markets Flashcards
- Monopolistic competition assumption
There are many small buyers and sellers
Low barriers to entry or exit
Differentiated goods
- Oligopoly assumptions
The market is dominated by a few large sellers
High barriers to entry/exit
Differentiated goods
Interdependence between firms
- Collusion
When two firms work together to limit competition (e.g. price-fixing).
- Overt collusion
When there’s a formal agreement between firms to limit competition .
- Tacit collusion
When there’s an unspoken agreement between firms to limit competition.
- Price wars
When firms undercut each other with lower prices to steal the other firms’ consumers.
- Predatory pricing
When a firm aggressively cuts its prices below AVC to force out competitors from the market.
Short-run: firm incurs a loss
Long run: firm forces out its competitors, so they can take over the market.
- Limit pricing
When an incumbent firm uses its economies of scale to set a price low enough to limit new firms from entering.
Small new firms, without economies of scale, won’t be able to compete so they’ll stay out of the market.
Limit pricing is a barrier to entry
- Non-price competition
When firms compete without changing price, e.g:
Advertising
Loyalty cards
Branding
Quality
- Contestable market
A market with low barriers to entry/exit.
- Contestability
How easy it is to enter a market.
- Hit & run competition
In contestable markets, if an incumbent firm is making supernormal profit in the short run, new firms will enter (or “hit”) industry.
They’ll undercut the incumbent firm to steal away its consumers and make supernormal profit.
To get rid of the new entrants, the incumbent firm has to set price = AC so only normal profit can be made. New firm will then leave the market (“run”) because supernormal profit is gone.
- Monopsony
A monopsony is when there’s only one dominant buyer in the market
E.g. the NHS is the only dominant buyer of doctors in the UK
- Minimum wage
A minimum wage is the lowest wage a firm can legally employ a worker for.
E.g. for over-25s in the UK, the national minimum wage is £7.50
- Trade union
A trade union is a group of workers who collectively bargain to improve employee welfare.
E.g. the NUT, the National Union of Teachers, who have previously gone on strikes to bargain for higher pay from the government
- Maximum wage
A maximum wage is the highest wage a worker can legally be employed for.
- Occupational immobility
Occupational immobility is when workers can’t move between different jobs (or occupations) because they lack the skills needed.
- Geographical immobility
Geographical immobility is when workers struggle to move between different areas.
benefits of collusion
- increases profits
- increases market share as they may be price makers can predatory price to reduce competition
- producer collusion with lead to an increase in quality of life
disadvantages of collusion
- illegal - fined shamed
- limits competition, lack of efficiency
- damages consumer welfare
what does price regulation do
limits price increase for consumers
2 types of price cap
RPI +k and RPI -X
what does RPI + K mean for the firm
Can increase in line with inflation and then an extra amount for supernormal profit to reinvest eg thames water
how does RPI - X work
Increase price in line with inflation but due to firms with a large market share they may be more inefficient so a little of that percentage cut to increase efficiency eg energy firms
4 ways UK government can control oligopolies
- price caps
- FInes for collusion
- Deregulation
- subsidies to new firms until they reach economies of scale
Evaluation points for collusion
- time lag
- no penalties for whistle blowers
- tacit collusion
- charging too high will reduce competition
3 reasons why profit maximising is important
- to reinvest
- to make sure you dont go below shutdown point
- owners r paid in shares as well as share holders
natural monopoly example
thames water charging only a fraction of a penny per litre
trade union example
2015 london tube strike cost £300 million in lost outut
how much higher are trade union wages than average workers
17%
3 ways how trade unions help
- bargain for better conditions and training
- higher wages
- collective strike disrupts production so is more effective
3 ways TU’s may not be effective
- earn £200-£300 a week while sstriking
- large supply of labour
- may outsource than pau higher wages
what does it mean in a monopolistic market to have differentiated goods
- price-makers but only by a bit because there are many substitutes
- means demand is elastic
