Y2 Market structures or smth Flashcards
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
Artificial barriers to entry
Predatory pricing
Buy-outs
Advertising
Loyalty schemes
Vertical integration
When is a natural monopoly needed
Extremely high fixed costs aka large scale infrastructure needed, so deterring entry. Trying to increase competition creates a lack of efficiency because firms have to duplicate resources. With a natural monopoly ATC keeps falling because of continuous EoS
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
Critics of Royal Mail privatisation
Sold too cheaply
Jobs lost to cut costs
Could have just improved performance with better managing
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
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
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.
Game theory
Branch of maths that is used to predict behaviour of firms in an oligopoly.
Nash equilibrium
Where all participants are pursuing their best possible strategy given the strategies of others
Competition of Markets Agency (CMA)
Takes action when oligopolies indulge in cartel like behaviour
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
Price capping systems
Max price
RPI-X (Inflation minus expected efficiency savings)
Max rate of profit on capital
RPI+K (inflation + investment requirements)
Pros of price capping
Prevents monopoly power
Higher consumer surplus
Improvements in productive efficiency
Controls inflation
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
Cartel
When multiple firms agree to restrict supply or fix the price of a good. (A formal type of collusion) eg OPEC
Negatives of cartels
-Higher prices
-Lack of transparency
-Less output
-Redistributes income from consumers to cartel leaders
-Discourages innovation and efficiency
Positives of collusion/cartel
-Price stability
-High profit = R&D and infrastructure investment
-Helps develop LICs
Solutions to cartels
-Legislation. Fines & prison
-Leniency programme (immunity if u snitch)
-Promote competition with deregulation
Contestability
How easy/difficult it is to enter a market
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
