Market Structures Flashcards
(45 cards)
How do we define internal economies of scale nicely?
Internal economies of scale are reductions in average costs achieved as the firm increases output in the long run
How do we define external economies of scale nicely?
External economies of scale are reductions in average costs achieved as an industry grows in the long run.
How do we define divorce of ownership from control nicely?
Divorce of ownership from control refers to the situation where the owners of a firm are not those deciding the conduct of the firm (taking day-to-day decisions).
Explain why a divorce of ownership from control does not typically exists with small firms.
In small firms, typically sole trader and partnership businesses, the owners of the business also control its behaviour. This seems likely to lead to the objective of profit maximisation being pursued as those running the business gain directly when the firm makes more profit. This would imply that the firm would produce all units for which marginal revenue (MR) is greater than marginal cost (MC) as this would increase the gap between total revenue and total cost, thereby increasing profit. Output is thus at Q1 in Figure 1, where MC=MR with a price of P1 established from the demand curve.
Why does revenue increase in markets with inelastic demand curves (price discrimination)?
In markets with inelastic demand, the price rise is met by a less than proportionate contraction in quantity demanded, leading to higher revenue.
Under what condition is price discrimination beneficial to firms (to do with separating submarkets)?
As long as the revenue gained from keeping the submarkets separate > costs incurred, this policy will add to profit.
De facto definition for price discrimination?
Price discrimination occurs when a firm charges different prices to different groups of consumers for an identical good or service with no difference in costs of production.
Conditions needed to price discriminate - in prose
In order to price discriminate, a firm must have a degree of price making power, the ability to identify consumers with a different price elasticity of demand for their good or service, and the ability to prevent market seepage.
Explain first degree price discrimination
In first degree price discrimination, each consumer is charged the maximum price they are willing to pay, therefore ensuring the maximum possible revenue for the firm (Revenue = price x quantity).
Explain how seepage can mean that price discrimination does not benefit firms.
In some markets, the cost of preventing seepage might be more than the gain in revenue that price discrimination brings about, leading to loss in profit. Therefore, price discrimination may not benefit firms.
Explain what market seepage is
Market seepage is where consumers who purchase a good or service at lower prices resell it to consumers who would have paid the higher price
The presence of _______ can be considered crucial if price discrimination is to be beneficial to firms.
Asymmetric information.
Apple wants to try first degree price discrimination. Why might it not work for them?
It is unlikely that firms like apple can use first degree price discrimination as they are exposed to imperfect information about the maximum amount that an individual consumer will pay for their product. First degree is more suited to things like market bazaars.
How could people discovering that apple is doing price discrimination (first degree) affect Apple’s profits.
Apple could face backlash if price discrimination is discovered. They could lose brand loyalty which would make the PED for their products more elastic and cause them to lose monopoly price making power. This could result in a price discriminating firm losing significant revenue and therefore profit.
Consumers can benefit from 3rd degree price discrimination. Without, e.g. student cinema tickets, a student would have been ___ from consuming the good.
EXCLUDED.
What is our main conclusion statement for things to do with price discrimination?
Price discrimination effect must be analysed on a case-by-case basis. Context is important
Price discrimination is better at managing demand. 3rd degree is used for train tickets. Explain how this leads to benefits for consumers in terms of managing demand.
If prices of train tickets 🚂 were not higher in rush hour, there would be EXCESS DEMAND, causing overcrowding of trains. Increasing prices therefore serves as a RATIONING FUNCTION, benefitting consumers as quality improves from lower congestion.
How do we elevate our answers when talking about profit max?
Not simply stating MC=MR, but briefly explaining why this is case.
“Profit max is at MC=MR and output Q1, price P1. If an additional unit of output were to be produced beyond this, it would add more to the firm’s costs of production than its revenue, thus reducing profit.”
Own example for growth/market share max over profit max….
Spotify, for example, is trying to expand its market share and by 2018 had yet to make profit as this probably required selling its services at a low price. It would hope not only to gain market share but also the loyalty of its customers, such that their demand becomes less elastic. In the long run, it may then be able to raise its price and make substantial profits.
Instead of just saying because of divorce of ownership and control, firms may not pmax, Peter Cramp suggests to add sophistication by adding things about shareholders disciplining management. Please barf out that spiel about how shareholders can get management to profit max…
- sell shares which would make company vulnerable to takeover; focuses mind of management
- use voting rights on occasions like annual general meeting of shareholders (but most don’t do)
- institutional shareholders like pension funds are more likely to exercise voting rights than individuals.
We can argue that where shareholders are more active the firm is more likely to profit maximise, but in interim judgement the assumption that firms will always profit maximise appears not to be valid.
How do we define monopolistically competitive nicely?
A monopolistically competitive market is a form of imperfect competition where many producers sell SLIGHTLY differentiated products, for example by branding or quality, in a market where the barriers to entry and exit are low.
What do we say about price making power for monopolistically competitive firms?
Due to product differentiation, firms in monopolistically competitive firms enjoy a SMALL degree of price making power.
Why is the demand curve downward sloping in monopolistically competitive markets?
Downward sloping because products are differentiated so firms have some price making power because brand loyalty may exist.
Explain why only normal profit is made in the long run in monopolistically competitive markets? - perfect spiel please
There are low barriers to entry and exit in the market so new entrants can easily enter, attracted by supernormal profits. They will undercut the incumbent firms on price. As a result, the demand curve shifts leftward until it is tangential to the average cost curve because new entrants take attract customers away from the incumbent firm (as they are a substitute).
