Market Structures

Question 1

How do we define internal economies of scale nicely?

Answer 1

Internal economies of scale are reductions in average costs achieved as the firm increases output in the long run

Question 2

How do we define external economies of scale nicely?

Answer 2

External economies of scale are reductions in average costs achieved as an industry grows in the long run.

Question 3

How do we define divorce of ownership from control nicely?

Answer 3

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).

Question 4

Explain why a divorce of ownership from control does not typically exists with small firms.

Answer 4

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.

Question 5

Why does revenue increase in markets with inelastic demand curves (price discrimination)?

Answer 5

In markets with inelastic demand, the price rise is met by a less than proportionate contraction in quantity demanded, leading to higher revenue.

Question 6

Under what condition is price discrimination beneficial to firms (to do with separating submarkets)?

Answer 6

As long as the revenue gained from keeping the submarkets separate > costs incurred, this policy will add to profit.

Question 7

De facto definition for price discrimination?

Answer 7

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.

Question 8

Conditions needed to price discriminate - in prose

Answer 8

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.

Question 9

Explain first degree price discrimination

Answer 9

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).

Question 10

Explain how seepage can mean that price discrimination does not benefit firms.

Answer 10

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.

Question 11

Explain what market seepage is

Answer 11

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

Question 12

The presence of _______ can be considered crucial if price discrimination is to be beneficial to firms.

Answer 12

Asymmetric information.

Question 13

Apple wants to try first degree price discrimination. Why might it not work for them?

Answer 13

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.

Question 14

How could people discovering that apple is doing price discrimination (first degree) affect Apple’s profits.

Answer 14

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.

Question 15

Consumers can benefit from 3rd degree price discrimination. Without, e.g. student cinema tickets, a student would have been ___ from consuming the good.

Answer 15

EXCLUDED.

Question 16

What is our main conclusion statement for things to do with price discrimination?

Answer 16

Price discrimination effect must be analysed on a case-by-case basis. Context is important

Question 17

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.

Answer 17

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.

Question 18

How do we elevate our answers when talking about profit max?

Answer 18

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.”

Question 19

Own example for growth/market share max over profit max….

Answer 19

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.

Question 20

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…

Answer 20

• 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.

Question 21

How do we define monopolistically competitive nicely?

Answer 21

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.

Question 22

What do we say about price making power for monopolistically competitive firms?

Answer 22

Due to product differentiation, firms in monopolistically competitive firms enjoy a SMALL degree of price making power.

Question 23

Why is the demand curve downward sloping in monopolistically competitive markets?

Answer 23

Downward sloping because products are differentiated so firms have some price making power because brand loyalty may exist.

Question 24

Explain why only normal profit is made in the long run in monopolistically competitive markets? - perfect spiel please

Answer 24

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).

Question 25

Why are monop comp firms better than oligs and monops in terms of efficiency?

Answer 25

Intense competition between suppliers means that demand is likely to be price elastic which means that prices are closer to marginal costs. Therefore, in contrast to monopolies and oligopolies, prices for consumers will be closer to the allocatively efficient price.

Question 26

Why are monopolistically competitive firms not productively efficient?

Answer 26

Monopolistically competitive firms do not produce at the lowest point on the AC curve and thus not productively efficient. Because the market is made of many small firms, it is unlikely that any are achieving substantial economies of scale unless MES can be obtained at a low percentage of market output.

Question 27

One word, homogenous goods. How does this difference mean that firms in monopolistically competitive markets face higher costs than firms in PC?

Answer 27

Firms need to spend on differentiating their product or service, usually by advertising to create brand loyalty, a strategic barrier to entry and source of price making power, increasing their costs. There’s no need for firms in PC to advertise because consumers have perfect knowledge and goods are homogeneous.

Question 28

Why are prices higher in a monopoly than in a competitive market? We are talking about a market where demand is inelastic, e.g. pharmaceuticals. Incorporate this fact into your answer.

Answer 28

As a sole provider, a monopoly is able to set its own price, subject only to the constraint of its demand curve. This means it can choose price, or output, but not both. Monopolies are most likely to raise price, especially if demand is inelastic. With inelastic demand, any increase in price is met by a less than proportionate contraction in demand, so that total revenue and in turn profits are increased. Monopolists are expected to profit maximise. In contrast, firms in competitive markets are price takers, accepting the market determined price which is driven by the force of competition to the point where price is equal to marginal cost.

Question 29

What can the CMA do to people it finds guilty of colluding against consumer interests?

Answer 29

Fines of up to 10% of company turnover and jail terms for company directors involved in price fixing

Question 30

What is consumer surplus?

Answer 30

This is the gap between the maximum price that a consumer would be willing to pay for a product and the price that they actually have to pay.

