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Micro Economics > Market Structures > Flashcards

Market Structures Flashcards

1
Q

Perfect Competition characteristics

A

Many buyers/sellers
No barriers to entry/exit
Homogenous goods
Price takers
Perfect Information

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2
Q

Examples of Perfect Competition

A

-Foreign exchange market
Currency is homogenous and there’s many buyers and sellers
-Agriculture market
Identical products

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3
Q

Why can’t firms in perfect competition invest

A

Due to perfect information, any r/D for a new innovation would be adopted giving no competitive advantage

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4
Q

Monopolistic Competition Characteristics

A

-large number of buyers and sellers
-low barriers to entry/exit
-produce non-homogeneous products
-price setting power
-A/P efficient

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5
Q

Examples of Monopolistic Competition

A

-Restaurants : low BTE for new restaurants and compete on quality of food
-Hairdressers : reputation for the quality
-TV programmes
-Clothing: designer

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6
Q

Limits of monopolistic competition

A

-brand differentiation would allow for SNP in the long term
-Real world there would be some BTE
Strong brand loyal and product differentiation acts as BTE

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7
Q

New Trade Theory

A

-product development is to have product differentiation and a brand
So specialisation about comparative advantage but instead the same good
British Fashion label/Italian

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8
Q

Oligopoly

A

Industry dominated by a few large firms

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9
Q

Characteristics of Oligopoly

A

-products are generally differentiated
-high concentration ratio
-firms must be interdependent
-there are BTE

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10
Q

Examples of Oligopolies

A

Car industry – economies of scale have caused mergers so big multinationals dominate the market. The biggest car firms include Toyota, Hyundai, Ford, General Motors, VW.

Petrol retail – see below.
Pharmaceutical industry
Coffee shop retail – Starbucks, Costa Coffee, Cafe Nero
Newspapers – In the UK market share is dominated by tabloids Daily Mail, The Sun, The Mirror, The Star, Daily Express.
Book retail – In the UK market share is dominated by Waterstones, Amazon and smaller firms like Blackwells.

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11
Q

3 outcomes of Oligopoly

A

-Stable prices (e.g. through kinked demand curve) – firms concentrate on non-price competition.
-Price wars (competitive oligopoly)
-Collusion- leading to higher prices.
The

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12
Q

Explain the Kinked demand curve

A

-This assumes that firms seek to maximise profits.
-increase the price, then they will lose a large share of the market because they become uncompetitive compared to other firms. Therefore demand is elastic for price increases.
If firms cut price then they would gain a big increase in market share. However, it is unlikely that firms will allow this. Therefore other firms follow suit and cut-price as well. Therefore demand will only increase by a small amount. Therefore demand is inelastic for a price cut.
-Therefore this suggests that prices will be rigid in oligopoly

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13
Q

Eva for kinked demand curve

A

-In the real world, prices do change.
-Firms may not seek to maximise profits, but prefer to increase market share and so be willing to cut prices, even with inelastic demand.
-Some firms may have very strong brand loyalty and be able to increase the price without demand being very price elastic

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14
Q

Price wars in oligopoly

A

Firms in an oligopoly may still be very competitive on price, especially if they are seeking to increase market share. In some circumstances, we can see oligopolies where firms are seeking to cut prices and increase competitiveness.

A feature of many oligopolies is selective price wars. For example, supermarkets often compete on the price of some goods (bread/special offers) but set high prices for other goods, such as luxury cake.

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15
Q

Why do price wars happen in Oligopoly

A

Price- competition may be weak and it may be hard to collude.
Causes firms to make loss in short term but in long term AVC>AR so leave the market and prices increase as supply falls

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16
Q

What is predatory pricing

A

Set low price where other firm can’t make a profit
So drives out new entrants and those who have large Market Share
Made easier by cross subsidisation

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17
Q

What is Limit pricing

A

Set price where normal profits are being made to drive out new entrants

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18
Q

Why may a large firm not want to collude

A

They have a strong business model so can charge higher prices or/and increase market share

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19
Q

Why may a firm choose Collusion instead of other strategies

A

Due to fear of engaging in lowering pricing and advertising which reduces industry profits

