promos book 2 Flashcards

Question

Characteristics of oligopoly

Answer 1

1. Dominated by a few large firms where market concentration is high - market concentration ratio (sum of % of the top few firms) 2. firms are mutually dependent and must consider reaction of rivals to price - high rival consciousness as any action taken by any single dominant firm will affect the sales of all the other firms - firms need to consider rivals reactions when setting a price or output 3. High BTE - natural BTE due to IEOS and AC of production - for new firms, operational costs will be significantly higher while revenue will be lower 4. Imperfect knowledge 5. Homogenous or differentiated products - Homo: rival consciousness is very very high because goods are perfect substitutes, competition is less aggressive and there is greater likelihood of firms colluding to increase profits - Differentiated: Degree of rival consciousness is lower but competition is more aggressive in the form of non price, no chance of collusion 6. incentive to collude and cooperate

Answer 2

- work tgt to reduce uncertainty - increase the predictability of their rivals reactions - agree on output quotas or fixed prices - limit product promotion or developement to not poach each others markets

Answer 3

1. few large firms - monitoring is easier - incentive to cheat to increase indiv profits (as they cant produce at profit max output at the quota) - then other firms will also need to follow suit and produce beyond their quota, lead to surplus and prices will fall and everyone will earn below that of the joint profits - easier to form agreement that meets the needs of every member 2. Sell homogenous products - easier to reach agreements - have similar cost conditions etc. 3. Absence/weak anti trust laws - illegal in many countries as they are anti competitive 4. Stable market demand - no need to renegotiate frequently

Answer 4

- work tgt to determine jointly the level of output that each member will product and the price each member will charge to behave like a monopolist - the cartels MC curve is the horizontal sum of the individual members MC curves - will choose to produce less output and charge a higher price (same as monopoly curve) - will divide the market amongst the members usually based on their current market share - each member will then sell the good at the price determined by the cartel

Answer 5

Oligopolies prefer to avoid price competition due to high degree of mutual interdependency - rivals will match any price decrease but will not follow it in any price increase - if a firm increases their prices, their output will fall more than proportionately (price elastic) - if a firm decreases their prices, the increase in Qd will be insignificant (price inelastic) and revenue falls - oligopolist will absorb the higher costs instead of passing it to consumers in the form of higher prices unless the change in marginal costs of production is significant graph 7

Answer 6

Barometric model - follow firm that is more adept at identifying changes in market conditions and has the ability to respond more efficiently Dominant firm model - one firm controls the vast majority of the market share and smaller firms must follow in order to maintain the small amount of market share they currently possess - Price set by the market leader is widely accepted as the market price by other firms - when leader initiates a change, the rest will follow - if a firm has a lot of excess capacity, might go against the price and start a price war

Answer 7

- undercut one anothers prices to achieve a greater share of the market - unsustainable in the long run - does not necessarily lead to higher revenues for firms and depends heavily on the reactions of the rivals in response to the price cut - likely to be initiated by firms with the largest MES - rivals that operate on a smaller scale have to shut down by stopping production temporarily or exiting in the long run - winner gains greater market share eventually but the firm must have sufficient past supernormal profits to recuperate from these losses

Answer 8

- reduce chances of price war - reduce risk of breaking collusive agreement - also helps to increase demand and reduce PED for firms product hence increasing its total revenue and profits

Answer 9

1. Salience bias 2. Loss Aversion 3. Sunk Cost fallacy

Answer 10

Individuals tendency to focus on items/info that are more noteworthy while ignoring those that do not grab their attention even though the objective difference between them is irrelevant - stress the specific qualities or characteristics of their products over their rivals

Answer 11

Pain of losing is psychologically about twice as powerful as the pleasure of gaining People are more wiling to take risks to avoid a loss than to make a gain

Answer 12

Continue a behaviour or endeavor as a result of previously invested resources (related to loss aversion) - feel too committed to something

Answer 13

1. Uniform pricing 2. Price discrimination 3. Predatory pricing 4. Price wars 5. Limit pricing

Answer 14

--> firm sells all units of its output at the same price and charge all of its customers the same price for the same good

Answer 15

1. where MR = 0 2. where AC = DD=AR

Answer 16

--> producer sells the same good at different prices whereby the price difference does not reflect the differences in cost of supplying the customer Aim: capture consumer surplus and earn higher total revenue and hence profits 1. Seller must have market power and ability to price discriminate 2. Seller must be able to identify and segment the market according to differences in PED for price discrimination to be profitable (eg. by age, use ID, by time, early bird discount etc.) 3. Seller must be able to prevent resale

