Paper 2 25 Marker Possibilities Flashcards
Market Structures
In July 2016 Apple’s share of the UK market for smartphones was 38%.
Evaluate whether such a high market share for one company is in the consumer
interest. Use appropriate diagrammatic analysis in your answer. (25)
Monopoly - 25% of market share so Apple is a legal monopoly
Profit Max is an issue. Higher prices (DRAW PROF V REV MAX DIAGRAM and highlight loss of CS in triangle).
However, assumes firm is Prof Max. Neoclassical would say they ould to prioritise interests of shareholders and owners, but as Apple is PLC could be divorce of ownership o control. William Baumol -> Could rev. max to increase salary -> necessitates fall in price which is good for consumers
Consumers could benefit from lower prices (draw Lower Monopoly MC Diagram) due to managerial economies of scale (explain). Reduced total costs, can pass savings to consumers.
However this depends on level of competition. High competition could mean this is necessary, Huawei & Samsung, and Sales Max can also move PED towards 0. If little competition no incentive for firms to do so.
Could also benefit form reinvestment of SNP for dynamic efficiency -> Innovation and greater quality -> we see this with Apple releasing new phone every year.
However, high market share can cause x-inefficiency -> higher prices
Conclusion - Beneficial or detrimental to consumers is hugely dependent on the objective of the firm and competition
Assess why firms collude using an industry of your choice (25)
Def. - Collusion is a non-competitive, secret, and sometimes illegal agreement between rivals which attempts to disrupt the market’s equilibrium. It involves two people/firms who would usually compete against one another, conspiring with one another to gain an unfair competitive advantage
UK Modelling Agency’s. In 2016, group of UK modelling agencys (Storm, Viva, FM Models) found guilty of price-fixing and fined £1.5m.
MA said these firms fixed minimum prices and common approaches were agreed. Benefit of this collusion is that consumers (fashion retailers online and high-street) must pay higher prices to modelling agencies, as they are all charging the same price ,’, Agencies see increased revenue and profit. This was an example of overt collusion, where firms formally agree to set prices in which they will benefit from.
2013 -> rise of social media -> lowered barriers to entry for new firms -> market share of these agencies decrease. Collusion could have helped maintain market share -> maintain price maker status -> SNP distributed to shareholders or reinvested for dynamic efficiency.
However, effectiveness of the collusion relies on the PED of the product, chance of whistleblower activity. Also is the risk of fines
Market was an oligopoly, so SNP can be made, however in worst case could have become near monopolistic, in which only normal profit could be made, bad for existing firms.
However, not all firms engage in collusion, and there is also an incentive to break the cartel (GAME THEORY DIAGRAM). Lowering price further than agreed -> increased sales, rev and profit -> other competitors market share decreases. As this incentive to break is so high, cartels are often difficult to sustain over time
Additionally, collusion allows firms to avoid costly price wars, especially in an oligopoly, due to high strategic interdependence. Oligopoly diagram. Firms may hold out at extremely low prices, maybe even subnormal, to drive competitors out of the market once they reach short run shutdown point (AR=AVC).
One example is the 1992 US Airline price wars, resulting in increased air travel but huge losses. Estimated that industry losses that year exceeded entire combined profits since the industry began.
However, collusion can be negative -> Easy profits from collusion can make firms lazy and avoid innovation and efforts to increase productivity. -> X-Inefficiency
In conclusion -> clear why they colluded -> increased revenue and market share -> exert market dominance in changing market.
That said, non-collusive behaviour likely more profitable if firms can sustain low prices below competitors, or non-price strategies like advertising and improved quality
Micro effects of switching to EV
Definition - effects on firms households individuals
P1 - Negative externality diagram, move to socially optimum petrol ban by 2030
However, production of EV has negative externalities
P2 - EV Car manufacturers like Tesla may see increased revenue
However, loss of government revenue as large proportion of tax. £28billion a year and 58p per litre
P3 - Greater dynamic efficiency and EoS
However, info gaps so may not switch to EV
Rev more realistic than prof
Definition
P1 - Rev max more likely in large firms because of divorcee of ownership of control. Baumol
Eval - prof max more realistic in smaller firms with no divorce of ownership of control
P2 - prof max more likely in monopoly with High barriers to entry
Eval - may profit satisfied due to conflicting evidence
P3 - Rev max less likely to draw CMA attention
Eval - assumes perfect info to know where these points are
