Essays

Question 1

Factors suggesting lower contestability

Answer 1

• increased barriers to entry/exit
• limit pricing being used
• economies of scale
• an increase in concentration ratio
• price fixing or collusion increasing
• lack of dynamic efficiency

Question 2

Evaluation of factors lowering contestability

Answer 2

• collusion is illegal and regulators can stop this
• lack of profitability can suggest an industry is contestable
• budget, cost-efficient firms may be emerging
• diseconomies of scale may be occuring

Question 3

Points for how regulation can increase economic efficiency

Answer 3

• price capping e.g. RPI-X can incentivise productive efficiency as they may need to cut costs
• likely to improve allocative efficiency as prices become lower
• economies of scale

Question 4

Why regulation may not improve efficiency

Answer 4

• regulatory capture e.g. bribery, revolving door, familiarity
• imperfect information
• DoS
• firms may lose best managers if pay is capped
• costs v benefits e.g. legal & admin costs
• benefits of monopoly

Question 5

Points for why some firms engage in collusion (essay points + K)

Answer 5

• interdependence likely to exist in an oligopolistic market structure
• reduces level of comp & cost of direct comp e.g. marketing or price wars
• increase revenue and profits
• can use game theory pay off matrix
• to restrict choice and increase price setting power
• enable costs of regulation and taxation to more easily be passed on to the consumer

Question 6

Evaluation of firms colluding essay

Answer 6

• illegal nature of collusion - risks of fines & criminal prosecution due to regulation
• impact on brand image
• complacency after collusion -> x-inefficiency
• elasticity of good - elastic goods may incentivise cheating on collusive agreements
• debate of whether it is collusion or just the nature of oligopoly markets
• competitiveness of new entrants may mean no profits despite collusion