Other theories of the firm Flashcards
other theories of the firm
perfect competition and monopolies are idealistic extremes
there is a growth towards the oligopoly with the markets dominated by the few
there are few firms and the few are ‘consciously independent’ and supply many
how do oligopoly firms set price?
in perfect competition, long run price is equal to the lowest average cost. in a monopoly the firm seeks to maximise profit and raise prices until marginal revenue = marginal cost
in an oligopoly, there are only a few firms and there is product differentiation
merket definition is therefore weak
firms know the pricing policy of the competition and products have brand loyalty - economic uncertainty
non-collusive oligopoly
assumptions:
- the firm strategy is independent
- the firm adopts its own profit maximisation policy
- there are no other interactions
the firm could follow several paths when in a oligopoly situation
the firm could assume its rivals will react to its own strategy and will bring to the game all their experience
price warfare
this attempt to raise market share and the reaction maintains market share
price stability
this period will follow behaviour of price warfare
kinked demand curve model
this model come from 2 assumption about how firms react to each other. each firm thinks:
if it raises its price other firms will not follow - if it cuts its price, so will everyone else
the price raising firm will expect its demand curve to be elastic due to brand loyalts
price reducing firm will expect competitors to react to protect their market share - therefore demand curve becomes inelastic therefore kinked demand curve
see notes
problems with kinked demand curve
- does not explain why oligopolies set price, only why they do what they do price its set
- expensive to keep changing price
game theory
- approach that looks at strategic behaviour of firms based on decision analysis
- all games have rules, strategies and pay offs
- duopoly of firm A and B: firm a expects outcomes summaries in a pay off matrix, problems when firm B for not do as firm a expects - unstable game play
form objectives and behaviour
- marginal cost curves used to indicate where optimum production would be
- the firm has 2 types of goals: maximising goals and non maximising goals
marginal cost approach
used to indicate where optimum production would be - MC curves
4 curves drawn:
- av cost per unit
- marginal cost (cost of making 1 extra unit)
- av revenue per unit
- marginal revenue (revenue gained by selling 1 extra unit)
profit maximised where MR = MRC
non marginal curves
-profit maximisation (PM) where TP is at maximum - rt. point where greatest difference between TR and TC
profit maximisation in practice
max profit when marginal cost = marginal revenue
in planning the project you can forecast the optimum output knowing the cost of operation
revenue maximisation
- small firms profit maximisation will dominate as figures are available
- in large firms alternative motives may operate as shareholders and managers becoming increasingly separated
- in the extreme production would be set where revenue income equals the costs = unsustainable
- sales revenue maximisation (SRM) where the margin earned on one extra goof would be zero or profit would be minimum acceptable level
constrained revenue maximisation
-shareholders normally place constraints on managers and so firm will have to operate between QSRM and QPM
see notes
growth maximisation
- growth governs the behaviour of the firm
- reward - successful at growing a firm
- managers can decide to do more projects and give less profit to shareholders:
- would change retention ratio
- balanced growth between a firms capital and demand requiring increasing capital expenditure would cause shift to the right
- most profitable projects undertaken first so a plot average profit ration against balance growth falls with more projects
