Firms And Decisions Flashcards
Define market concentration ratio. What does it tell you about level of competition?
Market concentration ratio is the percentage of total sales/production accounted for by the largest firms in an industry. A high market concentration ratio suggests that a small number of firms dominate industry —> low level of competition (comparatively to other market structures)
What is market concentration?
Market concentration measures the extent to which market share is concentrated between the largest firms in an industry
Barriers to entry definition
Barriers to entry is defined as anything that prevents or impedes the entry of new firms into an industry, thereby limiting the degree of competition faced by existing firms in the industry
List the key points to hit for explaining cost relative to size of mkt demand as a structural BTE
In markets where costs are high relative to size of market demand, market can only profitably support a small number of firms.
-The spreading of the high costs over a large output enables the lowering of the average cost
-with extensive IEOS, MES occurs at high levels of output
- existing large firm in the industry able to reap ieos, satisfying entire mkt demand at lower AC
-potential entrants begin prod on smaller scale, cannot charge price low enough to compete against incumbent
Define network economies, and explain how they act as a barrier to entry. How does this determine the strategies of firms in such markets?
network economies are the benefits to consumers of having a network of other people using the product/service. When a product/service is used by everyone, there are benefits to all users from having ACCESS to other users Network economies serve as a barrier to entry as once a firm has amassed many users, it is hard for rival firms to draw them away —> entrants unable to offer the same level of utility when their product is consumed as there are less existing users.
when a market is subject to network effects, the main concern isn’t so much profit as it is market share. This is because future customers’ willingness to pay depends on the number of existing users. By growing its market share early, firm increases its ability to raise prices at a later date, once it has taken advantage of its network offerings and driven adoption of their offering as much as possible. For this reason, many companies price their products low or for free early on.
Define what is sunk cost fallacy strategy
Sunk cost fallacy strategy involves convincing consumers to continue investing in a product or service based on the resources that they have already spent on it, even when it may not be the most rational decision
Define loss aversion
Loss aversion refers to the tendency to prefer avoiding a loss over making an equivalent or greater gain
Define salience bias
Salience bias refers to the tendency for people to focus on information that is the most prominent over less prominent but equally relevant pieces of information
Define internal economies of scale and internal diseconomies of scale
Internal EOS refers to the cost savings arising from an increase in scale of production of the firm. An increase in output results in a less than proportionate increase in total cost, causing average cost to decrease as output increases
Internal DOS refers to the situation where a firm, in increasing its scale of production, experiences rising AC. An increase in output results in a more than proportionate increase in total cost, causing AC to increase as output increases
Define external E(D)OS
External economies of scale refer to the reduction in unit cost arising from industry expansion
What are some sources of IEOS?
Indivisibilities of factor inputs. Some capital equipment that enhance productivity are too large and expensive for small firms to utilise efficiently. Large firms with higher output are better able to spread out these costs, resulting in lower AC
Marketing EOS: LArge firms buy inputs in bulk. This gives them greater bargaining power to negotiate for lower prices from suppliers
What are some sources of IDOS?
Managerial DOS. AS firms become larger, it becomes increasingly difficult to coordinate work among the different departments in the firm. Additionally, there could be problems of poor motivation and low morale among workers, resulting in a decrease in productivity. This will lead to a rise in AC
What is a source of external economies of scale?
Economies of Information
When an industry expands, Cost savings can be achieved from the sharing of information and knowledge. Firms may jointly set up research facilities, lowering costs for all firms as R&D costs are spread out. There is also scope for mutual cooperation to develop common industry standards, that would result in lesser waste and duplication in terms of developing rival technologies.
What is a source of external DOS
Increased competition for factor inputs.
Shortage of skilled labour causes firms to bid up wages in order to retain or hire these workers.
Increased comp for land for expansion makes it more expensive to purchase or rent.
Increased comp for raw materials bids up prices in factor market.
