Week 5

Question 1

when does an oligopoly occur?

Answer 1

when a few firms between them share a large proportion of the industry. eg coke, ford
- downward sloping relatively inelastic, depends on reactions of rivals

Question 2

what are the barriers to entry in a oligpoly?

Answer 2

unlike firms under monopolistic competition, there are barriers to entry few new firms, they are similar to a monopoly
- the size of the business, which will vary from industry to indsutry
-

Question 3

what is the interdependence under oligopoly?

Answer 3

one of the two key features of an oligopoly
- each firm is affected by its rivals’ decisions and its decisions will affects its rivals,
- firms recognise this interdependence and take it into account when making decisions

Question 4

what does the interdependence of ogliopolists mean for firms?

Answer 4

they either have to collude or compete

Question 5

what is collusive oligopoly?

Answer 5

when oligopolisits agree formally or informally, to limit competition between themselves. they may set output quotas, fix prices, limit product promotion or development or agree not to pinch each others markets

Question 6

what is non-collusive oligopoly?

Answer 6

when oligopolists have an agreement between themselves -f ormal, informal, in tacit
- where firms compete with each other and follow their own price, quantity and output policy independent of its rivals

Question 7

what is cartel?

Answer 7

a formal collusive agreement, the cartel will maximise profit by acting like a monopolist, with the members behaving as if they were a single firm

Question 8

what is a quota (set by a cartel)?

Answer 8

the output that given member of a cartel is allowed to produce (production quota) or sell (sales quota)
- allows members to share a market and prevents non-price competition

Question 9

what is tacit collusion?

Answer 9

when oligopolists follow unwritten ‘rules’ of collusive behaviour, such as price leadership. they will take care not to engage in price cutting, excessive advertising or other forms of competition

Question 10

what is dominant firm price leadership?

Answer 10

when firms (the followers) choose the same price as that set by the dominant firm in the industry (the leader).
- the leaders set the price by making assumptions on its rivals reactions to price changes, it assume that rivals will follow
- the leader will maximise profits where its MR = MC, it knows where its current position on the demand curve is then estimates how it would change in a an industry wide price changes and constructs its demand and MR curves on that basis

Question 11

what is barometric firm price leadership?

Answer 11

when the price leader is the one whose prices are believed to reflect market conditions in the most satisfactory way
- it tries to estimate demand and MR curves and sets the price where MC = MR
- in practice which firm takes this role changes, as any firm may change their prices

Question 12

what is wrong with the dominant firm price leadership?

Answer 12

the model assumes that followers will want to maintain a constant market share
its possible that is leaders raise their prices, the followers may want to supply more due to the new price
- on the other hand, followers may want to maintain hat they have for fear of invoking retaliations from the leader in the form of price cuts or aggressive advertising

Question 13

what is average cost pricing?

Answer 13

another type of tacit collusions, rather than having a leader you can have a established set of rules that people follow
- where a firm sets its price by adding a certain % for average profit on top of average cost

Question 14

what is price benchmarks?

Answer 14

this is price that typically is used. firms, when raising prices, usually will raise them from one benchmark to the another eg when costs go up

Question 15

what are factors favouring collusion?

Answer 15

• there are only few firms
• they are open with each other about costs and production methods
• have similar production methods and AC and so are likely to change prices at similar times by same %
• they produce similar products
• there is a dominant firm
• there are significant barriers to entry so little fear of new firms
• market it stable, makes it easier to reach agreements
• no government measure or curb collusions

Question 16

what is the cournot model?

Answer 16

a model of oliogpoly where each firm makes its price and output decisions on the assumption that its rival will produce a particular quantity
- profit will be less in this model than that under a monopoly or cartel as the price will be lower than monopoly price

Question 17

what is duopoly?

Answer 17

an oligopoly where there are just two firms in the market

Question 18

what is the Bertrand model?