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20
Q

2 types of collusion

A

Tacit and Overt

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21
Q

Difference between overt and tacit

A

Overt is a formal agreement and Tacit is no formal agreement

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22
Q

What are the 2 ways a cartel can operate

A

-Agree on a price and allow for non-price competition for market share
-Agree to divide the market based on market share

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23
Q

Give example of tacit collusion

A

-Price leadership
Firms follow Dominant firm (low cost and high MS) to not engage in any price wars. So Dominant firm can choose prices
-unwritten rules : keep advertising low

24
Q

Advertising

A

—repeated exposure to famous brands can make consumer more likely to buy from ‘trusted brands’
Coco Cola has high brand loyalty which acts as a BTE
Plus makes demand for a product more inelastic

25
Q

Loyalty cards

A

‘rewards’ or money back to customers who build up points/spending. Airlines use Airmiles to try and encourage repeat custom. Supermarkets use loyalty cards like Tesco points/Nectar(Sainsburies)
Firms gain info about consumer habits which can help increase sales

26
Q

USP

A

For example, food companies are offering a greater diversity of products, such as gluten free, sugar-free, vegan – niche products which appeal to a small segment. 3D Printing means firms can increasingly allow customers to be more specific in specifying the size, length and colour of products. Mass produced, homogenous ‘Off the shelf’ products increasingly feel outdated.

27
Q

Subsidised delivery

A

Amazon has been successful at pushing Prime Delivery accounts. This promises free next day delivery. Amazon is offering this delivery service as a loss leader. The cost of delivery is often higher than what a customer is actually paying. However, in the long-term, the convenience of Prime Delivery is changing shopping habits. Buying something on Amazon and having it arrive at your doorstep the next day, means customers are not wanting to go into town, park and shop at traditional stores. Amazon is steadily gaining more market power and market share.

28
Q

Product differentiation

A

For example Apply development of the iPod has allowed them to become a monopoly

29
Q

Efficiency in oligopoly

A

Statically inefficient
But dynamically efficient
Largest firm can benefit from EOS

30
Q

What characteristic does Game theory show

A

Interdependence

31
Q

What is game theory

A

Game theory is looking at the decisions of firms based on the uncertainty of how other firms will react.
For example, if a firm agrees to collude and set low output – it relies on the other firm sticking to the collusive agreement. If the firm restricts output (sets the High price), and then the other firm betrays its agreement (setting low price). The firm will be worse off.

32
Q

Dominant strategy

A

If the top firm chooses 1, he’ll choose the one that gets higher rev, same goes if top firm chooses 2..
top firm will always choose right

33
Q

Competition policy

A

Government policies to prevent and reduce the abuse of monopoly power

34
Q

Why do government have to intervene against monopolies?

A

Abuse of monopoly power can lead to market failure and be against the public interest

35
Q

Role of the OFT

A

investigate suspected abuses of monopoly power and engaging in prohibited practices. There are two main types of behaviour they investigate:

Collusive Behaviour
Abuse of Market Power

36
Q

What is Collusive behaviour and why does it cause market failure

A

This occurs when firms enter into agreements to fix prices and or output. This enables firms to make higher profits at the expense of consumers.

Collusive tendering. This occurs when firms enter into agreements to fix the bid at which they will tender for projects. Firms will take it in turns to get the contract and enable a much higher price for the contract.

Collusive behaviour is illegal and can be investigated by the OFT.

37
Q

What is abuse of market power

A

-If a firm has more than 40% of market share, it is considered to have market power.
-The OFT is more likely to investigate firms with a dominant market position. Though they can also investigate people with less market share.

38
Q

Examples of abuse of market power

A

Charging Higher prices – a Monopoly is able to set high prices. The OFT may consider this abuse of monopoly power if it leads to excess prices and profits.
Predatory Pricing – selling below cost with the intention of forcing a rival firm out of business
Vertical restraints – Firms may use market power to pay lower prices to suppliers (e.g. Supermarkets have been criticised for paying low prices to farmers. Also, firms may limit competition by preventing competitors from being sold in a shop. For example, an ice-cream manufacturer may give a free freezer to a shop – but on the condition, they only sell their ice-cream
Tie in Sales. E.g. A printer which makes people may its own brand very expensive ink.

