1
Q
What is X inefficiency
A
Occurs when a firm lacks incentive to control costs so AC is higher than necessary (the firm is not technically efficient)
2
Q
What is a demerger
A
A decision to split into 2 separate firms
3
Q
What is a partial demerger
A
When a stake in the de-merged company is retained by the other company
4
Q
What can cause a de-merger
A
Government intervention (CMA)
5
Q
Reasons for a demerger (4)
A
To focus on the core business (streamline cost and improve margins)
Reduce risk of dEoS (or dEoScope) by reducing range of functions in a business
Raise money from sale of assets and return to shareholders
Defensive tactic to avoid attention of competition authorities who might be investigating them
6
Q
Impacts of de mergers on businesses
A
Long term higher returns from removing the loss making part
Short term cost of hiving off business
Extra cash
Removing dEoS
7
Q
Impacts of de mergers on employees
A
Less chance of unemployment of loss making part removed
Reduced conflict (culture clash)
Opportunities for managers of newly demerged busiensses
8
Q
Impacts of demergers on consumers
A
LRAC falls -> prices fall (not necessarily due to scale of competition etc.)
Focused business better meets needs
9
Q
5 reasons why firms stay small
A
Size of market
Access to finance
No benefit
Regulation
Owner objectives
10
Q
Why might a firm stay small because of the size of the market
A
Niche
Personal service
Local monopoly
11
Q
Why might a firm stay small because of access to finance
A
Can’t acquire capital to grow
12
Q
Why might a firm stay small because there is no benefit
A
There are few/no EoS
dEoS
13
Q
Why might a firm stay small because of regulation
A
Prevents further growth
14
Q
3 factors affecting market structure
A
No of firms
Type of product
B2E
15
Q
What are the different behaviours that a firm can have in a market
A
Price/output
Non-price competition
Anti competitive behaviour
16
Q
What performance factors are there in firms
A
Type of profit (super/normal/sub)
Efficiency (all types)
17
Q
What is a market structure
A
No. and size of buyers of sellers
B2E
Degree of knowledge shared
Extent of product differentiation
Goals of the firms
18
Q
What is a B2E
A
Factors that make it hard for firms to enter/exit a market
19
Q
List of all B2E
A
Setup costs
Legal barriers (patents/safety criteria/permits)\
Brand loyalty/proliferation
Strategic entry deterrence (e.g. predatory pricing)
Vertical integration (ownership of suppliers)
Economies of scale (can’t match low costs)
First mover advantage
Sunk costs
20
Q
What is predatory pricing
A
Setting an artificially low price for a G/S to drive out competition
21
Q
What is limit pricing
A
Firm sets a low enough price to discourage new market entrants
22
Q
What are legal barriers
A
Market licences (e.g. taxis)
Patent protection (e.g. medicine)
State awarded franchises (e.g. Greater Manchester Bus services)
Import controls
23
Q
What does perfect competition mean for output
A
They can change it to whatever they want with NO effect on the price of the G/S
24
Q
How many firms are in perfect competition
A
Infinite
25
How many firms are in monopolistic competition
Infinite
26
How many firms are in an Oligopoly
2-8
27
How many firms are in a Monopoly
1
28
What is the nature of a G/S in perfect competition
Homogenous
29
What is the nature of a G/S in monopolistic competition
Slight differentiation (non price factors)
30
What is the nature of a G/S in an Oligopoly
Differentiated only on non price factors
31
What is the nature of a G/S in an Monoppoly
Unique
32
What are the B2E in perfect competition
None
33
What is an example of perfect competition
FOREX (closest but no true examples)
34
What diagram do you draw for perfect competition (draw them and compare to notes)
The two adjacent market and firm diagrams with SR and LR together
35
Why is the D curve shaped like it is in perfect competition
It is horizontal since there is perfectly price elastic demand
36
What is the SR equilibrium in perfect competition