Answer 18

a model based on the assumption that rival firms set a particular price and stick to it, eg supermarkets

Question 19

what is nash equilibrium?

Answer 19

the equilibrium outcome in both the cournot and bertrand models is not in the joint interests of the firms,
- in each case, total profits are less than under a monopoly or cartel but in the absence of collisions, the outcome is each firm doing the best it can given its assumption about what its rivals are doing -> nash equilibrium

Question 20

what is takeover bid?

Answer 20

where one firm attempts to purchase another to buy the shares of that company from its shareholders

Question 21

what is kinked demand theory?

Answer 21

A kinked demand curve model occurs because of strategic competition:
-If a firm raises its price, its rivals will not follow. The firm will now find their demand more elastic as consumers switch away to
rivals! (i.e. a flatter curve)
- If a firm reduces its price, rivals will feel forced to lower theirs too (will just move down the demand curve)

Question 22

what assumptions is the kinked demand model based on?

Answer 22

1- if a firm cuts it prices, its rivals will feel forced to follow suit and cut them, to prevent losing customers to the first firm
= a fall in price, will bring a small increase in sales, since rivals lowers their prices so people dont switch, the firm will hesitate to lower it price. Demand is inelastic below the kink
2- if a firm raises its prices, its rivals wont follow suit since, by keeping their prices the same, they will thereby gain customers from the first firm
= on this a rise in price will lead to a large fall in sales and people will switch to lower priced rivals and so the firm will hesitate to raise its price. demand is now elastic above the kink

Question 23

why is a oligopoly more advantageous than a monopoly?

Answer 23

1. depending on the size of the individual oligopolists, there may be less scope for economies of scale to lower costs and mitiage the effects of market power
2. oligopolists are likely to engage in more extensive advertising than a monopolist, this will raise costs. consumer could end up paying, higher prices though it may lead to product development and better info about the product

Question 24

why is the oligopoly more beneficial to the consumer than other market structures?>

Answer 24

1. oligopolists can use part of their supernormal profits for R&D, unlike monopolists, ogliopolistis will have an incentive to do so. if the product design is improve, it may allow the firm to capture a larger share of the marker and it may be some time before rivals can improve theirs. If tech also improves it could result in higher profits which will improve the firms capacity to withstand a price war
2. Non-price competition through product differentiation may result in greater choice for the consumer. Take the case of tablets or mobile phones. Non-price competition has led to a huge range of different products of many different specifications, each meeting the specific requirements of different consumers.

Question 25

what is countervailing power?

Answer 25

when the power of a monopolistic/ oligopolistic seller is offset by powerful buyers who can prevent the price from being pushed up

Question 26

what is the link between oligopoly and contestable markets?

Answer 26

• The lower the entry and exit costs for new firms, the more difficult it will be for oligopolists to collude and make supernormal profits. If oligopolists do form a cartel (whether legal or illegal), it will be difficult to maintain it if there is a threat of competition from new entrants.
• What a cartel has to do in such a situation is to erect entry barriers, thereby making the ‘contest’ more difficult. For example, the cartel could have a research laboratory, denied to outsiders. It might control the distribution of the finished product by buying up wholesale. Or it might let it be known to potential entrants that they will face fallout price, advertising and product competition from all the members if they should dare to set up in competition.
• The industry can behave competitively if entry and exit costs are low, with all the benefits and costs to the consumer of such competition – even if the new firms do not actually enter. However, if entry and/or exit costs are high, the degree of competition simply will depend on the relations between existing members of the industry.

Question 27

what are the criticism of the traditional profit- maximising theory?

Answer 27

• firms may not have the information to maximise profits
• they may not even want to maximise profits
• firms dont use MR and MC concepts, even if they know how much they’re selling in a moment, this gives them only one point on their curve and no point at all on their MR curve
• firms operate in a changing environment, demand and supply curves shift, some of this occurs due to factors outside of the firms control, some are a result of a firms policies

Question 28

what does the traditional theory of the firm assume?

