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
Features of perfect competition
Homogeneous products
Many suppliers and buyers
No barriers to entry
Perfect info
Firms are price takers
Benefits of perfect competition
No info failure
No monopoly
Only normal profits, so producer surplus minimised
Low price, lots of choice
Allocative efficiency
Productively efficiency in LR
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
Collusion types
Overt - Open agreements
Tacit - Unwritten agreements
Positives of collusion/cartel
-Price stability
-High profit = R&D and infrastructure investment
-Helps develop LICs
