1.5 Perfect competition, Imperfectly competitive markets and Monopoly Flashcards

Question

What is interdependence and what does it create in markets?

Answer 1

actions of one firm will impact other firms - creates uncertainty as firms are unsure of how competitors will react

Answer 2

allows firms to operate closer to conditions of monopoly and reduce uncertainty This could be ILLEGAL

Answer 3

firms often collude to segment the market geographically - monopoly power in own geographical area - allows inefficient firms to stay in business

Answer 4

formal agreement between firms to collude in the operation of the market - normally price fixing - or fixing ouput levels

Answer 5

allows them to operate closer to conditions of monopoly seen as against interest of consumer - ILLEGAL HOWEVER, some cartels might be allowed if it is seen to be in the interest of the consumer

Answer 6

by colluding, firms can make supernormal profits where AR > AC

Answer 7

if it is seen to be in the interest of th consumer - e.g. innovate new production processes - leads to better efficieny in the industry - lowers cost of production - benefits consumer as there is low prices

Answer 8

dominant firms set the price, others follow

Answer 9

**EXPLICIT** = firms **overtly** agree to set prices **IMPLICIT** = **tacit** agreement to set prices, difficult for regulators to identifiy tacit = no communication | overt = communicate

Answer 10

If firms A raises price, other firms will not drop price and gain market share as firm A sales will fall Therefore, demand = price elastic If firm A drops price, other firms will follow to retain market share Therefore, demand = price elastic | suggests that in oligopoly firms are unlikely to raise or drop prices

Answer 11

1.5.5 see notes for kinked demand curve

Answer 12

price tends to be stuck , despite changes in demand and supply in the market

Answer 13

**Collusive pricing** - agree to set high price, restricts output **Predatory pricing** - force competition out by setting low prices, high output to meet high demand **Limit pricing** - operates above profit max (MC=MR) **Cost plus pricing** - set price based on AC

Answer 14

heavy investment high level of capital investment, expenditure on fixed assets lead to a stream of income in the future R+D = barrier reducing threat

Answer 15

**Advertising** = sunk cost, deters new entrants. establish brand loyalty **Marketing** = differentiated from competition, new product development can increase demand and maintain brand loyalty

Answer 16

reduces likely-hood of price wars - as it leads to lower profits for firms

Answer 17

- innovating to create competitive advantages - this is because they can reinvest supernormal profits, leading to dynamic efficiency (EoS) - HIghly competitive reducing costs - leads to low prices, and better quality for consumers

Answer 18

- Reduces choice for consumers (high CR firms) - will act like monopolists, reducing output, increasing price leads to misallocation of resources and allocative inefficiency - Barriers to entry small competitive firms struggle to enter - Advertising = manipulate consumers leads to irrational decision making - Exhibit productive efficiency as they do not operate on the lowest point on LRAC curve

Answer 19

- only one firm in market - firm and market demand curve is same D = AR - profit maximises - MC=MR - makes supernormal profits as it produces where AR>AC - Price maker - opposite of perfect competition

Answer 20

**Productive inefficiency** - occurs above the lowest point on the LRAC **Allocative inefficiency** - as price does not reflect the value that consumers put on the product as P>MC **X-inefficiency** - no incentives to keep costs low. lack of competition **Dynamic efficiency** - firm makes supernormal profits in LR

Answer 21

**Economies of Scale** - lowers AC of production - can charge low prices **Use retainted profits to invest in R+D** - creates dynamic efficiency as innovation leads to better processes lowering the LRAC curve - better quality products can be developed as monopolies can invest without the threat of competiitors

Answer 22

**Removes competition due to barriers** - makes supernormal profits in LR by charging high prices - leads to consumer being exploited Can reduce choice for consumer and quality of products as there is no competition