Answer 17

--> firm charges a different price to different groups of customers buying the same product by segmenting the markets according to differences in PED of the groups - eg. by customer characteristics (age), location, past purchase behaviour (new customer discount) For new customers: - have yet to make a decision and are searching for products - no switching costs yet - higher PED - charge lower price

Answer 18

1. increase total revenue by capturing the consumer surplus of customers that are less price elastic 2. increase its sales volume to consumers that are more price elastic 3. increasing sales volume can also lower unit cost of production 4. allows firms to produce in cases where cost of providing a good cannot be covered by the low revenue generated (firm can continue to provide the good through cross subsidization, eg. higher revenue from popular train service help to keep less popular train service running)

Answer 19

- only effective if resale can be prevented - if cost of preventing resale is significant, it will negatively affect profitability - tech increases opportunity for resale (eg. carousell)

Answer 20

- sell below average variable costs in the short run - can lead to price war that leads to significant losses for all to be offset by future gains arising from higher market power and lesser competition - need sufficient past supernormal profits to cover losses in the present time - only used as a short term strategy - can hurt brand image as cheap prices make goods feel to be of bad quality graph 8

Answer 21

for price wars, firms expect rivals to drop their prices as well and its about who emerges as as the winner for predatory pricing, firms aim to deter entry and drive out rivals assuming that rivals cannot match the price decrease

Answer 22

setting a price below the profit max price but above the competitive level - short departure from profit max - potential entrants might decide that the risks of entering the industry are too high - more effective in industries with high sunk costs - potential entrants cannot match the lower price because they have higher production costs (not as much IEOS)

Answer 23

--> lowering degree of substitutability of products sold by a firm against the rivals Real: physical changes to the product but adding more features to existing products (taste, quality) Imaginary: Packaging, branding Service: Customer service Salience bias: - focus on developing the most salient features of their products Loss aversion - increases the switching barriers by offering attractive loyalty programs and customers will be less motivated to switch to other companies due to the prospect of losing the points they already accumulated and dont want to lose Sunk cost fallacy - customers purchase more goods to accumulate points to redeem a prize since they alr have existing points - Leads to an increase in demand and reduction in PED and CED, increasing profit max output and price - leads to higher scale of production and can exploit IEOS to lower unit cost of production

Answer 24

- Increases cost of production - Firms needs to continually differentiate as changes can be easily copied by other firms - subject to sunk cost fallacy and continue spending on differentiation - paradox of choice/choice overload - too many options can cause consumers to feel stressed and simply not choose any product and this can reduce demand

Answer 25

1. product differentiation 2. advertising 3. free gift while stocks last 4. customer loyalty reward programme 5. R&D for product innovation 6. green and ethical marketing

Answer 26

- bringing all the info necessary to facilitate the purchase - reduce cost of searching for consumers Salience bias - highlight the most salient features of the product - increase demand and reduce degree of substitutability - reduce search costs for consumers and make them aware of the product (informs them) - builds preference for the product over the competitors ones - persuades consumers to buy the firms products - strong branding locks existing customers in - increases demand and reduce PED and CED, increase profit max output and price - leads to higher scale of production and lower unit cost of production

Answer 27

- consumers prevented from weighing the pros and cons of their purchase in an objective manner, which might result in them making a less than ideal purchase - high cost of advertising - takes time to change taste and preferences - if other brands have strong brand loyalty, hard to convince their customers to switch firms - too much advertising will negatively impact brand image and profitability (advertising fatigue) - sunk cost fallacy

Answer 28

Loss aversion - fear of missing out on an opportunity - foster customer loyalty because free items give ppl a good impression of the brand - more likely to buy more items to hit the minimum amount that makes them eligible for the gift even if they dont need the items - while stocks last creates a sense of urgency - increase demand and reduce PED and CED, increasing profit max output and price - higher scale of production leads to lower unit cost of production

Answer 29

- free gifts incur costs - suboptimal decisions made by consumers

Answer 30

- Increase switching barriers and fosters customer retention - lock in their customers - loss aversion bias - motivated by the prospects of loss and promise of gains of better quality and cheaper products - strategies might anger customers if the program ends

Answer 31

--> developing new products and improved products through product functionality or adding new tech to meet these demands - increasing demand and reducing the substitutability for the innovative firms products - capture larger market share

Answer 32

- sunk cost fallacy - only temporarily effective

Answer 33

- consumers are getting more concerned about the environment - hence invest in sustainable products - trade off between sustainability and profits

Answer 34

- increase PED and CED - increase demand - DD=AR curve shift right and becomes steeper - increase profit max output and price - easier to implement for firms with the ability and incentive to do so MPC: have incentive, no ability Oligopoly: have incentive and ability Monopoly: have ability, no incentive Graph 9