MC = MR
P is set by the market
Profit maximisers set Q where MC = P
37
Why is there not supernormal profit in the LR in perfect competition
Supernormal profit in SR if P > ATC
BUT new firms are attracted
S of G/S increases
Price falls until P = MC
38
Is perfect competition allocatively efficient
Yes since P = MC (perfect allocation to D)
39
Is perfect competition productively efficient
In the LR
Firms produce at the bottom of AC to survive
40
Is perfect competition dynamically efficient
No because they only make normal profits so have nothing to reinvest
41
B2E in Monopolistic Competition
Low
42
Example of Monopolistic Competition
Hairdressers
43
How to draw the diagram of Monopolistic Competition (1 firm)
SR: Normal monopoly diagram
LR: AR shifts left (for an individual firm) until AR = AC (tangent)
44
Key characteristic of Monopolistic Competition (IMPORTANT)
Good information of market prices
45
What is the shape of the demand curve in monopolistic competition
Downwards sloping (elastic)
46
What happens in the SR on the monopolistic competition curve
MC = MR (profit max)
If P>ATC then supernormal profit occurs
47
What happens in the LR on the monopolistic competition curve
New competition enters the market due to low B2E
D for the original firm decreases until its a tangent to AC
This is since new firms offer similar (but not identical) goods
48
Are monopolistically competitive firms allocatively efficient
NO
P > MC because firms have some market power (price makers)
49
Are monopolistically competitive firms productively efficient
Firms have excess capacity so do not reach the bottom of the AC curve
50
Reasons for x inefficiency
Lower wages
remove worker perks
(more common in monopolies or gov industry)
51
Condition for dynamic efficiency
LR supernormal profit to reinvest
52
What is static efficiency
OCCUR AT 1 POINT IN TIME
Allocative
Productive
X
(Not Dynamic)
53
Are monopolistically competitive firms dynamically efficient
NO
Small SR supernormal profits but this is not LR so not dynamically efficient
54
B2E in an Oligopoly
High
55
Example of an Oligopoly
Supermarkets
56
Draw the diagram of an Oligopoly
Kinked demand curve with
57
What is the most important characteristic of an Oligopoly
That the firms are interdependent
58
What is an oligopoly (DAL)
Up to 7 firms have 70% of market share
59
What does interdependence lead to in an oligopoly
Price rigidity
60
Where can oligopolies profit maximise
Anywhere within the vertical line of the MR curve
61
How are oligopoly diagrams kinked
Elastic above Q
Inelastic below Q
62
What happens if 1 firm raises its prices in an oligopoly
Other firms WON’T follow
63
What happens if 1 firm lowers its prices in an oligopoly
Other firms WILL follow
64
In the SR what is the production level (Q) in an oligopoly
MC=MR
(Kinked AR -> discontinuity MR -> sticky prices)
65
What do oligopolies compete on
Non price factors more importantly (price is hard to compete on without collusion)
66
What may oligopolies do
Collude
67
Are oligopolies allocatively efficient
No
P > MC (DWL)
68
Are oligopolies productively efficient
No
High X inefficiency (less pressure to be lean due to few firms in the market )
69
Are oligopolies dynamically efficient
Yes
Large supernormal profit -> often reinvested into innovation
70
What are the B2E of a monopoly
Very high
71
Example of a monopoly
Rail network
72
How to draw a monopoly diagram
Simple C/R diagram
73
What shape is the D curve in a monopoly
Downwards sloping and elastic
Firm curve = market curve
74
SR price in a monopoly
MC = MR
Price is as high as possible since the monopolist is a price maker
75
LR price in a monopoly
Due to extreme B2E, there are supernormal profits (1 firm in LR)
76
Is a monopoly allocatively efficient
No
P > MC
Therefore they underproduce
77
Is a monopoly productively efficient
NO
AC is not minimised
78
Is a monopoly dynamically efficient
Yes
High profits for R&D
(But no incentive to innovate because they are the whole market so maybe not?)
