Chapter 2= market power and market failure Flashcards
market failure
occurs when there is an inefficient allocation of resources. Some potentially valuable resources are being wasted ie, not producing as much as they could do. Resources are being used inefficiently and consumers are less well off than they could be.
Market power
is the ability of a producer to exert some level of control over a market; this may include setting prices, restricting output, influencing other producers, creating barriers to entry and influencing suppliers. Where businesses can increase their market share they can usually also increase their market power.
cartel
is any agreement within a group of businesses to reduce competition, avoiding competing with each other. The agreement is usually secret and may involve various stages.
cartel members may agree on a range of issues such as:
PRICES may be fixed at a higher level than a competitive market would otherwise reach, or businesses may simply agree not to reduce prices and compete.
OUTPUT LEVELS can be to restrict supply forcing prices up.
MARKET SHARING involves dividing up the market so each cartel has their own area.
DISCOUNT AND CREDIT TERMS can be fixed to disadvantage consumers or suppliers.
PREFERENTIAL SUPPLY means restricting outlets that supply making the product more exclusive.
BID RIGGING means that cartel members may pretend to compete to win contracts but take it in turn to offer the lowest bit.
Where are cartels most likely to occur?
in markets where competition is already limited such as an oligopoly.
explicit collusion
occurs when there is a meeting or actual agreement to follow a joint strategy
tacit collusion
competing firms may not compete in any way the simply keep their prices at roughly the same level. If both charge the same for equivalent products prices will be higher than if competition was strong. They avoid price cutting without having an agreement.
restrictive practices
include any action that a business might use to limit competition for example, they might try and enter a market sharing agreement.
the public interest
means the interests of consumers and society in general rather than the interests of businesses.
ways of promoting competition
- laws against anti-competitive agreements
- restrictive practices prevented
- mergers and take overs may not be allowed (mergers are allowed if market stays contestable)
- only 25% market share
- privatised markets
- investigation and penalties
natural monopoly
occurs when the most efficient scale of production is a monopoly because more than one producer or supplier would involve wasteful duplication of resources.
a regulatory body
is a public authority or government agency responsible for exercising autonomous control over a sphere of business activity.
regulatory capture
occurs when the regulator is influenced by the industry’s point of view. This happens easily because they are working closely together.
what is the Competition and Markets Authority responsible for? (CMA)
=investigating mergers
=conducting investigations where competition may be weak
=investigations where there are breeches of UK or EU prohibitions
=penalising cartels
=enforcing consumer protection legislation
= co-operating with sector regulators
=helping businesses suffering due to anti-competitive practices of their competitors
employee protection legislation
equal pay and equal opportunities minimum wages the working time directive (max 48 hr working week) the health and safety act strict rules preventing unfair dismissal
