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Edexcel B A Level Economics > 4.1 Competition and market power > Flashcards

4.1 Competition and market power Flashcards

1
Q

What is a monopoly?

A

A sole supplier faces no direct competition

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2
Q

Give an example of an industry that is a monopoly.

A

UK rail operator franchises give firms a monopoly on their routes
HOWEVER, in indirect travel market, rail has substitutes –> rail market less powerful than other monopolies

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3
Q

What is monopoly power?

A

Firms have monopoly market if their market share is large enough for them to influence the market –> usually 25%

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4
Q

What is the spectrum of competition?

A

Range of levels of competition in supply to markets

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5
Q

What is normal profit?

A

Just enough profit to keep firms in the industry

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6
Q

Describe the perfect competition theory.

A

Demand is the result of utility that products offer consumers
Consumers are willing to pay up to the price justified by the utility of the product
Suppliers forced to be cost efficient to make normal profit
Equilibrium: D=S

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7
Q

What are the characteristices of perfect competition?

A

Many buyers and sellers
Identical products
Objectives for everyone: profit
Perfect knowledge
easy entry/exit
normal profit
demand is elastic

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8
Q

What is a duopoly?

A

2 suppliers only

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9
Q

What is an oligopoly?

A

A few large firms, most with additional small firms with very little market share

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10
Q

Give an example of an oligopoly

A

UK energy supply dominated by six large oligopolists, few smaller firms
parcel industry

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11
Q

What is monopolistic competition?

A

Involves product differentiation but otherwise keeps assumptions of perfect competition

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12
Q

what are the characteristics of less competitive markets?

A

product differentiation
branding
barriers to entry
abnormal profits
firms making demand more price inelastic

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13
Q

what is productive efficiency?

A

firms have an incentive to reduce costs so prices can be kept down

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14
Q

what is alllocative efficiency?

A

firms which can satisfy consumers are best placed to compete for resources

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15
Q

what are barriers to entry?

A

obstacles which may prevent new firms entering a market

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16
Q

give an example of an industry that has intellectual property and legal barriers

A

pharmaceutical industry - new drugs patented etc

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17
Q

give an example of an industry that has advertising and branding barriers to entry

A

soft drinks
cocacola and pepsi strong branding

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18
Q

What are purchasing economies?

A

include bulk buying and savings on transport costs

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19
Q

what are marketing economies?

A

cost of advertising spread over a wider output so less spent per unit
larger firms can afford their own market research

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20
Q

what are technical economies?

A

large scale machinery more efficient
double decker bus can hold more but still only one driver needed

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21
Q

what are managerial ecomies?

A

larger the firm greater level of specialisation can lccur
specialist staff can be employed

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22
Q

what are financial economies?

A

larger firms attract finance more easily as they have a known track record and more financial security so can be given lower interest rates
can access more sources of finance

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23
Q

what are external economies?

A

when firms are very large govts may build new supporting infrastructure and other institutions may provide support services

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24
Q

why may diseconomies of scale arise?

A

the larger the firm, the harder it is to manage
mistakes are often made, and large firms make large mistakes
large firms can be less flexible and so are slow to react to change
growht can lead to geographicla problems, increased transport cossts and logistical difficulties
specialisation can lead to workers being alienated, increased mistakes, falling productivity and increased absenteeism

