3.4 Market structures (+3.2 Business Objectives) Flashcards
What are efficiencies?
Concerned with how well resources, like time, materials or talents are used
What is static efficiency?
When resources are allocated efficiently at a point of time (short run efficiency)
Different types:
- Productive
- Allocative
What is dynamic efficiency?
When resources are allocated efficiently overtime
Via innovation
The more innovation, the more dynamically efficient a firm is
What is productive efficiency?
When production is achieved at it’s lowest cost
So produces at bottom of AC curve
AC=AR
Only exists where there is technical efficiency
Occurs when firm operates on PPF curve
What is technical efficiency?
When a given level of output is produced with the min number of inputs
Or max output is produced with a given quantity of input
Has to be technical efficiency when productive efficiency is present
- as its the cheapest way to produce
However, not all technically efficient outputs are productively efficient
E.g may be cheaper to produce output with a machines with 2 workers instead of 9 workers
What’s allocative efficiency?
(economic efficiency)
Measures whether resources are allocated to those who demand them
When the scarce resources are used t produce a bundle of goods that satisfies the consumer and maximises welfare
Where supply = demand
MC (supply) = AR / P (demand)
P = MC
What’s X-inefficiency?
(organisable slack)
Specific type of productive inefficiency
Where a firm fails to minimise it’s avg costs at a given level of output
So they don’t work on the curve AC
They work above it
What’s perfect competition?
- Buyers and sellers must be small enough to not influence the price
- Freedom to entry / exit
- Buyers and sellers have perfect knowledge of prices
- All firms produce homogeneous products
AR curve is perfectly elastic
- as a price increase will loose all sellers
so D = AR = MR as a straight horizontal line
Their MC curve is their supply curve
- as they are price takers
In the long run, firms all join as no barriers and removes profits
So theres no profit in long run
Productively efficient
Allocatively efficient
Dynamically inefficient
What’s monopolistic competition?
The same as perfect competition, but sells non-homogeneous products instead
Can increase prices without loosing all customers
- so have downwards sloping AR and MR, but demand is elastic
- not a price taker, but have weak market power
Can make abnormal profits in short run
Can’t in long run, as competition makes AC=AR
Allocatively inefficient
Productively inefficicnet
Dynamically inefficient
What’s an oligopoly?
- Few large sellers dominate the market
- Barriers to entry/exit are high
- Buyers and sellers have imperfect knowledge of prices and competitors’ actions
- Firms produce non-homogeneous products
Firms are interdependent
- an action from a firm affects others
Firms are price makers and adjust quantity based on strategic interaction with competitors
In the long run, firms can earn abnormal profits due to barriers to entry preventing new competitors from joining
Productively inefficient
Allocatively inefficient
Dynamically efficient
What’s collusion?
There’s a very strong incentive for oligopolistic firms to collude
Meaning they make agreements among themselves to restrict competition and maximise benefits
There’s different types of collusion?
- Formal collusion
- Tacit / informal collusion
What’s formal collusion?
Where firms make agreements to limit competition
Typically changing prices and output
Different types:
Price agreements
- where they fix prices, maybe low, to ensure other firms can’t compete
Cartel
- more ‘formal’ than formal
- regular meetings, agreements must be met, no cheating
What’s overt vs covert collusion?
Overt = formal collusion that’s open for everyone to see
Covert = hidden away from legal authorities
Most collusion today is covert
What’s Tacit / informal collusion?
Collusion but no formal agreements about co-operating together
Just monitor each other closely
Could do through price leadership
- where one firm sets a price (often big firm) then smaller firms follow
Game theory
Analysis of situations of groups being made interdependent
may not trust each other, but will be benefits if both of them work together.
- but a bigger reward if they betray, but if both betray, they both get bad
What’s a playoff matrix?
A table showing the possible ways a matrix will play off
How do you draw a playoff matrix?