79
What is a pure monopoly
A sole supplier in an industry
80
What is a working monopoly
The CMA defines it as any firm with over 25% of total industry sales
81
What is a dominant firm (monopoly)
Has over 40% market share
82
How are prices set in a monopoly
Firm is a price maker
BUT
A monopoly cannot charge a price that consumers will not pay
83
Negatives of a monopoly
High prices -> reduced CS
P > MC (allocatively inefficient)
Not at AC = MC (productively inefficient)
Lack of pressure to keep costs down (X inefficient)
Increased inequality (high prices mean people can’t afford the G/S, has regressive impacts)
84
Positives of monopolies for the firm (5)
EoS
alternative objectives (satisficing, sales max etc.)
Dynamically efficient,ent -> innovation
Cross subsidisation
Regulation (new firms cant enter because of complex rules)
85
What is a natural monopoly
Has high fixed costs so additional customers add very little extra cost so AC continue to fall over high outputs
86
What may a supplier need in a natural monopoly
All market demand to fully exploit EoS in the market to achieve productive efficiency
87
What does a Natural Monopoly usually mean
It doesn’t make sense for more than 1 supplier to be in the market
88
Example of a Natural Monopoly
Railway industry
Very high capital costs: tracks, maintenance etc.
EoS are significant and are gained as output increases
89
What would competition lead to in a Natural Monopoly
Duplication of infrastructure/networks so would be a waste
One dominant firm can serve the whole market at a lower cost than several firms
90
Why would the CMA tax monopoly profits
One off windfall tax on supernormal profits (e.g. 38% above limit on energy companies in the energy crisis)
91
issues of taxing monopoly profits
Tax avoidance
Loss of investment funds
92
Why might the government intervene into monopolies by liberalising the market
Breaking up monopolies -> increases contestability
93
Issues with liberalising a monopoly market
Smaller businesses may not reach EoS
94
Why might price caps be brought into a monopoly market
Encourages cost efficiency
Increases CS
95
Issues with introducing price caps into monopoly market
monopolists may find revenues in other ways
96
How can nationalisation be used to regulate monopoly power
Takes the utility back into public ownership and management
97
Issues with nationalising a monopolist
Possible loss of productive efficiency/X inefficiency
98
What is price discrimination
Charging different pries to different consumers for the SAME service
99
What are the conditions for price discrimination
Be a price maker (sufficient market power)
Different market segments (group consumers with different PEDs so inelastic can be more expensive and vice versa to max revenue)
Prevent resale/arbitrage (no secondary markets where firms can be undercut)
100
Why are the costs curves flat in 3rd degree price discrimination
No differences in costs
101
Where do firms produce in price discrimination
Where MC= MR in each different segment of the market
102
Evaluation point on 3rd degree price discrimination leading to higher profit
Assumes that there is no cost of separating groups -> may not increase profit (ID checks need a software/workers for age discounts)
103
Negatives for consumers of Price Discrimination
Exploitation of customers (majority pay more than MC)
Extraction of CS (turned into higher PS/supernormal profit)
Possible use of discrimination… as limit pricing/B2E to reduce competition
104
What is a structural B2E
Markets natural characteristics (high capital costs, EoS, vertical integration etc.)