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25
what are the arguments against monopoly?
monopolists earn abnormal profits at the expense of economic efficiency monopolist extracting price from consumers that is above cost of resources consumers needs and wants not being satisfied so good is under-consumed - less allocatively efficient less productively efficient - no motive
26
how can you protect monopoly power?
patents - owner exclusive use of invention or process vertical integration - control over supplies and distribution can be important predatory pricing advertising and marketing
27
what are the potential benefits from monopoly?
economies of scale may be passed on to consumers r&d and innovation - more abnormal profits can be invested natural monopoly - productive efficiency threat of compt will keep prices down and costs under control
28
when do natural monopolies occur?
great scope for economies of scale to be exploited overy a huge range of output high ratio of fixed to variable costs
29
what is a pure monopoly?
sole supplier of a good for which there are no close substitutes
30
give an example of a firm that is a monopoly
Cadbury's - have 34.1% of mkt share PED is relatively inelastic - brand loyalty and recognition innovational but also benefitted from economies of scale
31
what is the concentration ratio?
measures the extent to which a mkt or industry is dominated by a few leading firms
32
what is an oligopoly?
industry dominated by a relatively small number of large firms
33
give a global example of an oligopoly
sports footwear - 60% held by adidas and nike
34
what are the characteristics of an oligopoly?
product branding - each firm is branded entry barriers maintain supernormal profits for larger firms interdependence - firms must take into account rivals reaction non-price competition
35
what non-price policies will oligopolists use to increase mkt share?
better quality of service e.g. guaranteed delivery times longer opening hours for retailers, 24hr customer support discounts on product upgrades contractial relationships with suppliers
36
what is a duopoly?
2 firms dominate with a significant mkt share
37
evaluate duopoly
airbus and boeing control 100% of global mkt for large passenger aircraft perfect conditions for covert collusion - held production capacity growth below level of customer demand
38
evaluate 3 way oligopoly
mondelez, mars and nestle - lindt serious competition suspicioins of covert collusion when 3 firms kep cutting bar and pack sizes
39
example of 4 way oligopoly
tesco asda sainsbury and morrisons
40
how would you evaluate oligopoly?
tightness of oligopoly i.e. concentration ratio ease of entry - need credibility for years to break into planes but breaking into sausages is easier differentiated product? - if same then collusion more likely regulation - up to 10% of global turnover
41
what are the assumptions made by the theory of contestable mkts?
number of firms may vary freedom of entry and exit no collusion short run profit maximisers product is homogeneous or branded abnormal profit in SR normal profit in LR
42
what is contestability?
way of measuring how compt mkt is
43
what are the key conditions for a contestable mkt?
absence of sunk costs access to technology low consumer loyalty low entry barriers - costless
44
why have mkts becom more contestable in recent yrs?
entrepreneurial zeal recession - opened up to lidl and aldi deregulation - liberalisation of telecommunications tougher competition law to prevent predatory behaviour EU single mkt technology briught down some entry costs leading to increase in capital mobility technological spill-over - after patent ended for viagra ended other firms manufacturing drug
45
give some examples of contestable markets
fast food hotels private education bookselling city transport services
46
what are the evaluation points for contestable mkts?
threat of new comp influences firms behaviour
47
what is monopsony?
labour mkt structure in which there is a single powerful buyer of a particular type of labour --> gives them wage setting power
48
give some examples of monopsony employers
nhs armed forces supermarkets local councils
49
what is monopsony power?
buying or bargaining power in their mkt can exploit bargaining power to negotiate lower prices
50
give examples of industries where monopsony power exists
food retailers when purchasing supplies from farmers low-cost airlines getting a favourable price when purchasing a new fleet of aircraft govt in military equipment nhs as a purchaser of prescription drugs
51
what are the advantages of monopsony power in mkts?
improved value for money - nhs can drive down prices of drugs etc producer surplus - lower costs will raise profitability so moe r&d monopsony can reduce effect of monopolist - nhs vs pharmaceuticals mutual beneficial gains allow trade to continue fair trade - improved contracts and prices for farmers
52
what is working poverty?
a family with people in work remains below the official poverty line
53
disadvantages of monopsony power
wage offered is lower than the marginal revenue product worker exploitation working poverty
54
what are the key functions of a trade union?
pay bargaining protecting pension rights employment rights working conditions lobbying for improved MW and training funding
55
evaluate monopsony power and trade unions
monopsony may pay low wages but in practice may not and may beneift by increasing wages challenging assumptions - assuming labour productivity unaffected by wages big firms too big? - more competition policy?
56
what is the equation for contribution?
price - avch
57
what is the minimum efficient scale?
lowest level of output at which average cost is minimised
58
what is marginal cost/revenue?
the cost/revenue if one more good was to be made at the current ouput
59
what is allocative efficiency?
when the price is equal to the marginal cost noone can be made better off without making someone else worse off
60
what is productive efficiency?
when output is supplied at minimum unit cost, using fewest possible resources
61
what is dynamic efficiency?
changes in choice available in a mkt and quality or performance of products that we bought ongoing innovation

Edexcel B A Level Economics (28 decks)

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