39
Q

What does CMA influence

A

Competition and Markets Authority

UK competition policy is regulation by CMA (Competition and Markets Authority).

-Regulation of Cartels/Collusion. Based on the Competition Act 1998
-Education of business so that they comply with relevant competition act
-Consumer bodies can make ‘super complaints’ to the CMA for investigation of unfair practices.
-Mergers – The CMA must be notified of mergers and they can investigate if they think they might be against public interest.
-Investigate particular industries and see whether they are run in the public interest.

40
Q

Real life example of CMA regulating

A

Merger between Hungry House and Just Eat – allowed by CMA (Dec 2017)
-Referral of merger between soft drink manufacturers Refresco and Cott to an in-depth investigation (Dec 2017)
Concerned this merger could increase prices due to increased market share.

41
Q

Contestable market characteristics

A

-no barriers to entry/exit
-low sunk cost
-threat of new firms entering the market
-prices close to P(c) and profits low

42
Q

How can contestable markets benefit public interest?

A

-lower prices (AE)
-increased incentive to cut cost (x-efficient)
-incentive to respond to consumer preferences (AE)

43
Q

Factors that determine contest ability

A

-Sunk cost e.g raw meterial that can’t be reseller
-level of advertising, Coca-Cola has significant Brand loyalty so new firms need to spend on advertising to compete.
-vertical integration : if firm doesn’t have access to supply.. less contestable
E.g selling electricity requires access to National Grid
-Access to tech and skilled labour
E.g Nuclear power requires skilled workers and best workers require high wages that Google swe make

44
Q

How has the Banking industry become less contestable

A

-high sunk cost : network of banks set up
-Brand loyalty : so new firms need to advertise to attract new customers
-Existing banks have high profits, hit and run won’t occur

45
Q

Why does an industry that has ‘high profits’ seem as less contestable

A

If the market is highly profitable, this suggests the market is less contestable. In theory, if firms are making supernormal profit, it would attract new firms into the market. The persistence of supernormal profits suggests that hit and run competition is not possible and there are barriers to entry.

46
Q

Methods to increase contest ability

A

-remove legal barriers to entry
-force firms to allow competitors to use its network E.g OFTEL forced BT to allow other companies to use its netwroks
And a firm can now gain access to national network of gas/electricity infrastructure
-leglislation against predatory pricing
-OFT can legislate against abuse of monopoly power

47
Q

3rd degree price discrimination

A

-charging different prices to different groups for the same good and service

48
Q

Examples of price discrimination (Direct price discrimination)

A

-student discount
-senior citizen railcard
-peak/off-peak travel

49
Q

What are the conditions for 3rd degree price discrimination?

A

-Firm is a price maker. operate in imperfect competition; it must be a downward sloping demand curve.

-Separate markets. To prevent resale. E.g. stopping an adults using a child’s ticket. Prevent business travellers from buying discount tickets.

-Different elasticities of demand.
E.g. students with low income will be more price elastic and sensitive to price. Business travellers will have more inelastic demand.

-Low admin costs. It must be relatively cheap to separate markets and implement price discrimination.

50
Q

Advantage of price discrimination

A

Firms will be able to increase revenue. Price discrimination will enable some firms to stay in business who otherwise would have made a loss. For example price discrimination is important for train companies who offer different prices for peak and off-peak. Without price discrimination, they may go out of business or be unable to provide off-peak services.
-Increased investment. r&d which benefit consumers
-Lower prices for some.
Old people benefit from lower train companies; old people are more likely to be poor. Also, customers willing to spend time in researching ‘special offers’ and travelling at awkward times will be rewarded with lower prices.
-Manages demand. Lower price encourage people to travel at unpopular times (early in the morning) This helps avoid over-crowding and helps to spread out demand.

51
Q

Disadvantage of price discrimination

A

Higher prices for some.
(e.g. people who have to travel at busy times). These higher prices are likely to be allocatively inefficient because P > MC.

Decline in consumer surplus. Price discrimination enables a transfer of money from consumers to firms – contributing to increased inequality.

