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
- 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
2. high barriers to entry (economies of scale)
problems with an oligopolistic market
- can prevent innovation
2. may cause collusion and fix prices meaning not all consumers can access their goods
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 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.
- 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)
2. Pharmaceutical industry
how to prevent colluding oligopolies
give immunity to the whistle blowing firm so there is a greater incentive to cheat
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
why is the 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.
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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
why may monopsonies cause labour market imperfections
buyer power and employees have no other jobs to go to and as a result they can pay lower wages
this is especially relevant in the NHS as nurses and doctors dedicate around 7 years of their life to become a doctor and this may be wasted by working in another industry
how can trade unions cause labour market imperfections
may cause unemployment as labour costs increase
Characteristics of an oligopoly
High barriers to entry and exit High concentration ratio 4 firms owning 90% market share Highly differentiated or homogenous High market share Inter dependent Price rigid/sticky prices
Contestability
The threat of competition
Competition
Amount of firms that operate in a market
Sunk costs
A cost that cannot be recovered
CMA
Competition and market authority - regulate and deregulate
How to make markets more contestable
Changing nature of technology
Regulate firms
Economies of scale- more choice for consumers, innovation for producers
Types of economies of scale
Risk bearing Financial Managerial Technical Marketing Purchasing
Types of diseconomies of scale
Control
Communication
Coordination
Dynamic efficiency
When a firm spends some or all of this retained supernormal profits, reinvesting back into the business through aspects such as R&D
Perfect competition diagrams short and long run
SNP lost productivity efficiency gained
Perfect comp evaualuation
In short run, profit maximises assuming Cateris Parabus
Productive efficiency
AC=MC
Allocative efficiency
AR=MC
Contestable markets must have
Low barriers to entry and exit
Large pool of potential entrants
Good info about market
Incumbent firms subject to hit and run comp
Technology and contestability
Lower barriers to entry and exit
Increased pool of entrants
Improved information
Pros of contestability
Allocative efficiency. Move towards the efficiencies
Productive efficiency
X - efficiency
Job creation
Cons of contestability
Lack of dynamic efficiency - short term gains
Cost cutting in dangerous areas
Creative destruction
Anti-competitive strategies
Contestability evaluation
Length of contestability
Role of technology
Regulation
Dynamic efficiency
Why contestable markets should operate at AC=AR
Eliminate the threat = smaller profit margins
Prepared if threat becomes real (Price decreases, Quantity increases)
Game theory (oligopoly)
Price rigidity - compete on non price determinants
Temptation to collude
Incentive to cheat on collusion agreement
