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Economics > Monopolies and Competitive Markets > Flashcards

Monopolies and Competitive Markets Flashcards

1
Q

Meaning of X - efficiency and where is it located on a diagram?

A
  • Minimising waste
  • Production on the ac curve
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2
Q

Meaning of Dynamic efficiency?

A
  • Met when there is investment of LR supernormal profit
  • occurs over-time
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3
Q

Meaning of static efficiency?

A
  • When both Allocatively eff.(mc=ar) and Productively eff. (producing at the lowest point of AC curve)
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4
Q

Why are monopolies not X-efficient?

A
  • They lack a competitive drive and therefore complacency creeps in; x- inefficiency.
  • It is difficult to completely reduce and quite unpopular. It would require minimizing wages and bonuses.
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5
Q

Pros of Monopolies?

A

1) Dynamic efficiency (innovation)

2) greater economies of scale ~~> can improve a country’s competitiveness
– better than a Competitive market?

         ^3) Natural monopoly^

4) Cross subsidisation

5) Tax revenues from monopoly profits

6) Cross subsidy - use profits for social benefit

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6
Q

Cons of monopolies?

A

1) Allocative inefficiency (prices higher than mc=ar)

2) X - inefficient

3) Regressive effects on lower-income households

4) Productively inefficient

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7
Q

Evaluation of Monopolies? (Will pros or cons happen)

A

1) Important to judge firms with monopoly power on a case-by-case basis (not all are bad)

2) Dynamic efficiency (might not invest back into capital)

3) Eos of Dos more likely (depends on the size of the firm)

4) Objective of the firm (profit max or not?)

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8
Q

Characteristics of Monopolies?

A

1) High barriers to entry
2) Differentiated products
3) One seller dominating
4) Imperfect information
5) Firm is a profit maximiser

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9
Q

Why can’t supernormal profit last in the long-run for firms in the competitive market?

A

1) Supernormal profit will eventually draw in new firms into the market, who can enter because there are no barriers to entry + there is perfect information on market conditions.

2) As firms enter the market, supply shifts to the right, the price begins to fall and this continues to happen until there is nor more incentive to enter the market, i.e. until all these supernormal profits are taken away

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10
Q

Characteristics of natural monopolies?

A

1) Huge fixed/ start-up costs

2) Enormous potential for eos (output can be increased so much before dos

3) Rational for 1 firm to supply the entire market - competition is undesirable ~~~~~~~> competition results in wasteful duplication of resources with a lower potential for full economies of scale

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11
Q

Why is competition undesirable in regard to a Natural monopoly?

A
  • Competition results in wasteful duplication of resources because the second firm joining the market won’t have the same eos advantage as the first.
  • Eventually, they will be priced out of the market; their resources left idle.
  • Leading to allocative and productive inefficiency (competition makes it harder to increase output to perform eos.)
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12
Q

How can Natural monopolies be allocative?

A
  • Through regulation at the AE point.
  • Through the use of Subsidies to make sure that the loss of operating at this point is covered – making it fair for firms to produce at said point.
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13
Q

Why are Natural monopolies regulated?

A

Due to the nature of the Natural monopoly (e.g. Railtrack, gas, electricity, water, etc), it is crucial that regulators intervene, for the betterment of society so that they aren’t massively exploited.

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14
Q

Characteristics of a Perfect Competition market?

A

1) Many buyers and sellers

2) Homogenous goods ~~~> firms are price takers (taking the price from the market)

3) No barriers to entry/exit

4) Perfect information

5) Firms are profit Maximisers

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15
Q

What meaning of LR equilibrium in perfect competition?

A

Where normal profit is being made.

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16
Q

Meaning of SR equilibrium in perfect competition?

A

Where supernormal profit is being made.

17
Q

Where is the SR Profit maximization point on a diagram?

A

Where MR=MC

18
Q

Where is the LR position on the diagram located?

A

The minimum point on average cost.

19
Q

Why wont Subnormal profits last?

A

1) Firms will be incentivized to leave the market to produce opportunity costs, which is possible because there are no barriers to exit.

2) As they leave the market, supply will shift left, the price will increase and that will keep happening until there is no more incentive to leave, i.e. until there is normal profit left.

20
Q

Pros of Competitive markets?

A

1) Allocative eff. (Increase welfare)

2) Productive eff. (Decrease cost = decrease price)

3) X - efficiency (needed to survive)

4) Jobs (lower price and higher output)

21
Q

Cons of Competitive markets?

A

1) Lack of dynamic eff. (no innovative progress over time)

2) Lack of economies of scale - missing out on further decreases in costs ~~~> price

3) Cost cutting in dangerous areas

4) Creative destruction (new firms pushing out pre-existing firms, with their new ideas)

22
Q

Evaluation of Competitive markets?

