Y2 Market structures and intervention Flashcards by Frederick Renison

Natural barriers to entry

EoS make it hard for new firms
Networks with loyal users
Ownership of scarce resources
High set-up costs
High R&D costs

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Artificial barriers to entry

Predatory pricing
Buy-outs
Advertising
Loyalty schemes
Vertical integration

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When is a natural monopoly needed

Extremely high fixed costs aka large scale infrastructure needed
Huge potential for EoS
Competition means duplicating resources
Makes sense for there to be 1 firm only

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Why was Royal Mail privatised

Raises income for gov
Access to equity market to finance investment
Employee shared ownership will increase productivity
More dynamic efficiency
Profits pay tax to gov

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Critics of Royal Mail privatisation

Sold too cheaply
Jobs lost to cut costs
Could have just improved performance with better managing

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Oligopoly

Market dominated by a few producers (high concentration ratio), top 5 firms account for >50% market share. Theory for oligopoly depends on firm’s behaviour

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Usual features of oligopoly

Dominated by few firms
High enough barriers to entry to retain market share
Differentiated products and non-price competition
Firms are interdependent
Kinked demand curve

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Interdependence

Firms act on others actions. If you increase price, no one else will and you lose market share. If you decrease price, so does everyone else, so market share is still the same but less profits.

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Game theory

Branch of maths that is used to predict behaviour of firms in an oligopoly.

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Nash equilibrium

Where all participants are pursuing their best possible strategy given the strategies of others

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Competition regulators in UK & EU

European Competition Commission
(only for EU)
CMA- Competition & Markets Authority (oversees the UK regulators)

ORR- Rail
CAA- Air travel
Ofcom- Telecommunications
Ofwat- Water
Ofgem- Energy

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Telecoms UK
(case study)

Was an oligopoly - patchy networks, expensive calls and texts, no data
Ofcom allowed providers to use existing infrastructure - Cheap calls and texts, better service, 4G

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Price capping systems

Max price
RPI-X (Inflation minus expected efficiency savings)
Max rate of profit on capital
RPI+K (inflation + investment requirements)

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Pros of price capping

Prevents monopoly power
Higher consumer surplus
Improvements in productive efficiency
Controls inflation

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Cons of price capping in energy market

Real issue is lack of investment
RPI-X might be better
People less likely to switch
Small firms go bust

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Cartel

When multiple firms agree to restrict supply or fix the price of a good. (A formal type of collusion) eg OPEC

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Negatives of cartels

-Higher prices
-Lack of transparency
-Less output
-Redistributes income from consumers to cartel leaders
-Discourages innovation and efficiency

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Positives of collusion/cartel

-Price stability
-High profit = R&D and infrastructure investment
-Helps develop LICs

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Solutions to cartels

-Do nothing, game theory says that whistleblowing is inevitable
-Legislation. Fines & prison
-Promote competition with deregulation

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Contestability

How easy/difficult it is to enter a market

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Features of a contestable market

-No barriers
-Pool of entrants
-Perfect info

How did Ofcom increase contestability

Allowed the sharing of hard infrastructure (masts) so ‘Three’ could launch onto mobile network market

Hit and run competition

Low barriers to entry and firms making supernormal profits. So new firms enter, take profits and exit.

Monopolistic competition

Many small firms each with differentiated characteristics that give them a degree of monopoly power

Features of monopolistic market

-Many producers -Differentiated goods -Price makers -Non-price competition -Low barriers to entry -Normal profits in LR

Pros/cons of deregulation

Pros: -Consumer choice -High efficiency Cons: -No EoS -Low prod efficiency -Could result in monopolies/oligopolies

Price discrimination

When a firm charges different prices to different groups for the same good/service

Conditions for price discrimination

-Price makers -Some imperfect competition/information -Identifiable segments -Differing PEDs -No market seepage

Systemic risk (banking)

The potential that the failure of one firm threatens the whole system

Moral hazard

When firms take risky actions because they expect to be bailed out

Liquidity

Ability to meet short term obligations with cash equivalents

Banking regulation bodies

BOE - Monetary policy FPC (Financial Policy Committee) - Identify risks in system FCA (Financial Conduct Authority) - Protect consumers and promote competition

Liquidity ratio

Liquid assets against current debts

Capital ratio

Reserve funds against risky assets

Stress test

How well banks can withstand shocks

Libor scandal

Banks submitting false info about their borrowings to manipulate the LIBOR rate (interest rate that global banks lend to each other at). Barclays, UBS, Royal bank of Scotland

Marginal Revenue Product of Labour (MRPL)

How many workers a firm will employ at a given wage rate. =Marginal product of labour x Marginal revenue

WES/WED (wage elasticity of supply/demand for labour)

The proportional responsiveness of supply/demand of labour to a change in real wage rate. %change labour supply/ %change real wage rate

What is WES determined by

-Skills required for job -Training period -Vocational -Mobility -"Dirty job"

What is WED determined by

-Ease of substitution between capital and labour -How capital intensive -PED for good/service -Time span

Reasons for wage differentials

-Differences in productivity (age) -WES -Demand for good/service -Living costs -Dangerous/dirty jobs

Pros/cons of wage differentials

Pros: -Incentive for education/training -Encourages enterprise -Less voluntary UE Cons: -Income inequality -Poverty

Perfectly competitive labour market

-Many suppliers and employers -Wage takers -Perfect info about wages and job conditions -Homogenous jobs -Measurable productivity

Marginal revenue product

The revenue gained from an extra worker

Market clearing wage rate

The wage where D=S for labour

Pros/cons of trade unions

Pros: -Better living standards -Less universal credit -Motivated workers -Reduce monopsony power Cons: -Low UK competitiveness -Classical UE -Resists mechanisation -Strikes

Limits of rational behaviour

-Capacity to calculate costs/benefits -Altruism -Lack of self control -Bounded rationality -Heuristics

1st Degree PD

Each consumer pays exactly what they're willing to eg Market haggling, mechanic

2nd Degree PD

Prices vary depending on the quantity purchased and the time of day eg Bulk buying, off-peak tickets

3rd Degree PD

Groups are segmented and discriminated based on PED eg Age, barber prices

When would competition regulators intervene

-Cartel like behaviour & antitrust -Mergers that will have great mon. power -Liberalise concentrated markets -Monitor subsidies in UK and abroad to ensure fair competition (agriculture)

What shifts the labour supply curve

Wages of substitute firms Barriers to education/training Mobility of labour Size of working population Overtime