Answer 35

--> fall in both AC and MC 1. source for cheaper inputs 2. band tgt or set up jointly owned enterprises (to enjoy IEOS) 3. cluster tgt to enjoy economies of concentration 4. R&D - process innovation - automation etc. - reduce AC and MC of good - but can hurt demand for g&s that thrives on buyer seller relationship - very expensive if machinery is required + maintenance costs 5. offshoring and outsourcing - hard to control quality of services - communication barriers - data sensitivity

Answer 36

1. Mergers and acquisitions - horizontal and vertical integration - conglomeration 2. Franchising

Answer 37

Horizontal: - firm combines with or takes over a similar firm at the same stage of production to form a single entity - lower its long run unit costs of production by expanding its scale of production towards the MES - to increase market share dominance - makes its demand less price elastic - increase price setting ability - can also reduce duplication to lower costs - can also help to break into new markets Vertical: - Firm combines with or takes over another firm at a different stage of production but in the same industry Forward: firm moves into succeeding stages of production - lower uncertainty with regards to access to markets - improve supply chain coordination - more control over the way the product is presented and distributed (quality) - lower middle men costs (eg. transportation, business to business marketing) Backward: firm merges with another firm involved in the earlier stages of production - lower uncertainty with securing factor inputs - gain greater control of the supply, price and quality of factor of production (will not be hurt by suppliers providing materials of inferior quality, which can lead to a fall in demand for products) - mitigate potential risk in cost of production arising from supply disruption - use as entry deterrent by restricting the access to key fop to potential competitors - reduce costs as suppliers will not be able to push up prices of factor inputs

Answer 38

- IDOS if merged entity becomes too large - management decisions will be less efficient - hard to monitor - lead to higher average costs and adversely affects firms productivity - backwards integration also needs heavy investment into acquiring factories - low worker productivity - conflicting goals of companies - lack of competition can lead to fall in X efficiency

Answer 39

- one firm that has many smaller firms that sell a variety of goods and sercices that are not directly related to one another - subsidiaries can run independently of one another but reports to the parent company - helps to reduce risks and uncertainty

Answer 40

- rising average costs due to high levels of management needed - different working culture etc - parent company might not have the skills and expertise to support so many smaller subsidiaries - might hold onto poor performing subsidiaries for purpose of diversification and hurt to performance of more high performing ones

Answer 41

- reduce uncertainty and risks - acts as an entry deterrent and enables incumbents to enjoy higher market share and price setting power - firms can enjoy higher demand and lower degree of substitutability by restricting the number of potential firms in the market

Answer 42

- chain stores by selling the right to use a firms successful business model - can quickly expand - can avoid risk of investing significant amounts of capital - proliferation of brand to build brand presence, reducing search costs for consumers - increase revenue by collecting fees - hard to maintain the standard of quality and service - negatively impact the reputation of the franchise - communication issues - lack of freedom to operate independently even though some policies might not be effective in certain locations due to cultural differences etc. - must pay high royalties even in times of low demand and revenue

Answer 43

standard retail mark up of 2.4 of the cost price try to cover all costs of produciton

Answer 44

smth that displaces currently established tech or creates a whole new industry

Answer 45

- spurs new demand - creation of new products - eg. e commerce - help firms increase demand for their goods - enables firms to differentiate their products and services significantly - reducing degree of substitutability of their products - firms can digitalise to cut costs - increase competitiveness of existing industries - improve efficiency of supply chains - increase demand and reduce PED and CED - reduce AC and MC (labour, operations)

Answer 46

- decrease reliance on labour and cause unemployment - increase barriers due to digital connectivity issues - cybersecurity threat

Answer 47

Competition: - smaller firms that have fewer resources can enter the market and compete in segments of the market that have been neglected by main industry players - reduce market share of incumbents - level of competition rises Increase contestability (eg. cloud kitchens) - reduces BTE - reduces exit costs as set up costs are quite low - weakens position of established players and giving new firms space to grow - reduce market power of big firms - firms that are slow to respond to disruptive tech might be phased out over time

Answer 48

1. Allocative efficiency 2. Productive efficiency 3. Dynamic efficiency 4. Equity 5. Consumer choice

Answer 49

society produces and consumes a combination of goods and services that maximises its welfare ACHIEVED WHEN PRICE = MC - cost of producing each additional unit of good = satisfaction gained from consuming each additional unit of the good Underproduction: - each unit represents a net gain in welfare not enjoyed and more resources should be allocated to this good (deadweight welfare loss) Over production: - society values the last unit of the good less than the opportunity cost of producing that unit (deadweight welfare loss) Graph 11

