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economics > 4.1.5 competition/ types of market > Flashcards

4.1.5 competition/ types of market Flashcards

1
Q

4 main market types from LEAST to MOST competitive

A

perfect comeptition
monopolistic competition
oligopoly
monopoly

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2
Q

market structure is characterised by

A

number of firms
degree of product differentiation
degree of barriers to entry

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3
Q

homogoneous

A

products are all same

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4
Q

when do firms breakeven

A

TR=TC

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5
Q

profits increase when

A

MC<MR

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6
Q

profits decrease when

A

MR<MC

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7
Q

why do firms choose to profit maximise

A

increase wages
increase dividends for entrepreneurs
to finance investments

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8
Q

total profits are maximised when

A

marginal profits = 0

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9
Q

what is the principal-agent problem/ divorce of ownership from control

A

agent makes decisions for principle
agents acts in his own interests

eg when an owner sells shares they loose some control over the business
could lead to decreased wages for manager to increase dividends for shareholders

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10
Q

OTHER objectives of the firm

A

survival (esp in times of recession)
growth- so can take advantage of EoS
quality, to build a reputation
maximise sales revnue (when MR=0)
sales maximisation, until make a loss
environmentally friendly

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11
Q

what is the satisficing principle

A

earning just enough to keep shareholders happy
managers may satisfice by earning enough profits to keep shareholders happy whilst still meeting other objectives
this occurs when their is a divorce of owenership from control

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12
Q

characteristics of perfect competition (8)

A

many buyers and sellers
sellers are price takers
free entry and exit of the market
perfect knowledge
homogeneous goods
short run profit maximisers
factors of production are perfectly mobile
no externalities (negative or positive)

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13
Q

advantages of perfect competition (6)

A

perfect knowledge
no barriers meaning max choice for consumers
normal profits in LR so consumers aren’t exploited
max consumer welfare as P=MC
allocatively efficient as P=MC
productively efficeint as in LR MC=ATC

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14
Q

disadvantages of perfect competition (3)

A

unrealistic model
normal profits prevent dynamic efficiency
economies of scale not accounted for in model

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15
Q

explain how perfect competiion can ONLY make losses/profits in the SHORT RUN

A

if firms are making supernormal profit due to perfect knowledge and no barriers new firms will enter the market (supernormal profit is the incentive)
increased supply of the good which decreases prices and also decreaess D=AR=MR as firms are price takers
now AR=ATC so firms are making normal profit in LR
(same for loss but firms leave)

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16
Q

in the long run in perfect competition

A

MR=AR=MC=ATC

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17
Q

why are firms price takers in perfect competition

A

if decrease price, losses
increase price, lose all customers to competitors

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18
Q

why do only SOME firms leave a loss making industry

A

if AR<ATC>AVC, firms can remain in the market as they can cover their variable costs and can decrease AFC by increasing sales
but if AR<AVC this is the shutdown price and it is no longer profitable to remain in the market so firms must shutdown</ATC>

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19
Q

characteristics of monopolistic competition (8)

A

short run profit maximisers
product differentiation however lots of close substitutes
large number of buyers and sellers
dilluted market
compete based on non price factors
no barriers to entry or exit
some degree of price setting power
imperfect information

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20
Q

example of monopolistic competition market

A

hairdressers

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21
Q

monopolistic competition in short run

A

in SR firms profit maximise at MC=MR
at this point AR>ATC so supernormal profit
D is downward sloping as it has a degree of inelasticity due to non price factors

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22
Q

monopolistic competition in long run

A

firms are attracted to market by supernormal profits
makes firms D more elastic which shifts it left
AR=ATC so normal profits
H/E firms can influence their elastcity using non price factors which can make them profitable

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23
Q

advantages of monopolitic competition

A

firms can make profit so can reinvest, dynamic efficiency
more consumer choice
more realistic model than perfect competition

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24
Q

disadvantages of monopolistic compeition

A

low profits in LR so dynamic efficiency is limited
less productively efficient as aren’t at bottom of ATC
waste leading to neg externalities

