6: Market structures Flashcards
Productive efficiency
Lowest point of the ATC curve
Allocative efficiency
When a firm produces at a point where economic welfare is maximised (supply meets demand)
Dynamic efficiency
When a firm reinvests their profits to become more efficient
X-inefficient/X-efficent
Costs are high/lower than they should be
Productive + allocative =
Static efficiency
Characterisitcs of a monoply
Firm is the industry - whole output by the firm (single seller good)
Barriers to entry
No substitutes for the good
Profit maximise
Price maker
What is the deadweight loss in a monoply?
Consumer surplus lost and producer surplus ganied results in an overall loss of economic welfare
Pros of a monoply
Supernormal profits -> reinvest -> dyanmic efficiency -> lower ATC -> could lower prices -> increase consumer surplus
Economies of scale
Cons of a monoply
No allocative efficiency
High prices/lack of choice
Not productively efficient
X-inefficiency
Price discrimination (draw diagram)
When a firm with market power charges a different price to consumers for an identical product i.e. age, time of day, georgraphy
Conditions to price discriminate
Market power
No resale
Segregate the market between consumers with different willingess to pay and different PED
Cross-subsidisation
Those who pay a higher price, subsidise those who pay a lower price
Price discrimination pros
Profitable -> higher total revenue
Larger output
Cross subsidisation -> allows poorer customers access
Manages demand
Reinvest profits -> long-term benefits of increased dynamic efficiency + lower prices
Price discrimination cons
Unfair
Predatory pricng
Decline in consumer surplus
Natural monoplies
When competition is inefficient as it would increase costs i.e. railways and water companies
Characterisitics of a natural monoply
High capital cost to set up
Duplication is unecessary and wasteful
The MES does not occur until an extremely high level of output as the economies of scale do not diminish in the foreseeable future
Perfectly competitive market characterisitcs
Large number of buyers and sellers
Produce homogeneous goods (identical products)
No one firm or individual large enough to affect market price (price takers)
Factors of production are perfectly mobile
Customers and firms have perfect knowledge
No barriers to exit and entry
Have dynamic and allocative efficiency
Examples: Foreign exchange markets, agricultural markets, internet related markets
What is the shut down price in a perfectly competitive market?
AR < AVC - firms may make a loss but will remian in a market in case another firm leaves
Monopolistic competition characterisitcs
A form of imperfect comeptition
Found in many real world markers i.e. clusters of sandwhich shops, fast food and coffee shops in a town centre to pizza deliveries in a city or local haridressers
More realistic than perfect competition as products are differentiated
Does the demand in monopolistic comeptition represent the firm or the market and why?
The firm as other firms within the market produce partial but not perfect substitutes. Demand curve likely to be more elastic
Assumptions regarding monopolistic competition
Many consumers and producers
Consumers perceive there is non-price differences between products i.e. product differentiation - plenty of consumer switching
Producers price makers but price elasticity of demand is higher than that of a monoply
Low barriers to exit and entry
Efficiencies in monopolistic competition
Dynamic efficiency
X - efficiency
Problems with monopolistic competiton
Stable equilibrium is never reached
Inefficient outcome
Not allocatively efficient
Unable to fufill economies of scale
Critics of heavy spending on advertising and marketing argue that much of this spending is wasted and an inefficient use of scarce resources
Characteristics of an oligopoly
High concentration ratio (handful of large firms)
Differentiated products
High barriers to exit and entry
Mutual interdependence
Non-price competition
What happens if one firm lowers their price in an oligopoly?
Other firms follow -> price wars in lower and lower prices -> no firm wins
Collusive oligopoly
Firms act like a monoply and want to remove uncertainty by agreeing on price and output
Non-collusive oligopoly
Firms act independently and do not form agreements with each other
Overt collusion
Firms work openly together to agree on prices or market share
Tacit collusion
Unspoken actions between oligopolistic firms that are likely to minimise a competitive response
Price leadership
A leading firm in a given industry is able to exert its influence in the sector that it is in and can effectively determine the price of goods or services for the entire market -> leaves rivals little choice but to match price in order to keep market share
Pros of cartels
Dynamic efficiency
Industry supernormal profits
Firms + consumers price stability
Cons of cartels
Firms may not make supernormal profits -> risk the cartel may break down
Consumer pays higher prices
What does a cartel depend on?
