4.2: Market power and market failure Flashcards
What is collusive behaviour?
firms agree to work together on something like setting a price or fixing the quantity of output they produce, minimising competitive pressure
What can collusion lead to?
lower consumer surplus
higher prices
greater profits
can allow oligopolists to act as monopolists and maximise joint profit
Do firms in an oligopoly have strong incentives to collude?
Yes
they can maximise their own benefits and restrict output to cause market price to increase, increasing barriers to entry
When is collusion more likely to occur?
when only few firms facing similar costs, high entry barriers, not easy to be caught and consumer inertia
when does non-collusion behaviour occur?
when firms compete, establishing compt oligopoly
several firms, one w cost adv, products identical and markt saturated
what is overt collusion?
formal agreement made between firms
if illegal is easier to prosecute etc
what is tacit collusion?
no formal agreement but collusion is implied
give some examples of types of legal collusion
dvlpmnt of improved industry standards of production safety
information sharing so consumers have better information
JVs that seek to promote innovative and inventive behaviour
give some examples of innovative JVs
Adidas and Allbirds dvlping sustainable shoe
VW and Enel collaborating on electric vehicles charging infrastructure
what are three key aims of business collusion
in cartel, businesses recognise mutual interdependence and act together to maximise join profits
collusion lowers costs of competition, advertising etc
reduces uncertainty - higher profits increasing producer surplus + shareholder value
give three examples of anti-competitive practices
JD and leicester football club colluded to restrict competition of sales of leicester city branded clothing –> fined £880k
competitively sensitive information in respect of rates of pay for freelance workers that support the production and broadcasting of sports content in the UK shared between 5 companies –> £4 million total fine
major car companies investigatedinto breaches of competition law relating to end of life cars –> CMA imposed fines totalling £77,688,917 which includes a 20% settlement discount to reflect that they admitted their role in the infringement and agreed to cooperate with the CMA
why do many cartels break down?
falling market demand in recession
over product by some
exposure by CMA
entry of non-cartel firms
what are potential benefits from collusion?
general industry standards can bring social benefits - pharmaceutical research
fairer prices for producer cooperatives
profits invested etc
what are potential costs of collusive behaviour?
damage consumer welfare - high prices, loss of allocative efficiency, regressive impact
loss of efficiency
reinforces cartel monopoly power
what are factors influencing competitiveness?
lower prices
cutting costs
adding value
innovation
what are the advantages of regulation?
corrects market failure
protects consumers and workers
promotes fair competition
improves resource allocation
environmental protection
creates incentive for innovation
what are the disadvantages of regulation?
high administrative costs and enforcement costs
risk of govt failure - can lead to inefficiency and misallocation of resources
reduced efficiency and productivity
regulatory capture - regulators becoming biased towards firms, lobbying etc
unintended consequences
compliance costs
inflexibility
what are information gaps?
situations where consumers or producers lack full information leading to suboptimal decisions
why regulate a natural monopoly?
could charge excessively high prices
provide poor quality services
under produce than socially optimal level
how are natural monopolies regulated?
price capping
quality standards and performance argets
profit controls
public ownership
how may oligopolies and monopolies benefit staff?
employees have safe jobs, good salaries and large pensions, however in perfectly competitive may be zero hours and minimum wage
what is the gig economy?
wprkers have small jobs
are not entitled to holiday pay like zero hour contracts