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25
characteristics of oligopoly
high barriers to entry and exit high concentration ratio (5 firm over 60%) interdependence of firms differentiate products via branding
26
oligopoly characterised by market conduct
how they compete how they set prices
27
oligopoly characterised by market structure
number of firms conc ratio product differentiation
28
concentration ratio
combined market share of top few firms in a market higher conc ratio = less competitive market
29
collusion
2 or more firms work together to set price or output levels in an anti comptitive way more likely happen when less firms and higher barriers
30
cooperation
where firms work together for mutual benefit that does not harm the consumer or market
31
tactic collusion
dont specifically agree to collude eg price leadership hard to prove
32
example of cartel
canadian maple syrup price fix
33
why may a cartel collapse
although a cartel may maximise joint profits individual firms could even further increase profits by expanding output and undercutting cartel by a small margin thus cartels are usually undermined and collapse
34
is collusion illegal
yes
35
what do firms collude on
price eg cartel output eg restrict to drive up privces information eg customer details
36
fine for collusion
up to 10% of annual turnover however whistle blowing firm receives no firm
37
collusion case study- public schools
50 schools including eton and harrow schoolboys hacked computer and found emails about fee collusion they had put cartel way above inflation fined 0.7% of annual turnover
38
impact of collusion on consumer
regressive loss of consumer welfare lack of transparency unstable markets
39
kinked demand/sticky price theory
discontinuous MR curve so MR is not set and can be anywhere between A and B thus if MC (MC=MR is profit max) stays between A and B no need change prices which would be admin costs
40
cartel
group of 2+ firms control prices, limit output or prevent new entrants
41
price leadership
dominant firm changes prices and other firms follow to maintain market share
42
price wars
firms constantly cutting prices below competitors leading to more price cutting
43
aim of non price comp
make good more inelastic
44
factors influencing price in oligopoly
maker/taker interdependence PED output (high means low price) barriers (high means high price)
45
factors influencing output in oligopoly
market share of firm scope for economies of scale shape of ATC (L shaped)
46
factors influencing investment in oligopoly
importance of tech in industry change in tastes ability to access funds interest rates
47
factors influencing expenditure on research in oligopoly
risk need for development skill of workforce
48
factors influencing advertisement in oligopoly
degree of product differentiation value of branding profits to fund it cost effectiveness
49
game theory conclusions
price rigidity at lower price both firms choose thus leading to non price comptition temptation to collude to max both profits BUT also temptation to undermine collusion to max profit further
50
advantages of oligopoly
supernormal profits can lead to dynamic efficiency profits can lead to corp tax revenues collaboration can increase industry standards large oligopolies can be productively efficient
51
disadvantages of oligopoly
misallocation of resources loss of consumer surplus collusion reduces consumer welfare collusion can increase monopoly power of existing firms meaning less entrants less efficiency drives up ATC
52
Oligopoly case study- UK supermarkets
5 firm conc ratio of 66% compete on non price eg clubcard race to bottom as shown in adverts
53
what is a monopoly firm
firm with over 25% market share eg Tesco
54
characteristics of a monopoly firm
one firm limitted product differentiation high barriers supernormal short and long run profits price maker non price competition low productive and allocative efficiency inelastic demand due to lack of substitutes imperfect knowledge
55
barriers in a monopoly market
- legal, patents to stop competitors entering a market - high capital and sunk costs - economies of scale prevent small firms from competing on price - predatory and limit pricing (P
56
pure monopoly
firm with 100% market share
57
natural monopoly
gov or cma allow 1 firm to naturally supply market eg National Grid
58
disadvantages of monopolies
- lack allocative efficiency - lack productive efficiency - organisational slack so X inefficient - internal diseconomies of scale - inelastic demand and lack of substitutes so firms set high prices reducing consumer surplus - workers may have weak bargaining power - use profits to pay expensive consultants and thus avoid taxes
59
advantages of monoplies
- supernormal profits can be used to subsidise areas of the business that would otherwise be expensive for consumers - economies of scale, reduced ATC, could reduce prices to increase consumer surplus - may help keep the UK competitive internationally - can absorb price changes so priced remain fairly stable - supernormal profits can be reinvested to increase dynamic efficiency - increased corp tax revenues for gov
60
how can a monopoly be more dynamically efficient than a perfect competition firm
monopolist exploits their economies of scale giving them a lower marginal cost and thus they could reduce prices to increase consumer surplus this is known as a dynamic monopoly
61
x inefficiency
producing above the ATC curve because of organisational slack and complacency from supernormal profits