Potentially unfair. Those who pay higher prices may not be the poorest. For example, adults paying full price could be unemployed, senior citizens can be very well off.

Administration costs. There will be administration costs in separating the markets, which could lead to higher prices.

Predatory pricing. Profits from price discrimination could be used to finance predatory pricing

52
Q

Why does price discrimination help airlines who have a low mc

A

-MC of an extra passenger is very low, -incentive to use price discrimination to sell all the tickets.
This is why sometimes prices for airlines can be very low just before their date. Once the company is due to fly the MC of an extra passenger will be very low. Therefore this justifies selling the remaining tickets at a low price.

Examples

53
Q

Adv of privertisation

A
  1. Improved efficiency
    If you work for a government run industry managers do not usually share in any profits. However, a private firm has a profit incentive and so it is more likely to cut costs and be efficient. Since privatisation, companies such as BT, and British Airways have shown degrees of improved efficiency and higher profitability.
  2. Lack of political interference
    It is argued governments make poor economic managers. They are motivated by political pressures rather than sound economic and business sense. For example, a state enterprise may employ surplus workers which is inefficient. The government may be reluctant to get rid of the workers because of the negative publicity involved in job losses. Therefore, state-owned enterprises often employ too many workers increasing inefficiency.
  3. Short term view
    A government many think only in terms of the next election. Therefore, they may be unwilling to invest in infrastructure improvements which will benefit the firm in the long term because they are more concerned about projects that give a benefit before the election. It is easier to cut public sector investment than frontline services like healthcare.
  4. Shareholders
    It is argued that a private firm has pressure from shareholders to perform efficiently. If the firm is inefficient then the firm could be subject to a takeover. A state-owned firm doesn’t have this pressure and so it is easier for them to be inefficient.
  5. Increased competition
    Often privatisation of state-owned monopolies occurs alongside deregulation – i.e. policies to allow more firms to enter the industry and increase the competitiveness of the market. It is this increase in competition that can be the greatest spur to improvements in efficiency. For example, there is now more competition in telecoms and the distribution of gas and electricity.

However, privatisation doesn’t necessarily increase competition; it depends on the nature of the market. E.g. there is no competition in tap water because it is a natural monopoly. There is also very little competition within the rail industry.
6. Government will raise revenue from the sale

Selling state-owned assets to the private sector raised significant sums for the UK government in the 1980s. However, this is a one-off benefit. It also means we lose out on future dividends from the profits of public companies.

54
Q

Disadvantage of Privatisation

A

A natural monopoly occurs when the most efficient number of firms in an industry is one. For example, tap water has very high fixed costs. So less competition, can charge higher
Price

  1. Public interest
    e.g., health care, education and public transport are important public services. profit motive shouldn’t be the primary objective of firms and the industry. For example, in the case of health care, it is feared privatising health care would mean a greater priority is given to profit rather than patient care. Also, in an industry like health care, arguably we don’t need a profit motive to improve standards. When doctors treat patients, they are unlikely to try harder if they get a bonus.
  2. Government loses out on potential dividends.
    Many of the privatised companies in the UK are quite profitable. This means the government misses out on their dividends, instead going to wealthy shareholders.
  3. Problem of regulating private monopolies.
    Privatisation creates private monopolies, such as water companies and rail companies. These need regulating to prevent abuse of monopoly power. Therefore, there is still a need for government regulation, similar to under state ownership.
  4. Fragmentation of industries
    In the UK, rail privatisation led to breaking up the rail network into infrastructure and train operating companies. This led to areas where it was unclear who had responsibility. For example, the Hatfield rail crash was blamed on no one taking responsibility for safety. Different rail companies have increased the complexity of rail tickets.
  5. Short-termism of firms
    As well as the government being motivated by short-term pressures, this is something private firms may do as well. To please shareholders they may seek to increase short-term profits and avoid investing in long-term projects. For example, the UK is suffering from a lack of investment in new energy sources; the privatised companies are trying to make use of existing plants rather than invest in new ones.
55
Q

Eval of privatisation

A

-depends on type of market
-depends on the quality of regulation
-Is the market contestable and competitive to benefit consumer interest and efficiency savings

Micro Economics (1 decks)

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