Markets structures Flashcards
why is MC=MR the pmax
As long as the revenue of producing another unit of output (MR) is greater than the cost of producing that unit of output (MC), the firm will increase its profit by using more variable input to produce more output.
What are the assumptions in a monopoly
- high barriers to entry
- firms have imperfect knowledge -> gives the monopoly a USP as they can’t replicate goods
- profit maximiser
- goods are differentiated
where is the productively efficient point
where AC is at its lowest point
MC=AC
where is the allocative efficient point
where MC=AR
What conditions are necessary for price discrimination
- monopoly power
- two different markets with differing elasticities
- the ability to keep markets separate and prevent seepage
what is seepage
Means that a consumer cannot purchase at the low price in the elastic market, and then re-sell to other consumers in the inelastic market, at a higher price.
Meaning the firm will not benefit from increased revenue
Why can seepage occur
- Consumer have imperfect knowledge and a monopoly can sell to consumers at different prices
2 Advantages of price discrimination
- increased revenue can result in dynamic efficiencies
2. beneficial to lower income society
3 Disadvantages of price discrimination
- decline in consumer surplus
- administration costs
- those who pay the higher prices may not be the richest consumers.
3 benefits of a monopoly
why shouldn’t competition policy be implemented
- Dynamic efficiencies
- economies of scale (Eg natural monopolies) and this may translate into lower prices
- large tax revenues
3 negatives of a monopoly
- X inefficiency. no incentive to cut costs and innovate. -> less consumer surplus
- higher prices
- not allocatively efficient
how can monopolies improve allocative efficiencies in the long term
If productive efficiency increases this means costs will be kept down, and if these cost savings are passed onto consumer then allocative efficiency can be increased.
Productive efficiency may improve if investment in technology for the production line increases
Why may monopolies not profit maximise
- instead prioritise gaining market share,
- be socially responsible
- not for profit (student union)
What is the principal agent problem
The principal-agent problem is a conflict in priorities between a person or group and the representative authorized to act on their behalf.
Example of principal agent problem
As shareholders have no control over the business and managers can act in a different manner to achieve their personal goals.
Monopolistic competition
Here there are a large number of firms in the market selling differentiated products.
This leads to a small degree of market power as each firm offers something different to the others
Why can firms in monopolistic competition make SNP in the short run
as product or branding can be differentiated
Why can’t firms in monopolistic competition make SNP in the long run
As new firms can enter the market as there are low barriers to entry as demand is shared between more firms in the market.
The firm may be less able to benefit from economies of scale as a result therefore increasing costs
why can monopolies make SNP in the long term
They can differentiate their product and as there is imperfect knowledge of production and high barriers to entry other firms are unable to replicate what the monopoly has and erode the monopolies SNP
characteristics of an oligopolistic market
- small number of firms
- high barriers to entry (economies of scale)
- differentiated products.
problems with an oligopolistic market
- can prevent innovation
- may cause collusion and fix prices meaning not all consumers can access their goods
- negatives of monopolies without the benefit of them (economics of scale)
why collusive oligopolies may not be successful
there is always risk of cheating. as firms always seek to maximise profit this is likely
when can collusion in oligopolies occur
- if demand is inelastic
2. imperfect information
monopolistic competition characteristics
- no barriers to entry or exit
- firms produce differentiated products
- inelastic demand
why can monopolistic competitively firms make SNP in the short run but normal profit in the long run
the SNP earned from incumbent firms attracts new firms to enter the market.
this reduces demand for existing eroding the SNP causing normal profit in the long term
examples of monopolistic competition
- restaurants
- TV programmes
- Hair dressers
perfect competition definition
a theoretical market structure which assumes that all firms sell an identical product, firms are price takers, buyers and sellers all have perfect info and they can enter and exit the market without any additional cost
draw the perfect competition graph making SNP in the short run
..
why do firms in perfect competition only make SNP in the short run
- when firms diversify their product (eg only selling green carrots) they may gain more market share.
