TOF Essay Plans Flashcards
Evaluate methods to combat the abuse of monopoly power.
- MONOPOLY POWER = ability of firm to control price, measured via market share
- MARKET FAILURE as it results in under-allocation of resources to production of good
POLICIES:
- anti-trust law to promote competition e.g. US Federal Trade Commission, Qualcomm smartphone radio microchips antitrust case
- ban monopolies (except natural)
- ban collusion (agreement to fix prices and share output)
- regulate mergers (agreements between firms to join together) by imposing limits on size of merged firm
pros:
- greater competition benefits consumers who receive more Q at lower P
- reduces allocative inefficiency and welfare loss arising from underproduction of good by monopoly
cons:
- if laws are vague firms may exploit loopholes/alternate interpretations
- law not consistent around the world as different countries have different political views on monopoly regulation
- enforced to varying degrees
- difficult to find evidence of collusion
or can be abused to achieve by governments with a political agenda
Officials in Beijing said a price-fixing investigation into South Korea’s Samsung Electronics and SK Hynix and US-based Micron Technology had made “important progress”, without offering any specific examples of wrongdoing
- nationalisation - transfer of firm ownership from private to public sector
pro:
- regulate natural monopolies to sell greater quantities at lower prices to benefit consumers and reduce allocative inefficiency (see later)
con:
- greater inefficiency and higher than necessary COP as governments are not profit-maximisers
- natural monopolies e.g. Kaz Munay Gas Kazakhstan
MC pricing - force to sell at P = MC
pro: consumers better off as Pmc > Pm and higher Qmc corrects earlier underproduction of good and achieves allocative efficiency
con: losses for monopolist as P < AC, loss per unit is AC - P, impractical as monopolist must shut down/receive government subsidies in the LR
AC pricing - force to sell at P = AC (normal profit)
pros: consumers better off as P ac > Pm but allocative inefficiency as Qac < Qmc, doesn’t make loss so doesn’t need gov subsidy (fair-return pricing - normal profit)
cons: productive inefficiency (but not possible in natural monopoly anyway as D intersects AC before AC min), reduce incentive to lower AC as they are protected from low-cost competitors by a guaranteed price equal to their average cost
- trade liberalisation = removal of trade restrictions including tariffs and quotas
What kind of barriers to entry may be faced by firms?
FIVE POINTS
- economies of scale: especially true for natural monopolies e.g. Kaz Munay Gas
- legal barriers e.g. patents (sole rights to production), copyrights (sole rights to publication), tariffs and quotas (trade barriers restricting imports and thus competition)
- branding e.g. Netflix
- control of necessary resources involved in production e.g. De Beer’s from South Africa owned most of world’s diamond mines
- aggressive tactics: predatory pricing and threats to smaller firms
Compare perfect competition and monopolistic competition.
- describe models (A is… in contrast, B is…)
- LR price and output
- LR equilibrium, efficiency
- LR welfare
- R&D potential, EOS potential, type of competition faced
- define PC and monopoly
- monopoly has higher P and lower Q than PC
- define LR and describe LR positions; define productive and allocative efficiency
- 1) PC has both productive and allocative efficiency as P = AC min (normal profit) and P = MC always
- 2) monopoly has neither productive nor allocative efficiency as P is above
Compare perfect competition and monopoly.
- describe models (A is… in contrast, B is…)
- LR price and output
- LR equilibrium, efficiency
- LR welfare
- R&D potential, EOS potential, type of competition faced
b
Why do prices remain stable even when oligopolies don’t collude?
- define oligopoly
- price rigidity occurs because competing via price leaves both firms worse off; this is shown by the kinked demand curve model (Figure 1)
- if A raises price above P, B keeps price at P and demand for A’s goods drops sharply hence demand is elastic above P
- if A lowers price below P, B also lowers price and demand for A’s goods does not change much, hence demand below P is inelastic
competing via price leaves both firms worse-off
Why do oligopolies prefer to compete on a non-price basis?
Why do oligopolies avoid competing via price?
b
Compare oligopoly and monopoly (possibly outside syllabus).
similarities
differences
Insight of kinked demand curve model?
Limitations of kinked demand curve model?
Insights
- THERE IS PRICE STABILITY (RIGIDITY) EVEN IF OLIGOPOLIES DO NOT COLLUDE
- Firms avoid price competition/prefer non-price competition (also shown by matrix)
- Strategic behaviour (also shown by matrix)
Limitations
- can’t explain how firms got to “kink” P* and Q* in the first place
- does not hold during inflation when firms raise prices due to higher costs/rising demand
Compare monopolistic competition and monopoly.
- describe models (A is… in contrast, B is…)
- LR price and output
- LR equilibrium, efficiency
- LR welfare
- R&D potential, EOS potential, type of competition faced
b
Explain why a loss-making firm will not shut down in the short-run.
occurs in perfect competition - define PC model
- in the SR loss-making firm aims to minimise loss
- at least one fixed input therefore has fixed costs
- if it shuts down, loss = FC
- in Figure 1: diff. between AC and AVC is AFC, diff. between AC and P is per unit loss
- draw Figure 1 loss-making firm with AVC < P1 < AC
- if loss-making firm produces at P its loss per unit is smaller than its fixed costs, therefore it should keep producing (rather than shutdown, to minimise loss)
- from this idea, we also see that:
- — price where P = AC min = breakeven where firm covers both fixed and variable costs
- — price where P = AVC min = SR shutdown price where firm only covers variable costs
As long as the loss-making firm sells at a price above the short-run shutdown price, it will not shut-down in the short-run. In the long-run, when all inputs are variable, it can leave the industry.
Explain why a loss-making firm will not shut down in the short-run.
occurs in perfect competition - define PC model
- in the SR loss-making firm aims to minimise loss
- at least one fixed input therefore has fixed costs
- if it shuts down, loss = FC
- in Figure 1: diff. between AC and AVC is AFC, diff. between AC and P is per unit loss
- draw Figure 1 loss-making firm with AVC < P1 < AC
- if loss-making firm produces at P its loss per unit is smaller than its fixed costs, therefore it should keep producing (rather than shutdown, to minimise loss)
- from this idea, we also see that:
- — price where P = AC min = breakeven where firm covers both fixed and variable costs
- — price where P = AVC min = SR shutdown price where firm only covers variable costs
As long as the loss-making firm sells at a price above the short-run shutdown price, it will not shut-down in the short-run. In the long-run, when all inputs are variable, it can leave the industry.
What are the advantages and disadvantages of the PC model?
draw LR normal profit diagram
pros
- allocative efficiency always
- productive efficiency in LR, but in SR only if making normal profits (can have P > AC min or P < AC min)
- as their goods are homogenous and they lack price-making power, they respond directly to tastes and preferences of consumers
cons
- unrealistic assumptions
-
What are the limitations of the MC model?
more barriers to entry than model suggests
some assumptions are somewhat contradictory - LR normal profits which imply no R and D but also product differentiation which implies some R and D, evidence shows that they do undertake R and D
What are cartels and why are they hard to maintain?
b
Evaluate government policies (legislation, regulation) to regulate monopoly power.
legislation - ban monopolies, collusion, regulate mergers
- reduce P and raise Q
- can be vague
- not consistent between countries
- enforced to varying degrees
- difficult to find evidence of collusion
