Concentrated Markets Flashcards
What are the pros and cons of monopolies?
PROS:
•economics of scale
•dynamic efficiency which can reduce price in long run
CONS:
•higher prices to consumers
•lower quality products
What is a natural monopoly?
=because of resources they are monopolies
•high capital costs to set up
•MES high as econ of scale do not diminish
What is price discrimination and what are the conditions needed?
=the action of selling the same produce at diff prices to diff buyers, in order to max sales and profits
- market power
- no resale of goods
- segregate market between consumers+diff elasticities
3rd degree= consumer group (age, time of purchase)
2nd= quantity (bulk buy, 2 for 1)
1st= perfect price discrimination (haggling)
What’s the 1st degree graph?
- axis= price and quantity
- ATC
- MC
- MR=AR no consumer surplus as every consumer is paying their own price
- lots of P1, Q1 and P2, Q2 etc
What are the pros and cons of price discrimination?
PROS: •increases economic profit •dynamic efficiency •can provide cheaper goods/services •provide a good/service where none was available
CONS:
•Loss of consumer welfare
•inequitable (unfair)
What is the monopoly graph?
What is the monopoly market?
- axis= price and quantity
- AR (D) to the right of MR
- MC tick
- barriers to entry= patents, nationalisation, dominance of resources
- greater profit margins to expand advertising
- original products which involve expensive capital equipment (natural)
What is the definition of an oligopoly?
An industry shared by a small number of firms, limiting competition.
In the UK it is a 5 firm concentration ratio of more than 50%.
What is the kinked demand curve?
What is the theory?
- axis of price and quantity
- elastic and then inelastic A
- parallel MR
- MC at 2 points of discontinuity
- if a firm charges higher (elastic) consumers will go to rivals; if firm charges lower (inelastic) rivals will follow
- “sticky price” at point A
- discontinuity of MR between B and C= can have MC at any point+won’t effect revenue as MR=MC prof max.
What is collusion?
Where firms act like a monopoly and want to remove uncertainty by agreeing on price or output.
What is formal collusion?
What is informal collusion?
Formal= where an agreement exists between key firms in industry about price and output (illegal)
-VW refused to supply dealerships that didn’t sell to agreed price
Informal= one firms acts as a price leader who signals change to other firms in cartel
Usually dominant firm, barometric is when smaller firm is leader
Tacit is following the industry norm
What is a cartel?
A group of companies colluding to isolate from other suppliers creating high entry barriers with the aim of joint profit max.
Firm can only make individual profits if it defects
What is transfer pricing?
What is cost-plus pricing?
Transfer= large multi national companies can alter costs+prices to gain from diff tax levels in diff countries
Cost-plus= firm calculates AC of producing a given level of output
What is game theory?
Nash equilibrium?
=analysis of how game players react to changing circumstances and plan their response Players= firms Game= market Strategies= change in price/output Payoff= profits
Nash E.= optimal outcome of a game is one where no player has an incentive to deviate from his or her chosen strategy
What is zero sum game?
Where a gain by one player is matched by a loss by another firm.
What is the prisoners dilemma?
=to obey cartel agreement (reduce output to monopoly level) or cheat and over produce.
(to confess and get immunity or not)
What are the pros and cons of cartels?
PROS:
•price stability
•minimal advertising and marketing costs
CONS:
•higher prices for consumers
•lack of transparency
What is a contestable market?
What are the key conditions?
=low barriers to entry and exit so new suppliers can provide fresh competition to established businesses.
- absence of sunk costs
- access to technology
- low consumer loyalty
- size of entry and exit barriers
What are the 3 main conditions for market contestability?
- Perfect info and suppliers to make use of best available technology
- Freedom to enter+advertise
- Absence of sunk costs (irrecoverable costs if firm closes or leaves market)
What is hit and run entry?
Short run entry into a contestable market seeking to take available monopoly profits and then leave.
- possible when low entry+exit barriers
- when existing firms charging high prices relative to costs
What is the graph for consumer and producer surplus?
•price and quantity axis
•demand and supply X shaped curves
•consumer above (C first in alphabet)
producer below
What is deadweight loss?
=reduction in consumer and producer surplus as monopoly restricts output, loss of economic welfare
Triangle between MR=MC, AR continuing from ^ and MC=AR
What are policies used by the competition commission to control monopolies and mergers resulting in potential monopolies?
- break up
- price controls
- taxes on excess profits (windfall)
- nationalisation
- privatisation
- deregulation
Why may a firm choose to price discriminate?
- increase economic profit
- spread fixed costs
- gain economies of scale
What are the numbers that determine PED?
0 is PERFECTLY INELASTIC
1 is elastic
Always negative numbers
What is included in interdependence?
=firms cannot act independently due to the small number of competitors •game theory •prisoners dilemma •"sticky prices" •collusions •barriers to entry
What are the different types of barriers to entry?
Natural=
•high fixed costs
•ownership of scarce resources
•economies of scale already exploited by incumbent firms
Artificial= •predatory pricing •superior knowledge of incumbent firms •strong branding+loyalty schemes •vertical integration
How do oligopolies compete with pricing strategies?
- predatory pricing
- collusion
- cost-plus pricing= working out average costs+then adding a mark-up price
How do oligopolies compete using non-price strategies?
- extending sales by adding guarantees+discounts for next purchase etc
- spending on advertisement+sponsorship (e.g football premiership sponsored by Barclays)
- sales promotion (e.g BOGOF)
- loyalty schemes