Question 31

Why is it good for consumer surplus to increase (for consumers)?

Answer 31

As prices fall, consumer surplus grows. The significance of this is that consumers are left with more discretionary income to spend on other goods and services that generate utility for them.

Question 32

There is a question about renationalising the UK electricity industry. Explain how x inefficiency can arise from lack of competition and how nationalised firms may keep on surplus workers.

Answer 32

X inefficiency occurs when a firm lacks the incentive to minimise costs. The absence of competition in a nationalised electricity industry means that the optimum combination of factors of production will not be used to produce on the lowest possible average cost curve. For example, a nationalised electricity firm may be employing workers who are not necessary for the production process. They may be more concerned with the political implications of redundancies than removing surplus workers. These concerns are less likely in the private sector where the owners are more concerned with profits than elections.

Question 33

Explain the judgement about why it is better to have a state monopoly than a private monopoly in the market for electricity. Weave in the evaluation argument about efficiency in the state vs private

Answer 33

Being in the private sector does not guarantee efficiency - it is not inevitable. Theoretically, competitive pressure would encourage private sector firms to be X efficient however given the high barriers to entry in this industry it may be more likely in practice that a private monopoly arises and this may fall victim to the same issues of inefficiency that a state monopoly would. Industries such as energy play a key role in the welfare of consumers and citizens. A common value judgement is that things like water and energy could be considered necessities for basic living standards, and not luxuries, especially in developed high income countries like the UK. Government provision means that the disadvantaged can be looked after and provided with these necessities. A privately owned monopoly would be worse for allocative efficiency and consumer welfare than a state monopoly because their objectives may differ. A monopoly is the most efficient option in the energy industry with such large economies of scale to be exploited.

Question 34

Perfect competition provides a ….

Answer 34

Perfect competition provides a YARDSTICK FOR JUDGING THE EXTENT TO WHICH REAL WORLD MARKETS PERFORM EFFICIENTLY

Question 35

How does the CMA define a working monopoly and a dominant firm?

Answer 35

The CMA deems that a working monopoly is any firm with grater than 25% of the industries’ total sales and a dominant firm is one that has at least 40% market share.

Question 36

How do we add elasticity analysis to the whole idea of firms in PC having to keep prices low or else consumers will substitute their goods for cheaper ones elsewhere?

Answer 36

The cross-price elasticity of demand for one product will be high, suggesting consumers are prepared to switch their deamnd to the most competitively priced products in the market.

Question 37

Define privatisation

Answer 37

Privatisation is the transfer of assets from the public sector to the private sector. (Reverse for nationalisation)

Question 38

What is the main argument for privatisation?

Answer 38

The market will lower average costs, confer efficiency gains and involve more innovation than the state ever could because the profit-motive exists amongst self-interested agents whereas the government has no such motive.

Question 39

What is a key advantage of nationalised firms for the government (has to do with stuff like unemployment) that privatised firms don’t have?

Answer 39

A key advantage of nationalised firms is their ability to act as a vehicle for macroeconomic control, such as keeping employment levels high. This however still has to be balanced against the loss of efficiency and waste involved with having surplus employees.

Question 40

Privatisation means extra revenue is raised for the government. Build the chain of analysis about how this is useful.
BUT.. eval

Answer 40

Privatisation means extra revenue is raised for the government. Can be invested in services to alleviate poverty or improve occupational immobility of labour (possible caused by that privatisation). More revenue also improves government finances which could mean that the government has more fiscal headroom for tax cuts that generate economic growth, possible improving consumer welfare in the long run.
Eval: this is however a ONE-OFF benefit.

Question 41

XYZ is a natural monopoly. This could because the _____ that there is no ____.

Answer 41

XYZ is a natural monopoly. This could be because the FIXED COSTS OF RUNNING THE FIRM ARE SO SIGNIFICANT that there is NO SCOPE FOR HAVING COMPETITION AMONGST SEVERAL FIRMS.

Question 42

Who is the water regulator ?

Answer 42

OFWAT

Question 43

• What act improved information available for consumers?
• firms can still be deliberately inaccurate. What are some examples of this?

Answer 43

• The Competition Act
• in 2008, Severn Trent Water was fined 35.8m pounds for inaccurate reporting
• Tesco misreported its profits in 2014

Question 44

What is the regulator for energy?

Answer 44

OFGEM

Question 45

Consumers aren’t switching energy supplier even when they have price comparison sites. What fancy term does this suggest the issue is?

Answer 45

the readily available information that already exists to consumers (through price comparison sites) suggests that market failure is not from a lack on information. This indicates there is a level of CONSUMER INERTIA, making them reluctant to switch suppliers.