62
characteristics of a natural monopoly
high ratio of fixed costs to variable costs competition may be inefficient and cause waste
63
london underground as a natural monopolu
50% of income is from revenue and other half is from gov subisidies
64
why do natural monoplies need a subsidy
when they operate at AR=LRMC they are making a loss
65
what is price discrimination
charging different prices to different customers for the same product or service with prices based on willingness to pay
66
conditions necessary for price discrimination
- must be able to identify segments without excessive admin costs - at any particular price different PEDs must be present - seepage must be prevented such as buying in one submarket and reselling in another, undercutting firm
67
first degree price discrimination
priced at what customer is willing and able to pay takes away consumer surplus requires knowledge of customers eg painter may base price of how expensive your cars look
68
seconds degree price discrimination
- charged quantity based with blocks of consumption, eg Q1 minutes of phonecall at P1 and subsequent Q2 minutes at P2 - sell spare capacity off at cheaper price, eg trains, originally at MC= MR and spare at P=MC
69
third degree price discrimination
inelastic eg buying on day, charged high price as they have no time to consider alternatives elastic eg buying in advance charged low price as they will choose cheapest option
70
advantages of price discrimination
if dilligent consumers can gain lower prices less waste revenue can be reinvested for dynamic efficiency protects market share cover large fixed costs
71
disadvantages of price discrimination
loss of consumer surplus fairness loose loyal customers segment leakage issues of bounded rationality admin costs careful to cover MC loss of allocative efficiency
72
static efficiency
how efficient the market is at the current output level
73
dynamic efficiency
the extent efficiency can improve over time can be product innovation or process innovation influenced by R and D, human capital and technological change
74
productive efficiency
firm operating at the lowest possible ATC
75
allocative efficiency
where overall welfare is maximised P=MC
76
efficiency of LR perfect competition
productive allocative not dynamic as normal profits
77
efficiency of SR monopolistic competition
not productive not allocative dynamic
78
efficiency of LR monopolistic competition
not productive not allocative not dynamic as normal profits
79
efficiency of monopoly
not allocative not productive dynamic
80
efficiency of natural monopoly
allocative not productive as LRATC is l shaped not dynamic as making loss
81
long run benefits of competition
more productively and allocatively efficient because they provide goods and services that consumers want and competitive pressures force them to lower their CoP
82
short run benefits of competition
might make supernormal profits which can be reinvested back into the firm increasing dynamic efficiency and reducing LRAC
83
what non price factors do producers compete on
improve products improve services reduce cost
84
how to new firms overcome large firms with monopoly power
innovating
85
creative destruction
joeseph schuempter: idea that new entrepreuners are innovative which challeneges existing firms in the market, most productive firms will grow, least productive are forced to leave increasing productive potential eg netflix innovated dvd subscriptions tech change leads to development of new products, development of existing markets and destruction of existing markets
86
contestable market
new firms can challenge the status quo of incumbent firms and thus their is both actual and potential competition entrants have free access to production techniques and technology no significant entry or exit barriers such as sunk costs low consumer loyalty
87
implications of contestable markets for firm behaviour
more likely to be allocatively and productively efficient firms very aware of hit and run competition perfect competition style supernormal in SR normal in LR however firms tend to earn normal in SR to prevent competition
88
barriers to entry
aim to block new entrants to the market eg - economies of scale - legal barriers eg patents - consumer loyalty or branding - predatory pricing - limit pricing - vertical integration - brand prolyeration
89
predatory pricing
low prices to drive out firms already in the industry, as the firms leave old firms regain revenue
90
limit pricing
p
91
vertical integration
one firm gains control of stages of supply chain and prevents other frims from using it
92
brand proliferation
occurs when a large company acquires or absorbs multiple smaller brands in similar market areas so disguises customers from the saturation of the market
93
barriers to exit
prevent firms from leaving a market quickly and cheaply - cost of writing of assets and primary leases as sometimes it would be cheaper due to contracts - costs of redundancy
94
sunk costs
costs that cannot be recovered once spent eg advertising
95
consumer surplus
difference between what consumer is willing/able to pay vs the price inelastic demand will increase decrease in supply will increase
96
producer surplus
price their willing to charge vs what they charge
97
economic welfare
total benefit society recieves from an economic transaction producer + consumer surplus

economics (15 decks)

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