econplusdal - Micro Flashcards
definition and conditions necessary for price discrimination
charging different prices to consumers for the exact same good/service with no difference in cost of production
price making ability, info/ability to separate the market , prevent re sale
cons of price discrimination
allocative inefficiency - inelastic part of the 3rd degree price discrimination, p and Q are far from the allocatively efficient point P=MC, costumers are exploited are consumer surplus is decreased
inequality - widen income inequality as poorer people may be part of the inelastic group meaning they are charged high prices
anti competitive - low prices from the price elastic part of the price discrimination may drive out competition leaving the firm with pure monopoly power
pros of price discrimination
dynamic efficiency
economies of scale
some consumers benefit
cross subsidisation - money raised from price discriminating allows other area of the frim to still produce (uber)
objective of firms
profit maximising
re- investment (dynamic efficiency)
dividends for shareholder
allow for lower costs and pass them onto consumers ( long run)
reward for entrepreneurship
firms do not know their mc and mr
greater scrutiny by market authorities, investigation often does not end favourably
key stakeholders are harmed
objective of firms
profit satisficing
sacrifice profits to satisfy as may stakeholders as possible
profit max harms key stakeholders
consumers - bad reputation as they are being exploited
workers - low wages
government - investigation
environmental groups - protests, social media attack
objective of firms
revenue max
mr = 0 , meaning output level is greater
economies of scale
predatory pricing
principle agent problem, divorce of ownership and control
objective of firms
sales maximisation
economies of scale
limit pricing
principle agent problem
flood the market - consumers become aware ad develop loyalty for your product
objective of firms
others
survival
public sector organisation (p=mc), maximise social welfare
corporate social responsibility - acting ethically
negative externality in production example and analysis
pollution - lung cancer
resource degradation - polluting rivers
deforestation - people who rely on the Forrest
firms are ignoring social cost due to self interest, end result is over production/consumption , price is too low and is only accounting for the private cost not the full social cost
negative externality in consumption example and analysis
alcohol - crime, NHS cost
- consumer are ignoring the social benefit due to self interest as rational consumers are utility maximises
- consumers may not know the full social cost due to lack of information e.g cigarette market before the government intervention
- over consumption / production, price too high
welfare loss to society
Positive externality in consumption example and analysis
Health care, more healthy = more productive
Education, better educated = better job = higher wages = more tax
Consumers act in self interest and igorne any social benefits of their consumption as they are only interested in maximising their own utility.
As a result the market allocates resources at the private optimum meaning there is under consumption and under pricing resulting in a misallocation of resources
Society loses out on potential welfare
Government failure
When the costs of the intervention outweigh the benefits. The end results is a worsening of the allocation of resources harming social welfare
4 types of government failure
Information failure
Unintended consequences
Regulatory capture
Admin and enforcement costs
Government failure
Information failure
Valuing externalities - must be set at the right level to be effective and has high costs
Lack of information
Asymmetric information
Government failure
Admin and enforcement costs
In regulating, subsidy, state provision of info, price control
Government failure
Unintended consequences
Black markets - reduce tax revenue, cost of trying to police the black market, reduces the effectiveness of policies
Impacts on poor - minimum prices effect those with lower disposable incomes more
Impact on firm over strict regulation - shut down, relocate , lay off workers ( diseconomies of scale).
Firms become dependant on subsidy
Government failure
Regulatory capture
When ceos and mangers influence the regulator meaning the regulator works in the interest of the firm instead of society
The best regulators will be the ones that have previously worked in the industry but they will be bias
Monopoly regulation
Price regulation
RPI
RPI - x
RPI +-k
This measure is introduced to stop monopolies exploiting costumers and aims to set maximum prices at the allocatively efficient point ( P = MC)
Minus x is the expected increase in efficiency
+ k is the additional profit needed to be made to finance investment into capital goods
monopoly regulation
Evaluating price regulation
The level of x or k to be set is unknown , imperfect information
If x is too high firms will have to shut down
If x is too low the measure is ineffective, competitive target not met
opportunity cost of regulating ( tax payer burden )
By meeting the “-x” target it incentives the regulator to keep reducing x
Regulatory capture
Monopoly regulation
Quality control / performance targets
Limit train delays, gas and electricity cannot increase price for over 65 year olds in winter, NHS number of GP visits per hour. Incentive to be more efficient
Unintended consequences
Rushing GP appointments
Cheating the system, train delays = lie about the expected length of a journey
Monopoly regulation
Profit control
Profit control, adding a % onto the return from capital investment
Asymmetric info
Over report costs and over report capital employed
Also gives very little incentive to become efficient so costs rise out of control
Monopoly regulation
Taxing monopoly profits
Raises government revenue
Promotes tax evasion, removes monopoly benefits, less innovation + dynamic Efficiency, may cause monopolies who were previously profit saticficying to move to mc=mr
Cons of a firm having monopoly power
Allocative inefficiency - consumer surplus decreased , quality issues , DWL
Productive inefficiency - voluntarily forgoing economies of scale to restrict output keeping prices high and don’t minimise costs by operating at the lowest point on AC curve
X - inefficient - producing beyond their AC curve due to a lack of competition
Inequality - high prices on necessities have a greater effect on the poor as the higher prices is a greater % of their income
Pros of monopoly power
Dynamic efficiency
Greater economies of scale as a profit maximising monopolist could be producing at a lower price + greater output than smaller competitors due to their mc curve being shifted to the right
