Module 13 - Government and the firm

Question 1

Describe why the use of market power may be against the public interest

Answer 1

1. The firm can make supernormal profits
2. Consumers can be charged high prices compared to the cost of production
3. The firm has little incentive to improve efficiency.

Question 2

Describe possible benefits of market power

Answer 2

1. Firms may choose not to fully exploit their market power
2. Economies of scale may lead to lower prices
3. Profits may be spent on research and development (R&D) and capital investment, which lead to improved products and/or lower prices.

Question 3

Describe the three areas of competition policy

Answer 3

1. Restrictive practices policy
2. Monopoly policy
3. Merger policy.

Question 4

Give examples of anti-competitive practices

Answer 4

1. Charging excessively high prices to generate abnormally high profits
2. Paying unfairly low prices to suppliers
3. Limiting production to keep supply low
4. Limiting technical development to keep costs down
5. Discriminatory pricing or other discriminatory practices to the detriment of certain parties.
6. Predatory pricing to drive competitors out of business.
7. Forcing suppliers or customers to accept unfavourable contract terms, eg refusal to supply discount chains, tie-in sales

Question 5

Collusive tendering

Answer 5

Where two or more firms secretly agree on the prices they will tender for a contract. These prices will be above those which would be put in under a genuinly competitive tendering.

Question 6

Resale price maintenance

Answer 6

Where the manufacturer of a product (legally) insists that the product should be sold at a specified retail price.

Question 7

Vertical restraints

Answer 7

Conditions imposed by one firm on another which is either its supplier or its customer

Question 8

Tie-in-sales

Answer 8

Where a firm is only prepared to sell a first product on the condition that its customers buy a second product from it.

Question 9

Discuss the effectiveness of competition policy

Answer 9

In the past, competition policy often focused on market share and the existence of agreements between firms. Modern competition policies are based on the view that conduct and performance are more important than structure, ie they concentrate on the practices of firms and the effects of those practices on consumers and other firms.

• The prohibition of certain practices and a system of fines for a first offence is considered to be an effective deterrent.
• Large fined and jail sentences seem to be successful in deterring cartels, with the number of cartels failing in the UK and prices of items freed from cartels failing.
• A fundamental problem with collusion is that by its nature, it is a secretive activity. It is impossible to measure whether the majority of such agreements are uncovered.

Question 10

Describe the three stages of technological change

Answer 10

1. Invention - the development of new ideas, processes and products
2. Innovation - the implementation of new ideas in practice
3. Diffusion - the spread of the new products and processes throughout the economy.

Question 11

Explain why market forces may fail to encourage sufficient R+D

Answer 11

1. R+D free riders
2. Monopolistic and oligopolistic structures
3. Duplication
4. Risk and uncertainty.

Question 12

Describe six forms of government intervention

Answer 12

1. The patent system
2. Public provision
3. R+D subsidies
4. Co-operative R+D
5. Diffusion policies
6. Other policies

Question 13

Technology policy

Answer 13

Involves government initiatives to affect the process and rate of technological change.

Question 14

Patent

Answer 14

A temporary legal monopoly awarded to an inventor who registers an invention.