assess which of the two alternatives is more efficient in promoting long-term competition and justify the drawbacks or unintended consequences of the other.

In the economic debate on market structures and innovation, there are two opposing theses:

• Thesis A (Schumpeter): only large corporations with extraordinary profits and market power can finance the costly and risky R&D that drives technological progress.

• Thesis B (Arrow): an established monopoly or oligopoly tends to slow down radical innovation so as not to cannibalise its own profitable products (replacement effect) and acquires startups solely to shut them down (killer acquisitions).

1. a) Apply both theses to a real current sector (pharmaceuticals, technology, or automotive) and determine under what conditions the oligopoly functions as an engine of innovation or as a barrier to change.
2. b) In oligopolistic sectors such as mobile phones or household appliances, much of the brands' effort is devoted to "artificial differentiation" (continuous release of models with marginal improvements and heavy advertising campaigns). Judge whether this competition genuinely benefits the consumer or represents an inefficient allocation of resources compared to price competition.
3. c) Design an adjustment to patent law that appropriately balances two conflicting objectives: maintaining incentives for oligopolies to make large investments in R&D and ensuring that society and new competitors can access and improve those technologies within a reasonable timeframe.