A
  • SE vs DE. Which one is better?
    (grounded off the nature of the good/service)
    Technology? ~~> SE? .. Groceries? ~~> DE?
23
Q

Advantages of Privatisation

A
  • Leads to increased competition which in turn may lead to increased productive and allocative efficiency and the potential for lower prices for consumers.
  • Leads to lower taxes as governments no longer need to build and maintain infrastructure in these industries. Benefits of lower tax burden?
  • Privatisation gives government a windfall of tax revenue as shares are sold on the stock exchange. This could be used to increase provision of health/education. Benefits of this?
24
Q

Disadvantages of Privatisation

A
  • Privatising a nationalised industry may lead to a private monopoly which is both productively and allocatively inefficient. Government needs to deregulate the market to reduce barriers to entry to ensure this does not occur, but will it be successful?
  • The profit incentive of privately owned firms means that they may not produce at the [point of allocative efficiency which best benefits society.
  • Deregulating a newly privatised industry may lead to an increase in negative externalities as private firms ignore these costs when deciding how much to produce.
  • Loss of economies of scale due to increased competition leading to loss of productive efficiency and higher costs and prices.
25
Q

Advantages of Nationalisation

A
  • Government can set output and prices at the point of allocative efficiency as opposed to profit max in order to maximise welfare to society.
  • Nationalised industries are easier to regulate to ensure market failures like negative externalities are minimised.
  • Govt can ensure public sector workers receive a fair/living wage that helps to reduce income inequality and associated costs.
  • Nationalised industries are larger and benefit from more economies of scale leading to increased productive efficiency and hence lower costs and prices compared to a more competitive market. This is particularly true in the case of a natural monopoly.
26
Q

Disadvantages of nationalisation

A
  • Lack of competition or threat of competition (contestable markets) can lead to productive, allocative and x-inefficiency and hence poor quality service, high costs and high prices.
  • Moral hazard - nationalised industries are unlikely to suffer the costs of any poor decisions as losses made due to a poor investment decision will be picked up by the UK taxpayer.
  • Nationalised industries that are loss making need to be funded through general taxes and will hence have an opportunity cost in relation to the next best alternative use of this government revenue.
27
Q

Evaluation (Privatisation vs Nationalisation)

A
  1. It depends on the industry in question. An industry like telecoms is a typical industry where the incentive of profit can help increase efficiency. However, if you apply it to industries like health care or public transport the motive should be to maximise allocative efficiency rather than profit.
  2. It depends on the quality of regulation. Do regulators make the privatised firms meet certain standards of service and keep prices low? Or is there evidence of regulatory capture?
  3. Is the market contestable and competitive? Creating a private monopoly may harm consumer interests, but if the market is highly competitive, there is greater scope for efficiency savings. This depends upon the ability to remove barriers to entry, which is not always possible.
  4. Can you create incentives in a nationalised firm? For example, performance-related pay could replace the profit incentive.
  5. The need for national security and long term investment planning. Some industries (water, energy) are of national importance and require long term investment. Is it appropriate for these industries to be owned by shareholders who often have a short term profit incentive? Is it better for them to be nationalised, owned by and run in the public’s interest?
  6. Nationalisation could create a monopsony labour market which can exacerbate income inequality
28
Q

Barriers to entry due to incumbent firms’ actions?

A
  • Strong branding
  • Aggressive pricing tactics
  • Eos
29
Q

Barriers to entry due to the nature of an industry?

A
  • Capital intensive
  • High sunk costs
30
Q

Barriers to entry caused by Governments?

A
  • Health and safety
  • Licences
  • Regulations
31
Q

Characteristics of Monopolistic comp, long-run + short-run?

A

e.g. clothing firms

  • Slightly differentiated goods
  • low barriers to entry/ exit
  • good information
  • non-price comp
  • many buyers + sellers
32
Q

Characteristics of Oligopoly, long-run + short-run?

A

e.g. tesco

  • high concentration ratio
  • differentiated goods
  • INTERDEPENDENCE
  • non- price comp
  • Game theory employed
  • Price rigid, even if mc changes or demand.
33
Q

Characteristics of Contestable Market, long-run + short-run?

A
  • AC=AR
  • low barriers to entry/exit
  • subject to “ hit + run”
  • everyone has access to same tech
  • differentiation
34
Q

Eval on efficiencies, Monopolistic comp?

      <Can use same approach for all MKT structures>
A

Long - run (more important to eval. eff.):

  • AE = x. but… not as bad/ monopoly.. exploitation/ differentiation.
  • PE = x. but… differentiation desire/ harder to eos… easier than perfect comp/ mkt size?
  • DE = x, no super-normal profit in long-run… normal profit/ invested/ stay competitive.
35
Q

Eval on efficiencies, Contest MKT?

A
  • AE = + movement towards
  • Productive = +
  • X efficiency = +, prepared/ “hit and run”.
  • DE = x. but.. threat/ new firms/ innovation/ enjoy similar benefits
  • Creative destruction= lost jobs. but… move to new firm?
36
Q

Eval on efficiencies, OLIGOPOLY MKT?

A

Depends on.. Collusive or Competitive

AE= x AE= closer

PE= x PE= closer

DE= optional DE= +

37
Q

Characteristics of comp Oligopoly? + and -

A
  • Large no firms
  • one firm with significant cost advantage
  • Homogeneousi

+ and - = Same as Perfect comp

38
Q

Characteristics of collusive Oligopoly? + and -

A
  • Small nbr firms
  • similar costs
  • consumer loyalty = no cheat/ comp/ tactic

+ and - = Monopoly

Economics (22 decks)

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