Answer 28

that the owners of the firm make price and output decisions, it assumes that owners want to maximise profits, which is a critique of the theory. but do owners always want to?

Question 29

what is profit satisficing?

Answer 29

where decision makers in a firm aim for a target level of profit rather than the absolute maximum level, by not aiming for the max profit, it allows managers to pursue other objectives, such as sales maximisation as their own salary or prestige

Question 30

what is behavioural economics of the firm?

Answer 30

attempts to explain why the behaviour of firms deviate from traditional profit maximising because of the managerial use of mental shortcuts to simplify complex decisions and also managerial preferences for fairness

Question 31

what are some examples of heursitics?

Answer 31

heuristics are rules of thumbs or mental shortcuts to simplify things.
1. copying the strategy of the most profitable businesses in the market
2. focusing on relative rather than absolute profits, a managers performance may be judged by comparing the firms profits or other indicators with that of its rivals
3. making a satisfactory/target level of profit, rather than looking for new opportunities, managers may change a firms strategy only when its profit falls below target level

Question 32

what are some other potential biases of profit-maximising theory?

Answer 32

1. over optimisim:
2. including sunk costs, can lead to different prices from those set by a profit-maximising firm

Question 33

what do some managers have a preference for?

Answer 33

for fairness, they may care about the equitable distribution of returns to all stake-holders in the business, rather than trying to maximise profits

Question 34

can firms make use of behavioural economics?

Answer 34

• firms might be able to make use if they are profit-maximisers but their customers use heuristics that lead to systematic mistakes

Question 35

what is long-run profit maximisation?

Answer 35

an alternative theory which assumes that managers aim to shift cost and revenue curves so as to maximise profits over some longer time period

Question 36

what is the managerial utility maximisation?

Answer 36

an alternative theory that assumes that managers are motivated by self-interest. they will adopt whatever policies are perceived to maximise their own utility

Question 37

what is sales revenue maximisation?

Answer 37

an alternative theory of the firm that assumes that managers aim to maximise the firms short run total revenue
- unlike the long run profit maximisation and managerial utility maximisation, its easy to identify the price and output that meet this aim, at least in the short run

Question 38

what is growth maximisation?

Answer 38

an alternative theory that assumes that managers seek to maximise the growth in sales revenue (or the capital value of the firm) over time

Question 39

what are stakeholders (in a company)?

Answer 39

people who are affected by a company’s activities and or performance (customers, employees, owners etc). they may or may not be in a position to take decisions or influence decision taking of the firm

Question 40

what is organisational slack?

Answer 40

when managers allow space capacity to exist, thereby enabling them to respond more easily to changed circumstances

Question 41

what is just in time methods?

Answer 41

when a firm purchases supplies and produces both components and finished products as they are required. this minimises stockholding and its associated costs

Question 42

why is it difficult to predict the behaviour of a long run profit-maximising firm?

Answer 42

since different managers are likely to make different judgements about how to achieve maximum profits,
- demand and cost curves may shift unpredictably both in response to the firms own policies and as a result of external factors

Question 43

when managers want to raise their own utility what does it depend it on?

Answer 43

depends on factors such as salary, job security, power within the organisation and the achievement of professional excellence
- given that managerial utility depends on a range of variables, its difficult to use that theory to make general predictions of firms behaviour

Question 44

why do manager aims for maximum growth of their organisation?

Answer 44

believing it will help their salaries, power, prestige etc

Question 45

what is difficult to do with growth-maximising firm?

Answer 45

as with long-run profit-maximising theories, its difficult to predict the price and output of strategies of a growth maximising firm
- much depends on the judgements of particular managers about growth opportunities

Question 46

who makes decisions in large firms?

Answer 46

a number of different people from managers, shareholders, workers etc
- if these people have different aims, then a conflict between them is likely to arise
- a fir cannot maximise more than one of these conflicting aims, the alternatives is to seek to achieve a satisfactory target level of number of aims

Question 47

what do behavioural theories of the firm really examine?

