Market structures and competitive behaviour in leisure markets Flashcards
Short run
at least one factor of production is fixed, usually capital
Long run
All factors of production are variable
Fixed costs
Costs that don’t change in the short run with changes in output e.g. rent
Variable costs
Costs that change with changes in output e.g. raw materials
Labour costs - fixed/variable??
Wage rate = fixed Overtime and bonus payments = variable with output
Total cost (TC)
Total cost of producing a given output - made up of fixed and variable costs in the short run
Average cost (AC)
Unit cost total cost divided by output
Average fixed cost (AFC)
Total fixed cost divided by output Reduces with output increasing
Average variable cost (AVC)
Total variable cost divided by output Falls at first and then rises - due to the problem of a fixed factor of production, combination of resources becomes less efficient
Marginal cost (MC)
Change in cost resulting from changing output by one unit Key cost - firms are constantly considering whether to reduce or increase output Influences average cost - falls in MC reduce AC, vice versa
Long run costs
Total costs rise with output 3 possible LRAC curves
U shaped cost curve reasons
Economies of scale and then diseconomies of scale
Downwards sloping CC reasons
Economies of scale over a high range of output
L shaped cost curve reasons
Firm reaches minimum efficient scale of production then experiences constant returns to scale
Economies of scale
Reduction in long run average costs resulting from an increase in the scale of production
Diseconomies of scale
an increase in long run average costs resulting from an increase in the scale of production
Minimum efficient scale
the lowest level of output at which full advantage can be taken of economies of scale
Constant returns to scale
Long run average cost remaining unchanged when the scale of production increases
Internal economies of scale
economies of scale that occur within the firm as a result of its growth
Purchasing economies of scale
When firms buy in bulk they often pay less per unit purchased
Selling economies
A larger firm can make fuller use of sales and distribution facilities than a small one e.g. doesn’t cost twice as much to use an HGV twice the size of a lorry
Technical economies of scale
Large firms can afford to use high tech equipment and use it efficiently
Managerial economies of scale
As a firm grows in size it’s viable to employ specialists e.g. accountants
Financial economies of scale
Large firms usually find it easier and cheaper to raise finance than small firms - banks trust them more
Risk-bearing economies
Firm can produce a greater range of products - diversifying product range reduces the chance of experiencing a loss, should one of the products prove to be unpopular
External economies of scale
Savings in costs available to firms arising from the growth of the industry on the whole e.g. rise in tourism has led to universities running courses on travel and tourism Firms may be able to specialise in particular areas of the market Infrastructure, good reputation
Internal diseconomies of scale
Diseconomies of scale experienced by a firm caused by its growth e.g. difficult to run a large firm, keeping a check on everything that’s happening and coordinating production More people between whom there can be disputes
External diseconomies of scale
Diseconomies of scale resulting from the growth of the industry e.g. competition for resources, traffic congestion, pollution
Total revenue (TR)
The total payment a firm recieves May not move in the same direction as sales e.g. if a cinema raises ticket prices for a particular film, demand might be inelastic - same sales, more revenue
Marginal revenue (MR)
the change in total revenue resulting from the sale of one more unit
Average revenue (AR)
Total revenue divided by the output sold
Price taker
A firm that has no influence on the price of the good it sells
Perfect competition
A market structure (hypothetical) with many buyers and sellers, free entry and exit and an identical product
Price maker
A firm that influences price when it changes its output
Reality of most markets
Not perfect competition
Vast majority of firms including those in the leisure industry have a degree of market power & price making
Unit elasticity of demand
When a given percentage change in price causes an equal percentage change in demand, leaving total revenue unchanged
When is there UeD??