Natural monopoly - ore efficient to only have 1 firm in the industry in order to not duplicate costs
Cross subsidisation, may be able to provide another product
Characteristics of oligopoly
Few firms dominate the market , high firm concentration ratio
Different good
High barriers to entry : brand loyalty , sunk costs
Interdependence = rigid pricing shown through kinked demand curve
Lots of non price competition
Profit max not necessarily sole objective , fight for market share
Competitive oligopoly market , factors promoting competition
Large number of firms
New market entry possible - firms enter and remove supernormal profits
One firm with significant cost advantages
Homogenous goods
Saturated market
Competitive oligopoly market , factors promoting collusion
Small number of firms
Similar costs
High barriers to entry
Ineffective competition policy -likely to get away with actions
Consumer loyalty - as cheating on collusive agreement by undercutting prices will not increase your market share
Consumer inertia - not likely to switch
Pros and cons of competition in oligopolies ( threat of entry)
Pros - Allocative / productive /x efficiency gains, job creation as firms need to employ more people to increase output
Cons - Dynamic inefficiency, creative destruction, anticompetitive strategies, cost cutting in dangerous areas
Pros and cons of collusion in oligopolies
Cons
Absence of competition leads to productive and x inefficiency
Inequality due to higher prices burdening poor more
Damages consumer welfare with higher prices and a loss of allocative efficiency
Reinforces cartels monopoly power making it harder to firms to enter the industry
Pros
pharmaceuticals are allowed to join in research
Producer collusion getting a higher price for your product
Dynamic Efficiency - reinventing profits into R+D
higher pay for workers
What does game theroy show
Interdependence
Temptation to collude
dominant strategy to reach Nash equilibrium
What are the aims of government intervention to increase competition
Prevent excessive pricing Promote competition Ensure quality standards and choice Ensure effective privatisation of natural monopolies Promote technological innovation
Reason for minimum price introduction
Occurs in markets for goods with negative externalities.
Contracts demand causing consumption to fall to the socially optimum level, internalising the externality and helping society maximise welfare by reaching the allocatively efficient point
evaluation for minimum price introduction
Price inelastic demand reduces effectiveness
Regressive, burned the tax
Black market - dangerous ( safety of the goods will not be regulated e.g alcohol), loss in tax revenue, cost to try and destroy the black market
Level of minimum price - may cause firms to shut down, unless demand is inelastic, as this will instead raise revenue
Reason for and against maximum price
Prevent exploitation and income inequality
Shortage , excess demand, problems on how to allocate supply
Black market - exploitation via quality or price
Enforcement cost, Germany really struggle with this
Max price set at correct level?
Producer surplus falls, for landlord less income = less maintenance of properties
Cost meeting the excess demand, producing own good, subsidy
Arguments in favour of nationalisation
Greater economies of scale - lead to productive efficiency gains that lower AC and therefore prices
Government will focus on service provision - allocative efficiency at a low price, maximise consumer surplus ( socially optimum level) —> minimising over/under production problems that the private sector may of had
Less likely to be market failures as government will address any externalities
Public sector can be a vehicle for macro - economic control
Arguments in against of nationalisation
Potential diseconomies of scale as they company could become huge —> coordination/communication/motivation issues
Lack of incentive to minimise costs of production —> wasteful production —> x/productive inefficiency
Lack of supernormal profit = dynamic inefficiency as there is no profits to finance the technology gains/innovation/ R + D
Highly expensive + burdens the taxpayer : wages , maintenance, buying the asset from the private sector in the first place
Opportunity cost
Higher prices due to a lack of competition —> monopoly outcomes
Risk of moral hazard
Political priorities override commercial issues
Lack of experts
Evaluation points for nationalisation
Economies of scale available dependant on the industry
Regulation could be better
If the private sector was already competitive
Size and objectives of private sector firms - if they weren’t profit maximising
“ in a period of austerity, when national debt is high can the government afford to spend these large sums”
Definition and effect of privatisation
When state run organisation are sold to the private sector —> increasing efficiency and competition due to the profit motive
Advantages of privatisation
Privatisation causes an increase in competition due to privatisation pushing output out to the allocatively efficient point. Firms will produce goods that the consumers want
Reduction in x inefficiency as firms look to drive down costs to remain competitive + maximise profits
Dynamic efficiency gains due to the incentive to be efficient
Disadvantages of privatisation
No guarantee that firms will rush to the industry —> limited competition due to barriers to entry = productive + allocative inefficiency ( short run )
Loss of natural monopoly and therefore loss of economies of scale —> productive inefficiency as smaller firms cannot exploit all economies of scale
Private sector will not want to produce loss making goods even if they are socially desirable
Evaluating government regulation
If firms do not flood to the industry
Government regulation - increase competition where markets become oligopolies and local
monopolies, forcing firms to take externalities into account
Evaluating monopoly power ( not just cons)
Will they actually be dynamically efficient
Could be too big ( diseconomies of scale)
May not have profit max objective
Markets may be regulated to counterbalance the cons
May use price discrimination
Competition or threat of entry ( Tesco with 26% market share)
Natural monopoly
Type of good ( luxury like apple )
Evaluating threat of entry
Do you really lose dynamic efficiency
Long run or short run contestability, limit pricing or other anticompetitive strategies will kick out the threat of entry. Firms can also patent their ideas
The improvement in technology could actually allow firms to improve in acquiring consumer data allowing them to price discriminate
Regulation could minimise the effect of “cost cutting in dangerous areas” and “anti competitive strategies”
