competative markets and oligopolies Flashcards
pros of a competative market
-allocative efficiency ( P=MC), decrease in prices, increase in CS/ increase in quantity etc.
-productive efficiency - minimise AC, fully exploiting EoS decreasing costs and prices
-x-efficient - minimise waste producing on the AC curve
-Jobs - as quantity is high, so is labour as its a derived demand
cons of a competative market
-lack of dynamic efficiency
-lack of EoS so MCm is lower than MCc
-cost cutting in dangerous areas to be x efficient
-creative destruction
evaluation of competative markets
-still dynamic efficient even though it maybe small
-level of EoS
-natural monopoly
-where cost cutting is taking place
-regulation
-static vs dynamic efficiency, whats better socially, necessity - static but in certain markets dynamic efficiency is better (electronics)
-type of G/S
oligopoly
a market dominated by a few large firms that offer differentiate products with high barriers to entry
firms are interdependent and may use collusive or competitive strategies
oligopoly aspects
-few firms dominate the market ( no more than 7 firms with around 70% market share, high concerntration ratio)
-differentiated goods - firms are price makers
-high barries to entry/ exit
-INTERDEPNDENCE( firms make decisions on their own, make actions based on actions/ reactions on other firms)
-non-price competition ( comp of brand, quality etc.)
-profit max. not sole objective
examples of oligopolies
soft drinks ( coca cola, pepsi etc.
-car industry
-airline etc.
kinked demand curve explained
increase in price
if firm increases price , quantity decreases a lot more due to interdependence, other firms will not raise price to try undercut firm and gain market share,
increase price and decrease demand, total revenue and market share
kinked demand curve explained
decrease in price
decrease in price to inelastic demand curve, other firms will follow to try protect market share - price war
total revenue decreases and over time there will be no change in market share
charging within vertical gap
-kinked demand curve
as long as costs change within vertical gap and firm is profit max., itll always charge a price of P1, so firms wont need to increase price if costs are within this vertical gap
conclusions of oligopoly and kinked demand curve
-price competition (firms may still decide to decrease price to compete)
-non-price competition
-temptation to collide
nash equilibrium
prisoners dilemma
both firms charging the lowest price as 90p is the dominant strategy
prisoner dilema conclusions
-price rigidity at 90p, therefore if firms compete theyll compete on a non-price factors
-temptation to collude- increase price for each firm means they both make more money without the other firms undercutting so they both make more money (form a cartel/agree on a fixed price)
-incentive to cheat on collusive agreements (doesnt make sense for the LR)
overt collusion
firm get together and decide to fix prices or quantity in formal agreements
tacit collusion
informal agreements not to engage in price wars
price leadership
dominant firm and smaller firm follow pricing decisions of that firm
competative oligopoly
price or non -price factors promoting competative oligopoly
-large no. firms (less concentrated oligopoly) - organising collusion is difficult
-new market entry possible as making huge supernormal profit just encourages other firms to enter the market ( low BtoE)
-one firm with significant cost advantages making it difficult to decide on a fixed price/ quantity
-homogenous goods - dont have price making power to fix prices
-saturated market - lots of price wars, only way to get ahead is to snatch market share (cheat on collusive agreement)
collusive oligopoly
factors promoting a collusive oligopoly
-smal no. firms - easier to organise collusion
-similar costs - easy to decide on fixed quantity/ price
-high BtoE - supernormal profit wont necessarily attract other firms
-ineffective competition policy
-consumer loyalty - wont massively benefit undercutting due to loyal consumers
-consumer inertia - consumers not willing to switch suppliers, lazy or too difficlut
performance evaluation
competative oligopoly
-static efficiency
-dynamic inefficiency
-lose EoS benefits
competition pros/cons
performance evaluation
collusive oligopoly
-static inefficiency
-dynamic efficiency
-economies of scale
contestable markets
a market in which potential exists for new firms to enter the market
perfectly contestable market
has no entry or exit barriers and both incumbent firms and new entrant firms have access to the same level of technology
contestable market features
-low barriers to entry
-large pool of potential entrants
-good information of market conditions (cost/ technology)
-incumbent firms subject to hit and run competition (firms enter market snatch supernormal profit then leave
how has technology increased contestability
-lower barriers to entry (firms dont have to be physical anymore, lower sunk and start up costs
-increased pool of entrants (technology increases innovation, technology = decreases costs of production
-improved information (internet)
contestable markets limit price
AC = AR
Sales maximisation