Answer 47

how managers and other interest groups actually behave, rather than merely identifying various equilibrium positions for output, price, investment etc

Question 48

what happens if targets were achieved last year?

Answer 48

they’re likely to be made more ambitious next year, if they were not achieved, a search procedure will be conducted to identify how to rectify the problem. this may mean adjusting targets downward, in which case there will be some form of bargaining process between managers

Question 49

when is life made easier for managers if conflict is avoided?

Answer 49

this will be possible if slack if allowed to develop in various parts of the firm, if targets are not being met, the slack can then be taken up without requiring adjustments in other targets

Question 50

why are satisficing firms less innovative?

Answer 50

Satisficing firms may be less innovative, less aggressive and less willing to initiate change. If they do change, it is more likely to be in response to changes made by their competitors. Managers may judge their performance by comparing it with that of rivals.
- Satisficing firms may be less aggressive in exploiting a position of market power. On the other hand, they may suffer from greater inefficiency

Question 51

what is monopoly policy?

Answer 51

• it seeks to prevent firms from abusing a dominant market practices i.e misusing their economic power.

Question 52

Why are price wars started?

Answer 52

Industry upset or strategic intent

Question 53

What are the reactions to when a price war starts?

Answer 53

1. Maintain the price
2. Split the market
3. React with other measures eg differentiation strategy, improve quality, increase promotion,

Question 54

what is non price competition?

Answer 54

• takes two forms of either product differentiation, or R&D#
  it avoids price wars and makes it much less certain that rivals will be able to find an effective counter strategy

Question 55

what will each brand be a mix of?

Answer 55

technical, quality, design and service standards

Question 56

what is vertical and horizontal product differentiation?

Answer 56

vertical: quality is vertical as if two prices are equal, all the consumers prefer the same superior product
horizontal: characteristic differences not considered inferior or superior.
if two prices are equal, some consumers prefer one product and other consumers prefer the other product

Question 57

what is the aim of effective product differentiation?

Answer 57

to create a good that is distinct and preferred

• Reduces direct substitutability of goods (cross-price elasticity).
• Less substitutable, more unique goods have less elastic demand (higher prices & profits can be sustained)
• It can act as a barrier to entry
  Practically:
• Costs are often passed onto the customer through those higher prices.
• If a new firm has a superior product → experience has shown,
  advertising alone cannot be an effective barrier

Question 58

what are the 3 main components of strategic management?

Answer 58

strategic analysis, strategic choice, strategic implementation

Question 59

what are the analytical frameworks from which firms can devise strategies which give them competitive advantage?

Answer 59

Porter’s five forces Model (1980)
* Porter’s value chain analysis
* Porter’s generic strategies

Question 60

what is porters five forces model?

Answer 60

1. bargaining power of buyers: depends on the Bargaining leverage which refers to buyer concentration versus firm concentration, Buyer volume, Buyer switching costs relative to firm switching costs, Buyer information, Substitute products.
   and also depends on the Price sensitivity which refers to Price / total purchases, Product differences, Brand identity impact on quality performance, Buyer profits and Decision makers’ incentives. ->customers can use their forces to drive prices up and down to capture more value for themselves, they can plays rivals against each esp when theres no product differentiation etc
2. Bargaining power of suppliers: Depends on differentiation of inputs, switching costs of suppliers and firms in the industry, presence of substitute inputs, supplier concentration, importance of volume to supplier, cost relative to total purchases in the industry and impact of inputs on cost or differentiation. -> suppliers can use their negotiating leverages to charge higher prices or demand more favourable terms
3. Threat of new entrants: depends on the barriers to entry, economies of scale, proprietary product differences, brand Identity, switching costs* Capital requirements, access to distribution, absolute cost advantages, access to necessary inputs, government policy, expected retaliation. -> this threat can force firms to keep prices down, cap their potential profit but it depends on the above factors
4. Threat of substitute products or services: depends on factors like relative price performance of substitutes, switching costs, buyer propensity to substitute. ->
5. Rivalry among existing competitors: the rivalry depends on Industry growth, fixed (or storage) costs / value added, intermittent overcapacity, product differences, brand identity, switching costs, concentration and balance, informational complexity, diversity of competitors, corporate stakes, exit barriers. ->

Question 61

what are the limitations of the porters five forces model?

