Key Points Flashcards
Factors affecting profitability
degree market comp- if more cmop then tend towards normal profits, monopolu with barriers to entry can make supernormal profits
- rate of ggrowth of market demand- profitability squeezed in recessoin, decrease demand businesss less prices
- Ped potentila to use price discrim to increase profits- charge diff prices diff people
- Changes cost factors- variable/fixed, impact gov regulators, subsidies
How is conc ratio set out
No firm: conc hold
Causes disecon of scale
control and communications- problem monitor productiity and work quality- risk increasing wastage of resources, increase cost but not tooal output
Coop- workers in large firms may feel sense of alienation and loss of morale
Neg effcts internal piliitics, info overload, unrealistic expectations among managers, culture clash between senior people with inflated egos
More regulation and scritiny by gov as grow bigger- increases costs by regulation
Too much underutilised capital
Exampels econ of scale
technical-and containerisation
-managerial
-financial
Risk bearing
Network
Criteria for perfect comp
Half pppp
Homogenous products
All firms access factorproduction
Large no of buyers and sellers
Free costss entry into and exit rm market
Perfectly elastic demand curve- horizontal
Price takers- firms cannot dictate market price
Perfect knowelge
Prodit max key objective
example perfect comp
Foiregn exhcnage market
Agri goods
Monopolistic comp
large no firms in makret
No barriers to entry and exit
Differentiation
Industry conc low
Allocative efficiency monoplistic
No
Productively efficient monoploistic
No
Perfect comp allocative
Y sr and lrr
Perfect comp productive efficiney
Lr
Game theory
Study of strategic understanding by firms that operate in interdepdnent markets
Dominant strategy
Strategy that firm iwll undertake to max own interests regardless of other players
Explanation game theory
3/3 collude- pareto optemum
5/0 but risky
1/1 safest
Nash equlibrium
Equlibirum outcome of a game where no colusion
Critic of kinked diagram
Stigler
Who came up with kinked diagram
Sweezy
Reasons diff firms obejctives§
managerial obejctives
Returns to shareholders
Info constraints
Cost and pricing
Small businesses- lifestyle business
State owned corp- raneg diff econ social political objectives
Why sales max
if struggle to do as much as possible
Gain market share- ie aldi
Econ of scale ie netflix 2021 20%
Supermarkets may have loss leader
Principle agent problem
Conflict occurs from varying objectievs
Economic efficiency
Alloccative and productive efficiency
Productive efficiency
No additional output can be produced from the factory inputs available at the lowest position abailiabel
Av cost minimised
At lowest ac
Rev max more relatsic obective than profit max
Loa - depends on size and sturfture of firm- to a dregree
Trad econ firms seek to maimise make best possible from available options
Rev max profut max non profit max
Rev max more than profit max
seek max rev where mr=0
Eg divorce of wonership, principle agent problem
Manager bonus with rev sales- baumol
Profit max more than rev max
seek max profit- total rev- total cost
Trad econ most likely
Greater wages/dividens
Retained profit source cheap finances- iinvestment avoids interest rates
Market leaders such as apple can set price- innovation schumpter creative disruption iphne touchscreen thanr nokie, airdorp
Not profit max
Principle agent problem- shareholders not control- investment
Bounded rationality- alrge complex firms may be unable to access all finances, aware at margine- but more abel for small firms
Penalties cartels uk
10% worldwide profits
3-15y exec
Costs of collusive behavour
Damages consumer welfare- higher prices, loss consuemr surplus, loss allocative efficiency, hits lower income famileis/regressive impact
Absence of competition hits efficiency- x inefficieny leads to higher unit cots, less incentives to innovate/loss dynamic efficiencies, output quotas penalised firms who want to expand
Reinforce cartel- hard new businesses to enter
Potential benefits from collusion
General industry standards can bring social benefits- pharama, car sfaety research
Fairer prices for producer coop in lower and middle income developing companies- decrease rates with extra income generated
Profits have value- how used, capital investment, higher wages for employers, randd leading to dynamic efficiency
Roles cma
Monitor and investigate mergers- sainsburys and asda 2019
Protect consumers against unfair market practises
Fight against market cartels
Recommendations to gov and regulators to benefit consumer
Hold exec personally responsible
High fines
Investigate market when case of consumer or comp problem
Cancorelia and actavais acucsed of illegal agreement which enabled higher prices for a life saving drug to be prolonged
Roles cma hold exec personally responsible
Libor price fixing tomorrow hayes- 11 years
Trade for ubs and citi group
Roles cma high fines
2012 major tv producing companies philips and samsung 1.1bn pounds to several firms for coluding iin production of cathode ray tubes for increasing price tv sets
Pure monopoly
100%
Working monoplly
25%
Dominant firm
40%
Gov inteverntion for monopolies- price regulation
set price control to force monoplies to choose a price lbelow profit max price- rpi -x (x re[resentas expected efficieny of firm
Or rpi -x+k -k investment- used in water industry has allowed investmentof 130bn OFWAT regulator
Gives incentive for firms to be as effciient as possible
Gov inetrvention for monopolies- quality standards
can obeseve quality of gs
Gas and electircity markets regulators ensure elderly treates fairly- esp in colder months
Post office has deliveries on daily basis to all areas
Electricity generators forced to have enough capacity to prevent balckouts
Require political will to ensure upheld
Gov intervention for monopolies= performance targets
punctuality targets trains
-split service into regions to compare-e water industry
Targets on price quality, consuemr choice and costs of production, imrpoes service and gains for consumers
Firms will resist the introduction of targets- required political will and undertsnaidng, firms will attempt to find was to meet targets whe actually impsoses it- change train times so not techinally runnicg late
How to resolve divroec of ownership
Renumeration schemes- profit related pay
Use of boards owners and shareholder smake deciison of firms and in agm
Discuss hwo divroecce of wonership from control may affect both the conduct and performance of firms
Inrto- define divroce fo ownership, consuct firms, performance
Diff maximisers- trad profut but also rev and sales- show on diagram
How problem- impact conduct as principle agent problem
Impact performance- efficiency disecon of scale and financial performance
Solutions
-renumenrtaio package
Sharehohlder boards
Overall may be problem but avoidable
A consumer will be in a state of eqiliibrium with respect to the q of the goods purchased where
Relationship between marginal utility and price is the same for each product bought
Hypothesis of diminishing marginal utilisty- shap shape of curve
Downsward sloping demand curve
Why do we need nurgde
When we tend to forget something
When we see the benefits now and costs later- intertemporal choices- choices that hav econsequences over time
Zero price effect
The demand curve for a good changes shape dramatically once the price of the good is zero
Should gov intervene to encourage healthy diet
Y- market failure
Sugar tax- trad policy
Education cmapaigns- trad policu
Behavoural- choice archetecture framing
Conc- behavoural policies most but perhaps with education too
Tax on unhealthy food
Sugar tax imposed apr 2018 unit tax
Evidence of sugar tax in mexico supports success of this policy with sales of sugary foods decreasing by 12% in first year of tax
Tax revenue hypothecated to reduce consumption of unhealthy foods
Draw diagram- demand contracts
But unliekly to be effectiev- diff to put monetary value on cost of neg externality- demand unhelathy foods prcie inelastic, regressive