- AR>AC meaning SNP is earned in the short run
- in the long run new firms are attracted into the market as they are incentivised by profit
- as there is perfect knowledge of production competitors copy products which erodes into the original firms SNP.
- overtime the supply of the diversified product increases
- and firms have to lower prices from p1 to p2 to attract demand over competitors as PED is elastic
- when prices are a P2 no SNP is made in the LT
what is the short run
when one factor of production is variable.
negatives of monopolies
why is competition policy required
- they have no incentive to be productively or allocatively efficient as they have market power and can charge their own price and sell at their quantity.
the existence of competition may encourage firms to sell at the sales max point (which will benefit consumers)
- by having competition policy monopolies are encouraged to rnd in order to gain SNP over competitors
examples of competition policy
- subsidising new firm to enter the market and lower their cost of production so they can better compete
- deregulation making it easier for the new firms to enter
examples of colluding oligopolies
- Organisation of petroleum exporting countries (OPEC)
- British airways colluded with Virign to increase ticket prices following a rise in oil prices
- sainsburys colluded with various dairy suppliers to raise prices in other supermarkets
how to prevent colluding oligopolies
give immunity to the whistle blowing firm so there is a greater incentive to cheat
Competition Act of 1998, states the OFT has the power to impose penalties on companies of up to 10 per cent of their worldwide turnover for breaches of competition law.
evaluation of policies increasing competition
- depends on brand loyalty. if it its so strong government intervention may fail
- depends on the objectives of the business. firms may prioritise dividend than rnd therefore creating a better product
- some firms may prefer dynamic efficiency over static efficiency (especially in the tech market)
a firms may prevent competition by supplying at AC=AR to maximise sales and increase market share limiting new completion
why is there no incentive for firms in an oligopoly to change prices.
(oligopoly diagram kinked)
- if firms were to increase their prices they will lose market share. Demand becomes elastic for price increases
- if firms were to cut their prices they will gain a lot of 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.
evaluation of the kinked demand curve
- Some firms may have very strong brand loyalty and be able to increase the price without demand being very price elastic.
draw the collusive oligopolies diagram.
monopoly diagram
what is a market imperfection
when the market is not at its equilibrium.
for example a labour market imperfection occurs when the wage and the quantity of workers is not at the allocatively or productively efficient point.
name 3 labour market imperfections
- monopsony
- trade union
- it can be hard to measure productivity may lead to worker such as teachers to be undervalued.
draw a monopsony diagram
sndji
examples of price wars in oligopolies
- short haul air lines
2. supermarkets
arguments for nationalisation
- natural monopoly- costs of set up is so high that it is pointless for firms to set up.
A private natural monopoly could easily exploit its monopoly power and set higher prices to consumers. Government ownership of a natural monopoly prevents this exploitation of monopoly power.
- profit goes to government revenues
(however the cost of taking over an industry may be higher) - the financial crisis the government had to buy shares from Lloyds and the RBS giving them liquidity to honour short term debts
arguments for privatisation
- increased profit motive
2. may be more responsive to changes in consumer demand
the shut down condition
the level at which lrtc exceeds average revenue
people may enter this market because SNP may be earned which may attract new firms to set up in the short run. and average revenue can be covered by variable costs
however in the long run fixed cost may exceed average revenue and it may not be profitable to keep producing
oligopoly definition
when few firms with high concentration ratios dominate the market. there are high barriers to entry and firms sell differentiated goods
interdependent on other firms
where is the sales maximisation
AC=AR
when making sales you need to be on A game
ways to increases contestability
- removing legal barriers (eg Royal Mail was privatised)
- forcing Force firms to allow competitors to use its network For example when BT was privatised, OFTEL forced BT to allow other companies to use its network.
example of a market with low contestability
- walking tourist tours
- home to home hair dresser
- grass cutter