Lower or increase price
Incentive? Could be drive out comeptition
Game theory
A method of modelling the strategic interaction between firms in an oligopoly
What are the roles when game theory is applied to oligopolies?
Players = firm, game played on the market, strategies = price and output decisions, payoff = profits
Dominant strategy
a situation in game theory where a player’s best strategy is independent to those chosen by others
Nash equilibrium
a situation within a game when each player’s chosen strategy maximises pay-offs given in the other player’s choice so that no player has an incentive to alter behaviour
Imperfectly competitive markets
Firms face real and potential competition, argues that the number of firms is not important, what matters is the absence of barriers to entry and the level of sunk costs
Perfectly conestable markets
Free entry to new firms and free exit for incumbent firms
Sunk costs
Irrecoverable costs to the owners of the firm should it close down or leave the market. Act as a barrier to entry
Low contestability
Difficult to enter
High contestability
Easy to enter
What is hit and run entry?
Short run entry into a market aiming to take some monoply profits and leave the market.
Possible when entry and exit costs are low and when the exisiting firms are charging higher prices compared to costs
Where does increasing contestability come from?
De-regulation and new technology
Competition policy
A set of measures designed to promote competition in markets and protect consumers in order to enhance the efficiency of markets. Has 4 strands: monoplies, mergers, restrictive trade practices and promotion of new competiton
Structure, Conduct, Performance paradigm
Structure: Number of comeptitors, heteroheneity of product, cost of entry and exit
Concduct: Price taking, product differentiation, tacit collusion, exploitation of market power
Performance: Productive efficieny, allocative efficiency, profitable
Argues that market structure determines how firms conduct themselves and that this in turn determines performance of the market
Government intervention: Mergers
Comeptition and markets authority (CMA) inevstigate mergers that result in a 25%+ market share to prevent uncompetitive outcomes in the market
If merger not in public’s interest will be blocked
CMA want to prevent firm having large market share which could lead to high price, low quantity and quality which exploit customers
Government Intervention: Quality standards
Legislature to ensure firms meet a min quality standard i.e. gas and electric companies can’tçut off gas/electric for pensioners if they haven’t paid their bill during winter
Government Intervention: Performance targets
Ensure firms are operating in the consumer’s interest and that competitive outcomes are achieved i.e. rail companies only allowed a certain amount of delays
Government enhancing competition between firms through promotion of small business
Deregulation -> removes govt controls -> removes barriers to entry
Improvement in access to finance for small businesses
Reduce tax
Provide grant/subsidy
Government intervention: deregulation
Removal of govt controls i.e. BT’s infrastructure given to competitors in telecoms industry -> promotes comeptition and market contestability by removing artificial barriers to entry
Deregulation pros
More consumer choice
Lower price
Contestability
More govt revenue through tax
Deregulation cons
Negative externalities
Less SNP -> less dynamic efficiency
Smaller firms would be less efficient -> fail when market conditions change
Diseconomies of scale
What does deregulation depend on?
The extent to which other barriers to entry and exit remain and the extent to which it results in greater comeptition in a specific area
Comeptitive tendering
Governments contract out a provision to a firm offering lowest price and best quality of provision
Saves public sector beauracy and inefficiency
Private sector has incentivve to reduce costs due to comeptitive nature + frees govt of maintenance as private sector has expertise
Pros of comeptitive tendering
Increased comeptition
Greater efficiency
Transparency
Value for money
Cons of comeptitive tendering
Limited choice
Reduced quality
Bureaureacy
Privatisation
Privatisation
Transfer of assets or organisations from state ownership to private ownership i.e. Britsh Airways, British Gas
Pros of privatisation
Revenue from sales (for govts)
Increased comeptiton -> fall in costs -> X-efficiency, productive efficiency
Cons of privatisation
Negative externalitites
Public goods not provided as not profitable
Risk of no economies of scale
Nationalisation
When private sector assets are to sold to the public sector
Nationalisation pros
Protects jobs
Protects GDP
Systemic risk
Positive externalities
Social welfare
Nationalisation cons
Tax payers pay -> austerity
Moral hazard
What type of demand is the demand for labour?
