Concentrated Markets Flashcards by Anna Richards

Why might a firm decide to try and grow? (3) (CES)

Cost saving
Economies of scale
Shareholder value

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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

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What are the advantages of internal growth? (3) (DIE)

Develop new products
Invest in the capital/labour
Export to foreign markets

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What are the advantages with external growth? (4) (FIEO)

Faster access to new products
Increased market share
Economies of scale
Overcome barriers to entry

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What is horizontal integration?

2 business’ in the same in the same industry, at the same production stage, become 1

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What is a benefit of horizontal integration?

Cost saving (fewer workers)

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What is vertical integration?

2 business in the same industry, at different production stages, become 1

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What is a benefit of vertical integration?

Better control of the supply chain

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What is forward vertical integration?

Closer to the final consumers of the product

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What is backward vertical integration?

Closer to the raw material of the supply chain

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What is conglomerate integration?

When 2 business’ have no obvious relationship

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What is lateral integration?

When 2 business’ join together, that produce similar but non competing products

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What are the risks of merging companies? (2)

Clash of ideas

Loss of human capital

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Why might 2 firms decide to merge? (2)

Better profits

Reduce competition

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What is a monopoly?

A firm that has 25% or more market share?

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What are the barriers to entry associated with a monopoly? (5)

Patent laws
Nationalisation
Limit pricing
Sunk costs
Ownership of scarce resources

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What are the barriers to exit associated with a monopoly? (2)

Closure costs

Loss of business reputation

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What are the sources of monopoly power? (4)

No. of competitors
Advertising
Degree of product differentiation
Barriers to entry/exit

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What is an oligopoly?

A small number of large firms that dominate the market

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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