Long term factors (usually)
E.g. Airlines
105
What is a strategic B2E
Incumbent firms erect these like limit pricing or predatory pricing
Usually short term
106
How do structural vs strategic B2E affect competition
Weaken competition and protect incumbents from rivals
Structural -> LT advantages
Strategic -> ST deterrence but risk of regulatory scrutiny
107
How do structural vs strategic B2E affect contestability
Requires low B2E and minimal sunk costs so no hit and runs
Both lower contestability: structural raises baseline costs, strategic signals threats
108
Arguments in favour of price discrimination
Potential cross subsidisation of activities that bring social benefits (e.g. lower prices for medicine in LICs)
Better use of spare capacity (environmental benefits of less waste)
Brings new customers into the market (who wouldn’t be able to pay the “normal” price)
Use of monopoly profit or research (dynamic efficiency)
109
Pros of NLW (6)
Reduces exploitation of lower paid workers
Reduces scale of relative poverty and inequality
Reverse effects of employer discrimination and gender pay gap
Improves incentive for people to work (higher wage guaranteed)
Encourages firms to train workers and increase productivity
Reduces need for low pay workers to claim benefits (universal credit)
110
Cons of NLW (6)
Fall in employment due to increased wage costs for firms
Firms are less competitive internationally (macro)
Danger of wage leapfrogging and wage inflation
Not the most effective way to reduce relative poverty, better to use SSPs in the LR like education
Creates artificial distortions in the Labour Market
Firms may travel abroad and exploit wages elsewhere
111
Reasons for maximum wage (4)
Decreases unemployment and can stimulate animal spirits (e.g. cap on banker bonuses)
Reduces income inequlaity
Reduce gender pay gap
Makes markets more competitive (e.g. rugby player salary caps)
112
Why should maximum wage not exist
Many workers travel abroad where there are no caps (e.g. rugby players to France)
No max wage incentivises people to work hard -> MPL increases (from incentive) -> MRP increases
Labour force is unwilling to work for a low wage
Removed caps on bonuses leads to more stable incomes (its a way they try and get around it)
Brain gain -> improves QoL domestically
113
What is MRP
Marginal revenue product (MRP = MPL x MR)
114
What is game theory
Study of rational behaviour in the situation of interdependence
115
What are the 3 claims of game theory
It is rational to be Price Rigid (in non price competition)
There is a temptation to collude
There is an incentive to cheat on the collusive agreement
116
Do a prisoners dilemma table for revenue in a price elastic market
See oligopoly and game theory OneNote doc
117
What is a cartel
An agreement between businesses not to compete with each other with the intention of maximising joint profits
(Can often be verbal so not written down)
118
How does a firm decide in a game theory situation
They adopt the dominant theory where they maximise average revenue/minimise average loss
119
What is predatory pricing
Setting prices below costs (AR
120
What is limit pricing
Pricing at a level that potenital new firms cannot achieve
E.g. because new firms do not have EoS
121
Examples of non price competition
Use of advertising and marketing strategies to increase demand and develop brand loyalty
ALSO:
Guaranteed delivery times
Longer opening hours
122
How much do firms spend on ads (4)
An be millions for many firms
Some do it to profit max, others to increase revenue
Important for start ups
Is a B2E by incumbent firms
123
How do cartel members price fix
Prices/discounts are set by all firms as the same to increase revenue
124
How do cartel members do bid rigging
They decide who should win a contract in a competitive process before it occurs
125
How do cartel members place output quotas/restrictions
Limit levels of production supplied to a market to increase the price
126
How do cartel members do market sharing
Choosing which customers or geographic areas will be supplied by who
Preventing competitors from entering the marekt
127
What are the 2 types of collusion
Covert (hidden)
Overt (open)
128
What is tacit collusion
A dominant firm makes price changes which all others follow
e.g. price leadership
129
Why do firms collude?