Answer 50

when all resources are fully and efficiently utilised production of goods and services at the lowest possible average cost of production Society: occurs when firm is producing at MES and all IEOS have been exploited Firm: occurs at any point on the LRAC - lowest possible average cost for each given level of output - if it operates above the LRAC curve, it is X inefficient for PC firms, they are productively efficient and operates at MES because it has to be cost efficient or make a loss (as they are price takers)

Answer 51

Firms are technologically progressive through investment in R&D in order to reduce the average cost of production or to meet the changing wants and needs of consumers over time - better quality output and new production methods - fall in unit cost at every level of output For PC firms, there is no ability or incentive for R&D - perfect info, innovations are quickly replicated and innovating firm will not be able to reap the fruits of its innovation - no supernormal profit to invest - very expensive with no guaranteed returns - all products are homogeneous

Answer 52

fairness in distribution in wealth, income, opportunities and profits For PC firms, profits are spread amongst many small firms and normal profits are made - no sustained redistribution of income from households to firms and is equitable

Answer 53

consumers should be given the freedom to choose from a variety of goods and services PC firm sells homo goods so no choices

Answer 54

ALL FIRMS ARE ALLOCATIVELY INEFFICIENT - Price is greater than MR - at profit max level where MR = MC, price is greater than MC - for each unit produced, the benefit from consuming the good is greater than the opportunity cost of producing it - DWWL Graph 12

Answer 55

Monopoly and Oligopoly more inefficient and greater underproduction - Monopoly and oligopoly more price inelastic, difference in price and MC greater than for MPC - more severe underproduction and more allocatively inefficient Graph 13

Answer 56

Can afford to be X inefficient and operate above the LRAC - because they can retain supernormal profits into the long run due to presence of high BTE - but this is a wastage of resources to society - lack of intense competition, complacency and no need to keep minimising costs since there is still supernormal profits - makes no sense to expand production all the way to MES if market demand is not large enough to support it - but because of large scale of production, still possible that unit cost is lower than that for an PC market because its operating nearer the MES graph 14

Answer 57

- Large scale advertising costs a lot - money could have been used to produce more goods/improve quality of goods - economic waste and is allocatively inefficient

Answer 58

- WILLING to differentiate as it is their only source of power - low BTE means only normal profits in the LR (can be easily copied) - NO ABILITY to invest in R&D which require huge financial capacity - tend to merely emphasises superficial product differentiation (eg. packaging and design) which incur lower costs

Answer 59

- Long run supernormal profit, give them ABILITY to engage in R&D - presence of BTE allows firms to retain supernormal profits derived from innovation hence they are WILLING - innovation can also act as further BTE Oligop - existing competition amongst the few dominant firms induces them to invest in R&D to differentiate their products from those of their rivals - also reduces fear of rivals reactions to their pricing strategies - more WILLING than monopolies to innovate Monop - lack of intense competition and high BTE - complacency - NOT WILLING - already have supernormal profit without R&D - innovation might erode the value of their existing products

Answer 60

- only normal profits in long run - no sustained redistribution of income from consumers to producers - while there is a loss of consumer surplus, the extent is not as great as in a monopoly or oligopoly

Answer 61

- Inequitable - Supernormal profits are concentrated at the hands of a select few monopolies which have the ability to block potential new entrants or a few dominant producers at the expense of consumers who pay higher prices for a limited quantity of a good - sustained redistribution of income from consumers to producers due to LR supernormal profits HOWEVER, - if big firms enjoy significant IEOS and passes it on to consumers, consumer surplus is not necessarily reduced

Answer 62

Monop - no choice as the product is unique MPC/Oligop - product differentiation, ppl can choose - more so for MPC because there r more firms - however oligop can engage in product proliferation and offer a range of similar products for different tastes and preferences

Answer 63

1. entry into and exit from the market is costless 2. no exit costs (sunk costs) - reduces risks 3. perfect info - all producers can make use of the best available production tech in the market 4. low consumer loyalty - reduces risk of entering the market threat of firms entering will ensure that the incumbent firm will be efficient

Answer 64

- Increase sales volume, sell nearer normal profits instead of profit max price - make return sufficient to keep its fop in their present use - similar to limit pricing graph 15

Answer 65

- inefficient firms cannot survive - have to change their ways or leave the industry in the LR - will produce on the LRAC

Answer 66

- monopoly likely to invest in expensive R&D if there is credible threat from a potential entrant - failure to price competitively and be as cost efficient as opssible will turn potential competition into actual competition due to ease of entry under contestable markets

Answer 67

increase contestability - lower BTE (eg. grant more licenses)

Answer 68

- benefit consumers from lower income groups who are more price sensitive - can consumer good which they could otherwise not afford - makes it less equitable due to greater redistribution of income from consumers to producers - expense of consumer surplus - use of higher profits to set up BTE