MICRO Competition

Question 1

Cartel

• definition
• example

Answer 1

• A formal agreement between firms in which they agree on prices, output, market share etc.
• OPEC, 14 petrol exporting nations, aim to avoid oil price fluctuations

Question 2

Collusions

Answer 2

When existing firms engage in a price-fixing cartel (illegal).

Question 3

Contestable Markets

• Definiton
• Assumptions

Answer 3

• A market with low barriers to entry and exit e.g.low sunk costs, meaning firms are exposed to high levels of competition.
• Hit and run entry (chasing SNP), low barriers, low sunk costs.

Question 4

How to increase contestability in a market?

Answer 4

• Privatisation of public assets
• Harsher competition policies i.e. anit-monopoly and anit-cartel
• Deregulation, removing red tape
• Opening up to oversees trade e.g.EU single market
• Entrepreneurial zeal i.e.grants and tax breaks.
• Technological change = lower entry costs

Question 5

Contestable Markets

• Benefits

Answer 5

• Productively efficient (incentive to cut costs)
• X-efficient (incentive to cut costs)
• Allocative efficiency (incentive to produce goods are the prices consumers are whiling and able to pay)
• Dynamically efficient (incentive to improve quality, reliability and choice) BUT maybe not SNP

Question 6

Competition Market Authority (CMA) - Who - Aim - Role - Powers

Answer 6

• UK’s primary competition Authority - Aim to promote competition so as to protect consumer interest. - Prevent anti-competitive behaviour e.g.preditory pricing, verticle constraints and collusion/restrictive practices, investigating mergers. - Forces sale of assets, company fine (up to 10% sales revenue), individual fine, individual prosecution i.e.imprisonment, order practice to stop and disallow merger request.

Question 7

Barriers to Entry

• Definition
• Examples

Answer 7

Factors that prevent or make it difficult for new firms to enter a market

• Economies of scale
• Capital investment (specialist machinery)
• Patents
• Licences and permits
• Brand loyalty
• Marketing costs
• Specialist knowledge

Question 8

Barriers to Exit

• Definition
• Examples

Answer 8

Factors that prevent, or make it hard for, existing firms to exit a market.

• Poor factor mobility
• High sunk costs