4.1.5.8 Dynamics of competition and competitive market processes (Paper 1 & 3)

Question 1

Define price competition

Answer 1

• Reducing the price of a good/service to make it more attractive than those of competitors

Question 2

Firms in concentrated markets are likely to benefit from…

Answer 2

economies of scale - reduce AC - firms may able to reduce prices while still making SNP

Question 3

Benefits of price competition

Answer 3

• In a concentrated market - where Eos are present - reinvest SNP into R&D - new, innovative products and methods of production
• Can lead to dynamic efficiency - leads to reduction in firms’ costs at every given output level

Question 4

Define dynamic efficiency

Answer 4

Improvement in productive efficiency over time

Question 5

Price war

Answer 5

• Firms in an industry repeatedly cut prices below those of competitors in order to win market share

Ev: Tends to reduce the profits earned by all firms - so often only used as last resort

Question 6

Define non-price competition

Answer 6

• Competition on the basis of product features other than price, such as quality, advertising or after-sales service

Question 7

Why is it that firms in highly concentrated markets are able to compete vigorously on the basis of factors other than price?

Answer 7

• Any attempt by one firm to undercut the prices of its rivals may spark extreme price competition - a price war - which can damage the profits of all firms involved

Therefore - non-price competition more beneficial overall

Question 8

Examples that show the benefit of non-price competition

Answer 8

• Quality of service can attract customers to give a firm repeat business
• Number of major car retailers pride themselves on high-quality after-sales service - maintaining strong consumer loyalty
• Similarly - major supermarkets - make extensive use of consumer loyalty cards - in return for exchanging commercially valuable info with the supermarket, consumers build up points that give special offers

Question 9

Why may firms in concentrated markets compete on the basis of both price and/or non price factors?

Answer 9

• Large firms may use the benefits of EoS to reduce their prices and thus take some market share from rival firms
• However - firms often compete using non-price factors such as quality, reliability and strategies to increase consumer loyalty

Question 10

Creative destruction

Answer 10

• Over time - firms use use innovation to overcome existing barriers to entry in a monopoly, often in dramatic ways
• E.g. - consider how Amazon and eBay have transformed the market for online shopping
• Similarly - Uber has transformed the often monopolistic market for taxis in many cities around the world