Exercises: 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.

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.

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.

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.

On a highway, there are only three gas stations in $200$ kilometers. 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.

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).

In an autonomous community, 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 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).