Refer to prisoners dilemma
By acting together, they act as a monopoly
Restrict supply -> increase prices
Increase supernormal profits
130
What are barriers to entry
High setup and sunk costs
Need for EoS to make (super)normal profit
Legal barriers
Brand loyalty
Strategic entry deterrence
First mover advantage
Vertical integration
131
What is a contestable market
Faces no B2E and E so the threat of entry is enough o keep the industry behaving at a competitive price and output
132
Methods to increase **contestability**
Lowering legal barriers to entry e.g. reform of patents, allowing more operating licenses
Impact of new tech that allow smaller firms to enter e.g. e-commerce
Trade agreements that make it easier for competition from imports
Entrepreneurial zeal
133
Critiques of contesatable markets
No market is **perfectly contestable** but the theory is a reference point to see the level of contestability
134
How can contestability be tested
Requires a great deal of unavailable informaiton form the cost structure of the incumbent firms
Contestability is about the threat of new entry, not actual new entries
Absence of new competition x= lack of contestability
135
Why might contestable market lead to allocative effeciency
Firms are under pressure to keep prices low
If they raise prices, challenger firms can enter the market and undercut them
136
Why might contestable market lead to dynamic effeciency
Firms are encouraged to innovate and develop to gain a competitive advantage
137
Why might contestable market lead to productive effeciency
Strong incentive to keep until costs under control and avoid managerial slack and other x inefficiencies
Attempt to operate under EoS
138
CoR for hit and run competition
Increase in contestability -> downward pressure on prices towards MC -> actual competition and threat of hit and run
139
What is a monopsony
Has buying/bargaining power in the market
Buying power means that a monopsony can exploit their bargaining power with a supplier to negotiate lower prices
Reduced cost of purchasing inputs increases profit margins
140
Where do monopsonies exist
In both product and labour markets
141
What is a pure monopsony
1 buyer
142
what is a realistic monopsony
1 buyer dominates the market
So sellers cannot sell their products to other firms outside the market
143
Positive of a monopsony for the monopsonists
Buy for lower prices -> lower costs -> higher profits -> profits to invest into R&D?
144
Negative of a monopsony for the monopsonists
Firms may be investigated by the regulatory authorities
145
Positive of a monopsony for the suppliers
Only need to build up a relation ship with 1 buyer
146
Negative of a monopsony for the supplier
Receive lower prices for G/S -> lower revenue -> subnormal profit -> less available profit for reinvestment
147
Positive of a monopsony for the customers
Lower costs may be passed on to IF PED > 1
Might benefit in LR from R&D
148
Negative of a monopsony for the customers
Suppliers may cut quality to save on costs
Suppliers may leave the market -> lower supply -> increased prices -> decreased CS
149
Positive of a monopsony for the Employees
Monopsonists employees may have safer jobs
150
Negatives of a monopsony for the Employees
suppliers may have less safe jobs
Worse working conditions for suppliers who have to cut costs
Jobs may be cut
151
How can a monopsony be countered
Small firms collude and act as a monopoly to ensure higher prices -> bi-lateral monopoly
152
What is a bi-lateral monopoly
1 buyer
1 seller
153
Where can a monopsony also occur
A sole employer in a labour market
Means the employer has bargaining power over their employees
154
Positive of a Labour market monopsony on the monopsonist
Employ for low wages -> lower AC labour -> higher retained profits -> may increase R&D (dynamic E)
155
Negative of a Labour market monopsony on the monopsonist
Risk of gov intervention
Bad publicity over “exploiting workers” could damage reputation
156
Positive of a Labour market monopsony on the supplier (employee)
Gain more stable employment if the firm is a major employer
157
Negatives of a Labour market monopsony on the supplier (employee)
Lower wages -> less incentive to work + lower income ->
Poor working conditions
158
Positive of a Labour market monopsony on the customers
Lower costs may be passed on to customers if PED > 1
LR benefit from increased R&D
159
negative of a Labour market monopsony on the customers
If lower costs are just kept as profit, customers may see no price fall (CS doesn’t change)
Poorer working quality -> lower quality G/S
160
What is an example of price controls as a regulatory method to reduce monopoly power
OFGEM sets an energy price cap
161
Analysis of price controls as regulatory methods to reduce monopoly power
A max price is set below the profit maximising price forcing the monopolist to charge a new lower price set as P (Q is set where P = MC)
This reduces consumer exploitation and increases CS
Can encourage allocative efficiency if the cap is set near MC
162
Evaluation of using price controls as regulatory methods to reduce monopoly power (3)
Regulator may lack information to set the correct price
Risk of regulatory capture (higher P set)
Can deter investment and cause S shortages
163
NEXT DO PROFIT CONTROLS
Microeconomics
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