When total revenue does not change and marginal revenue is zero
Predatory pricing
Setting price “predatorily” low in order to force rival firms out of the market
Aim = maintain a monopoly
Leisure product elasticity
- Most leisure products have income elastic demand
- Changes in income can effect revenue of leisure market firms
- Things e.g. cinema and theatre are superior goods
Superior good
A good with positive income elasticity of demand greater than one - demand for the good rises disproportionately as incomes rise
Effect on leisure products from changes in the prices of related goods
- Changes in the price of related products affect a firm’s revenue
- E.G. a rise in the price of public transport man reduce demand for cinema tickets - increased cost of getting there
Other factors that influence demand for leisure products
- Weather
- e.g. period of bad weather may increase demand for TV
- Special events
- Big concert is likely to increase the demand for a band’s merchandise
Barriers to entry and exit
- Obstacles to new firms entering a market
- Obstacles to firms leaving a market
Sunk costs
Costs incurred by a firm that it can not recover should it leave the market
e.g. costs involved in building/buying assets - formula 1 race track
Limit pricing
Setting a price low to discourage the entry of new firms into the market
Examples of barriers to entry
- legal barriers - patents, licences
- high start up costs
- brand names and loyalty
- economies of scale
- Limit pricing
Examples of barriers to exit
- Sunk costs
- Advertising expenditure - especially long term
- Contracts - firm may be legally obliged to supply a product for an amount of time
Awareness of barriers to exit act as barriers to entry
Pure monopoly
The firm is the only firm in the industry
Profit maximisation
Achieving the highest possible profit
Marginal cost = marginal revenue
Supernormal profit
Profit earned where average revenue exceeds average cost
Normal profit
The level of profit necessary to keep a firm in the market in the long run
Natural monopoly
A market where long run average costs are lowest when the market is dominated by only one firm
Legal monopoly
A market where a firm has a share of 25% or more
Dominant monopoly
40% share or more
Oligopoly
Market structure characterised by several large firms
UK definition = CR5 of more than 50%
Key features of an oligopoly
- High barriers to entry and exit - allow supernormal profits in the long run
- Differentiated products
- Price makers
- Firms are interdependent
- High level of non price competition
Problems with price cutting
- Likely to provoke a price war
Kinked demand curve
Explanation of kinked demand curve
- Above current price, demand curve will be relatively elastic - likely that rivals will not follow price rise, so choosing to raise price will lose a significant number of sales
- Below current price, demand is inelastic - firm anticipates that its rivals will match price cuts
- Kink in demand (AR) curve means MR curve has a discontinuity at output Q
- Small change in MC does not alter the profit maximising output
What does the kinked demand curve suggest
Price rigidity likely to exist in an oligopoly
firms more likely to rely on non-price competition e.g. advertising, competitions
Cartel
- Formal collusion involves firms forming a cartel
- Firms produce separately but sell at one agreed price
- Illegal in UK
Tacit collusion
When firms follow the price strategy of one firm
Price leadership
Monopolistic competition
Market structure characterised by a large number of small firms selling a similar but not identical product
Incumbent firms
Firms already in the market
Characteristics of monopolistic competition
- Low barriers to entry and exit - normal profit earned in the long run
- differentiated products
- non-price competition e.g. after-sales service, good location
Dynamic efficiency
Efficiency in terms of developing and introducing new production techniques and new products
Monopoly efficiency
- Price set above marginal cost - output is below and price is above allocatively efficient levels - ALLOCATIVELY INEFFICIENT
- No incentive to minimise average cost - PRODUCTIVELY INEFFICIENT
- Lack of competition may mean it doesn’t spend much on research, development, innovation - DYNAMICALLY INEFFICIENT
- Economies of scale significant - prices may be lower under monopoly
- Supernormal profits - llikely to be able to innovate
X inefficiency
The difference between actual costs and attainable costs
Contestable market
Market in which there are no barriers to entry and exit and the costs facing incumbent and new firms are equal
Monopolistic competition efficiency
- Fail to achieve allocative efficiency - restricts output in order to maximise profit, under-produces the product - ALLOCATIVE INEFFIENCY
- Not productively efficient - excess capacity - PRODUCTIVE INEFFICIENCY
- Criticised on the grounds that there are too many firms producing too low an output at relatively high prices, wasting resources
Hit-and-run competition
Firms quickly entering the market when there are supernormal profits and leaving it when the profits disappear
Features of a contestable market
- What determines behaviour and efficiency is not actual but potential competition
- Perfectly contestable = no barriers
- Incumbent and new firms have equal costs, access to technology
- No brand loyalty
- No potential barriers to entry - existing firms wouldn’t engage in limit pricing
One firm in a contestable market?
Threat of competition would still ensure that the firm is efficient and earns normal profit in the long run
Contestable market efficiency
- Allocatively efficient
- Productively efficient
Regulation
Rules administered by a government agency or legal body
Designed to influence barriers, prices charged, product standards, how the product is sold
Examples of regulation
- British board of film classification
- ABTA (association of british travel agents)
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Government regulations
- Backed up by law, operated by government
- Designed to correct market failure arising from abuse of market power, lack of information, under-consumption of merit goods etc.
Objectives that a firm follows
Influenced by type of organisation, priorities of managers and owners
Assumed main objective of private sector firms?
- Profit maximisation
Criticism of profit maximisation as a prime objective
- Hard to calculate marginal cost and marginal revenue
- IN PLCs (often found in oligopolistic markets e.g. cineworld group) there is a separation of ownership and control
- Owners (shareholders) care about high a profit as possible, managers may have other objective
Sales revenue maximisation
- An alternative objective to profit maximisation
- Objective of achieving as high a total revenue as possible
- Because managers salaries are often linked to growth of sales rather than profit performance
- High/expanding sales may attract external finance/greater economies of scale
- To maximise sales reevnue, firm would produce as long as extra output increases revenue - until MR is zero
- In practice, usually subject to a minimum profit constraint - level needed to keep shareholders content
Profit satisficing
Aiming for a satisfactory level of profit rather than the maximum level
Stakeholders
People affected by the activities of a firm
e.g. workers, managers, owners, creditors (accountants)
Growth maximisation
Objective of increasing the size of the firm as much as possible
- Managers likely to earn more, higher status, increased career prospects if they run a big firm
Utility maximisation
The aim of trying to achieve as much satisfaction as possible
e.g. owners of low down sports clubs may do it for satisfaction rather than high profits