Answer 61

The model is good from the perspective of a firm looking at its strategic environment
However, there are a number of criticisms:
* Static (reality is dynamic)
* Doesn’t allow for co-operative / collaborative models
* It doesn’t consider much the internal elements of the firm

Question 62

what is porters value chain analysis?

Answer 62

The value chain shows how value is added to the final product as it moves through the chain of production.
- Support activities don’t ‘add value’ directly, but can make the production process work more efficiently, i.e. reduce costs or increase quality.
steps are: inbound logistics which is warehousing and inventor, operations is converting raw materials into final product, outbound logistics is the delivery, marketing and sales, and service is the maintenance, repair, customer service

Question 63

what does Porter’s five-forces and value chain analysis show sources of?

Answer 63

competitive advantage which can fall into categories of low cost or product differentiation:
1. Cost Advantage:
* Absolute
* Relative
2. Differentiation:
* Physical characteristics
* Psychological reinforcement
Market based strategies thus
fall into 2 main categories:
1. Cost leadership,
2. Differentiation and
(3.) Focus can be whole or ‘segment’ of market

Question 64

what is Porters generic strategies model?

Answer 64

The two basic types of competitive advantage of low cost and product differentiation combined with the scope of activities for which a firm seeks to achieve them, lead to three generic strategies for achieving above average performance in an industry: cost leadership, differentiation, and focus.
1. Cost Leadership
In cost leadership, a firm sets out to become the low cost producer in its industry. The sources of cost advantage are varied and depend on the structure of the industry. They may include the pursuit of economies of scale, proprietary technology, preferential access to raw materials and other factors. A low cost producer must find and exploit all sources of cost advantage.
2. Differentiation
In a differentiation strategy a firm seeks to be unique in its industry along some dimensions that are widely valued by buyers.
3. Focus
The generic strategy of focus rests on the choice of a narrow competitive scope within an industry. The focuser selects a segment or group of segments in the industry and tailors its strategy to serving them to the exclusion of others.

The focus strategy has two variants.

(a) In cost focus a firm seeks a cost advantage in its target segment, while in (b) differentiation focus a firm seeks differentiation in its target segment. Both variants of the focus strategy rest on differences between a focuser’s target segment and other segments in the industry. The target segments must either have buyers with unusual needs or else the production and delivery system that best serves the target segment must differ from that of other industry segments. Cost focus exploits differences in cost behaviour in some segments, while differentiation focus exploits the special needs of buyers in certain segments.

Question 65

what forms can active rivalry take?

Answer 65

ACTIVE RIVALRY between firms to WIN and RETAIN
customers can take a number of forms. Principally these are:
1.Price competition
2.Product differentiation (i.e. Advertising, Promotional Competition)
3.New Product Competition (i.e. innovation)
The nature and intensity of competition depends on market
factors as Porter’s 5-forces suggest.

Question 66

what is structure-conduct paradigm?

Answer 66

The Structure  Conduct  Performance paradigm says that business conduct
(behaviour) varies according to the characteristics of the market structure it is faced with.
→ In turn so therefore does it’s performance

Question 67

what are the stages of SCP?