It is derived demand meaning it depends on the demand for the product a worker is producing. i.e. increase demand for coffee -> increased demand for baristas
Marginal product =
Number of extra units of output a firm gains by employing an extra unit of labour.
Change in total product / Change in number of workers
Marginal revenue =
Change in total revenue / Change in output
Marginal revenue product of labour =
The addition to a firms revenue by employing an additional worker
MR x MP
Problems with Marginal Revenue Product of Labour (MRPL)
Difficulties measuring
Efficiency wage theory -> higher wage increases productivity
Non-monetary benefits of jobs
Public sector wages
What causes a shift out right for MRPL?
Improved training, better capital and/or management
Increased demand for final product
Increase in productivity
Firms profitability
Changes in number of firms
Elasticity of demand for labour =
Measures the responsiveness of the quantity demanded of labor to changes in wage rate
% change in quantity of labour demanded / % change in wage rate
Factors determining EDL:
Propotion of labour cost to total cost - Larger the proportion of labour cost to total cost, the higher the elasticity of demand for labour. Demand = more elastic in labour intensive industries
Availability of substitutes - more elastic when labour and capital are interchangeable, more inelastic with specialised labour
Price elasticity of demand for final product
Labour Supply
Number of workers willing and able to work in a given occupation or industry at a given wage
Factors affecting supply of labour
Real wage rate on offer in the industry
Migration of labour
Perks
Barriers to entry
Bonuses/commission/overtime
Mobility of labour
Substitute occupation
Elasticity of supply of labour =
Measures the responsiveness of the quantity of labour supplied to change in the real wage rate
% change in quantity of labour supplied / % change in wage rate
Factors affecting elasticity of labour supply
Skills + qualifiations required for the job
Length of training
Sense of vocation (enjoyability of a job)
Time period
Geographical immobility
Occurs when workers find it difficult or impossible to move to jobs in other parts of the country or other countries for resosn such as higher housing costs in where jobs exist and family problems
Occupational immobility of labour, capital and land
Occurs when workers find it difficult or impossible to move between jobs because they lack or cannot develop the skills required for new jobs
Government policies to combat geographical immobility
Improve supply of housing, reducing rent
Offer subsidies
Harmonisation of welfare and tax systems that encourage inward migration of labour within the European economy
Firms policies to combat georgraphical immobility
Relocation packages -> reduce costs of paying form schools
How to combat occupational immobility of labour
Training schemes
Increased investment in vocational education and life-time learning opportunities
Flexible working
Why does national min wage go up?
In line with inflation
More workers -> reduce unemployment
Wage efficiency theory
Prevent exploitation
Trade unions
An organisation of workers who joing together to further their own interests through process of collective bargaining i.e. Transport and general workers union
Monopsony
Another influence on wages
Monopsanist
Single dominant buyer of a good/service or factor of production i.e. government is main employer of soldiers
Conditions for a monopsony
Price makers -> dictate wages
To employ more workers, wage rate has to increase
Marginal cost of labour will exceed the average cost of labour
If you pay the next worker a higher wage, all other workers need to be on the same wage
Reasons why min wage results in unemployment
If set too high
If MRPL cannot shift right
Reasons why min wage doesn’t result in unemployment
Wage efficiency theory (shift in demand for labour)
Imperfect labour market -> inc wages = inc no. employment -> depends on level of min wage
Public vs Private
Monopsony pros
Job stability
Low cost
Low price
Profit driven -> dynamic efficiency
Guranteed supply
Monopsony cons
Decline in industry -> structural unemployment
Exploit workers -> drive down wages but depends on perks
Exploitation of suppliers
Current labour market issues
Public sector workers undervalued and underpayed -> strikes
Gender pay gap
Rise in the economically inacitve
Inflation -> fall in real wages
Hard to fill vacancies i.e. hospitality, public sector
National min wage pros
Reduce poverty
Reduce inequality
Prevent unemployment trap
Fair wag
National min wage cons
Job losses
Higher costs = higher prices
Doesn’t take into account regional differences