Have 2 people/ firms etc
Have so they can either accept or deny something and their outcome relies on the other person/firm
Draw vertical lines in all 4 boxes
Have the top left one where they collude, e.g both co operate and both deny they did a crime
Have the bottom right where they both don’t work together and end up getting a longer sentence each
Have the other 2 where the one who try to co-operate looses out massively and the other one is best off
What’s a monopoly?
Only one firm in the market
Barriers to entry are too high to enter
Firm is a price maker
Productively inefficient
Allocatively inefficient
Dynamically efficient
Pure monopoly (100% share)
Working monopoly (firm with monopoly powers, >25%)
Pure monopolies are when it just works out more efficient for only one firm to run the market
E.g tap water
What’s price discrimination?
Done by monopolists to maximise profits
Charging different prices for the same good for different categories of people
Monopolists only do this when:
- face different demand curves
- able to distinct different groups of people
- must be able to keep markets separate for a low cost
Price discrimination splits up the graphs, but only changing their AR and MC
Don’t have to draw MC and AC for the segmented graphs
What’s the 3 degrees of price discrimination?
First degree
- occurs when firm can charge each customer a different price
- the max price that they will pay
Second degree
- charges customer on how much of the product they buy
Third degree (important one)
- splits consumers into different groups, based on characteristics
- e.g times for the train, elderly people get cheap etc
What’s a monopsony?
When there’s only one buyer in the market
No competition to buy due to economies of scale etc
Pay lower prices as firms selling have no choice, but supply them less
- not good for consumers
Have higher abnormal profit
Pure monopsony is rare
- but many firms have monopsony powers
What’s a bilateral monopoly?
When a monopsony meets a monopoly in the market
So theres only one buyer and one seller
There is greater allocatively efficiency here
Prices, quantity demanded/ supplied are all higher
What’s a contestable market?
Assumes there’s freedom to entry/ exit
Any number of firms
Firms compete with no collusion
Perfect knowledge
A contestable market will follow some of these traits, not perfectly
But mainly if entering market is easy = contestable
There’s no perfectly contestable markets
Perfectly competitive and monopolistic competition are contestable due to low barriers of entry
Abnormal profits in short run
Normal profits in long run
What’s hit and run competition?
When firms enter markets for high profits, then leave at low profits after driving the price down
Happens in contestable markets
What’s consumer sovereignty?
The power of consumers to allocate resources through their spending decisions
The ultimate control of a firm
What’s Neo-Keynesian Economics?
Believe firms maximise long run profit rather than short run
Tend to keep prices high and keep them due to ‘stickiness’ of supply and demand
- as they believe it damages their position in the market
What are the 4 different types of business objectives?
Profit maximisation
- MC=MR
Revenue maximisation
- top of TR curve
- MR=0
Sales maximisation
- AC=AR
Profit satisfying
- Making only enough, sufficient profit and not maximising anything
- to benefit other peoples needs, like wages, or satisfying shareholders
What’s Nash equilibrium?
When they both make not much as they both drop prices
Will make a lot more if the colluded
But they can’t be screwed over
What are the 3 types of price competition strategies?
Price Wars
Predatory pricing
Limit pricing
What are price wars?
Where several firms repetitively lower their price to outcompete others
To gain/ defend market share
Occur when non-price competition is weak
Prices are increased back to normal after firms leave, due to low supply
What is limit pricing?
Like predatory pricing, established firm drops price so new firm struggles to compete
But prices are low, but above cost so still profitable
Prevents potential rivals from entering
Usually legal to do so
May not raise prices back to was before, as they can just enter again, and they’ve got a bigger marketshare
What is predatory pricing?
Lowering prices when a new competitor joins the industry in order to drive them out
Prices are often lowered to a point below the cost of production. Once they have left the market, prices are raised again
Strategy is usually illegal
Is illegal in the UK under the Competition Act 1998
What are 8 non-price competition strategies?
Loyalty through loyalty cards and rewards
Branding
Packaging
Celebrity/ influencer endorsement
Corporate sponsorship
After sales services
Delivery policies
Product warranties