Answer 67

first is Basic conditions which refers to supply, Availability of inputs, Technology, Product specifications and Demand: Tastes and Substitutes
1. Structure - this refers to the construction, formation and the makeup of an industrial organization. It also describes the kind of environment in which an organization or market operates, barriers to entry, cost structure
2. Conduct - this describes the behavior or comportment of buyers and sellers to the structure of a market. It also refers to the way buyers and sellers interact with each other and the way they behave, pricing behaviour, output, mergers etc
3. Performance - this refers to the achievement or accomplishment or results of a particular market or industry. Performance variables that are considered in the market include product quantity, product quality, and production efficiency, market share, share price

Question 68

what are the advantages and disadvantages of the SCP?

Answer 68

ADV:
* This is a paradigm based on empirical data
* Reduces all industry data into meaningful categories
* Consistent with neoclassical theory
* Allows a workable standard of performance to be defined
DISADV:
* Neo-classical theory not precise about S-C-P relationship
* Which variables belong to S, C or P?
* Difficult to define performance
* Difficult to define market/industry structure
* Empirical research: Weak relationship for S → C → P causality
* No dynamic aspects
* Alternative views of link between profits and concentration.

Question 69

what is the conclusion on the SCP?

Answer 69

Conduct and Performance have feedback effect on structure.
Strategies (conduct) may be more important than structure..

Question 70

discuss the market structures of the 4 types of markets?

Answer 70

a. Perfect Competition – Many firms/ unrestricted entry/ homogenous (or undifferentiated) product/ examples (approximately) carrots etc.
b. Monopolistic competition – Many (or several) firms / unrestricted entry / differentiated product / examples e.g. builders, restaurants etc.
c. Oligopoly – few firms (barriers to entry – see conduct) / either undifferentiated or differentiated product / examples cement, phones etc.
d. Monopoly – one firm (barriers to entry – monopoly types or see conduct) /

Question 71

discuss the conduct of the 4 types of markets?

Answer 71

a. Perfect competition firms are price-takers – horizontal demand curve for
individual firms (i.e. infinitely elastic); profit max at MC=MR based on output.
b. Monopolistic competition engages in product differentiation (costs). Relatively price elastic demand.
c. Oligopoly engage in strategic interactions (collusion or competition possible) on price and differentiation.
d. Monopoly – Inelastic demand curve, market can bear high price rises, restricted supply pricing; activities to maintain barriers to entry.

Question 72

discuss the performance of the 4 types of markets?

Answer 72

a. Perfect competition – zero supernormal profits in long-term, due to market entry pushing price down to bottom of AC curve. As produces at bottom of AC curve is efficient.
b. Monopolistic competition – zero supernormal profits in long-term but not producing at lowest AC, so not efficient. (costs of product differentiation)
c. Oligopoly – Supernormal profits in the long-run, worse outcome than monopoly if collusion as higher costs from multiple
firms
d. Monopoly – Supernormal profits in the long-run. X-inefficiency. can have deadweight loss (any deficiency caused by an inefficient allocation of resources) or economies of scale, efficiency and
profit for R&D arguments,

Question 73

what is price stickiness? what causes them?

Answer 73

Price stickiness, or sticky prices, is the resistance of market price(s) to change quickly, despite shifts in the broad economy suggesting a different price is optimal
- happens as firms are reluctant or unable to change prices due to menu costs, fixed contracts, and fear of price wars in oligopolies.

Question 74

When does collusion work best?

Answer 74

Collusion works best in stable markets with a small number of players where ‘tit-for-tat’ experience can build up
– no one has the incentive to break the collusion as it is more profitable
- if one firm suddenly has the ability to cut costs it could be more profitable to undercut competitors – hence collusion breaks down.

Question 75

What is overt collusion?

Answer 75

Overt collusion - ‘cartel’ has a market outcome just as in monopoly, where firms act as one firm and share the profits, but are illegal in many countries (anti-trust laws)

Question 76

Give examples of tacit collusion?

Answer 76

Price leadership eg dominant and barometric price leadership
- ‘Rules of thumb’ such as Average cost pricing – everyone set P = ATC + x% or Price benchmarks (i.e. If P = £14.99, then if costs rise → rise P to next benchmark i.e. £15.49).