Concentrated Markets Flashcards
Why might a firm decide to try and grow? (3) (CES)
Cost saving
Economies of scale
Shareholder value
What is internal (organic) growth?
Occurs when a business gets larger by increasing the scale of its own operations rather than relying on the integration with other firms
What are the advantages of internal growth? (3) (DIE)
Develop new products
Invest in the capital/labour
Export to foreign markets
What are the advantages with external growth? (4) (FIEO)
Faster access to new products
Increased market share
Economies of scale
Overcome barriers to entry
What is horizontal integration?
2 business’ in the same in the same industry, at the same production stage, become 1
What is a benefit of horizontal integration?
Cost saving (fewer workers)
What is vertical integration?
2 business in the same industry, at different production stages, become 1
What is a benefit of vertical integration?
Better control of the supply chain
What is forward vertical integration?
Closer to the final consumers of the product
What is backward vertical integration?
Closer to the raw material of the supply chain
What is conglomerate integration?
When 2 business’ have no obvious relationship
What is lateral integration?
When 2 business’ join together, that produce similar but non competing products
What are the risks of merging companies? (2)
Clash of ideas
Loss of human capital
Why might 2 firms decide to merge? (2)
Better profits
Reduce competition
What is a monopoly?
A firm that has 25% or more market share?
What are the barriers to entry associated with a monopoly? (5)
Patent laws Nationalisation Limit pricing Sunk costs Ownership of scarce resources
What are the barriers to exit associated with a monopoly? (2)
Closure costs
Loss of business reputation
What are the sources of monopoly power? (4)
No. of competitors
Advertising
Degree of product differentiation
Barriers to entry/exit
What is an oligopoly?
A small number of large firms that dominate the market
What are the features of an oligopoly? (5)
Possess monopoly power Highly concentrated Non-price competition Price wars Entry barriers
What is a concentration ratio?
A tool for measuring the market share of the top 5 firms in an industry
What is interdependence?
Cannot act independently of each other
What is a cartel?
When 2 or more firms enter in to an agreement to restrict supply or fix the price of a good
Why do cartels tend to breakdown?
Because firms have an incentive to cheat on their quotas to benefit from high prices/output
What are the conditions that will make the cartel more likely to stay? (3)
Small number of firms
Penalties for cheating
Easy observation of others
What is price leadership?
Firms look up to 1 dominant firm to set prices
What is game theory?
A study of how game players react to changing circumstances and plan their response
What is zero sum game?
A gain by one player is matched by the loss of another
What is risk averse?
Where one party does not take action that might promote retaliatory activity by another party
What is collusive behavior?
Firms recognise their interdependence and act together rather than compete
What is competition law?
Prohibits attempt to fix prices
What is price discrimination?
When a firm with market power charges different prices to consumers for the same product
What are the conditions necessary for price discrimination to take place? (3)
Market power
No resale
Segregate the market between consumers with different willingness to pay
Explain what first degree price discrimination is. (perfect price)
Each consumer pays exactly what they are willing to pay. There is no consumer surplus
Explain what second degree price degree discrimination is. (quantity)
Bulk-buying, 2for1, the more you buy the less you pay per unit
Explain what third degree price discrimination is. (consumer)
Age, Time, Geographical
What are the advantages of price discrimination? (2) (ID)
Increase economic profit
Dynamic efficiency
What are disadvantages of price discrimination? (2)
Inequitable
Welfare loss
What are the features of a contestable market? (3) (FLL)
Freedom of entry/exit
Low sunk costs
Level of brand loyalty
What is hit and run competition?
A firm enters the market to take advantage of the supernormal profits, if the market is no longer profitable the firm will leave the market
At what point does allocative efficiency occur?
MC = AR
At what point does productive efficiency occur?
The lowest point on the LRAC curve
What is static efficiency?
Both allocative and productive efficiency at the same time
What is dynamic efficiency?
Reduce costs by new production processes
What is consumer surplus?
The difference between what what the consumer is willing to pay and what they actually pay
Does the consumer surplus triangle sit above or below the equilibrium point?
Above
What is producer surplus?
The difference between the price the producer is willing to sell and the price they actually sell
What is dead weight loss?
A loss in economic welfare
