3.4 - Market structures Content Flashcards

Question

# 3.4 - Market structures What are the assumptions of monopolistic competition | [6]

Answer 1

* Many buyers and many sellers * Differentiated products * Non-price competition * Low-to no barriers to entry and exit * Limited price control * Imperfect information

Answer 2

* Product quality * Product performance – processing speed, reliability * Branding * Functionality * Provenance of a product – where it has come from, environmental footprint * Quality of after-sales service for customers – e.g. product guarantees

Answer 3

Increase in costs. AC shifts up, MC shifts inwards. (This is also true for oligopoly, monopoly).

Answer 4

Supernormal profits are eroded away - new firms entry the market due to lack of barriers to entry. Increases overall market supply and decreases demand for each firm. Until the point where AR = AC. In the long run, a monopolistically competitive firm can make neither supernormal profits nor losses.

Answer 5

NO They have market power to charge above P=MC.

Answer 6

A monopolistically competitive firm is not productively efficient because it does not produce at the minimum of its average cost curve.

Answer 7

* Few sellers - High concentration ratio - rule of thumb - C5 ratio of >60% * High barriers to entry and exit (sunk costs, brand loyalty, EOS) * Imperfect information * Differentiated products * Price makers but also price rigidity * INTERDEPENDENCE OF FIRMS

Answer 8

* Banking - HSBC, LLoyds, Barclays, Santander * Supermarkets - Tesco, Asda, Sainsburys, Morrisons * Cafes - Starbucks, Costa, Pret * Cinemas - Odeon, Vue * Petrol retailers * House developers

Answer 9

* Because firms are **interdependent** * Increasing price will lead to loss of revenue, as consumers can go to competitiors, who keep their price the same * Decreasing price will also lead to loss of revenue, as competitors will also lower their prices * Therefore there is no incentive to change prices, prices stabalise at P1Q1 (price rigidity)

Answer 10

* When considering demand - use kinked demand * When considering costs - use imperfect competition with supernormal profits

Answer 11

They lose revenue If one firm increses its prices, competitors will not follow as they can attract the firms consumers by having a lower price.

Answer 12

They will lose revenue as competitors also lower prices. This starts a price war which is bad for the revenue of all firms Firms instead engage in non price competition E.g. Waitrose profits fell 24% in 2015 due to price war

Answer 13

* Loyalty programmes (Tesco Clubcard) * Complementary goods (Costco offer free samples) * High quality products (product differentiation) - waitrose, M&S * High quality customer service.

Answer 14

Loyalty programmes and upgrades High quality food/service and luxury seating

Answer 15

1. Attract new customers without starting a price war 1. To increase brand loyalty - more inelastic demand. 1. Interdependence To increase overall profits

Answer 16

1. Product differentiation - improve quality and product range 1. Large scale advertising and improved branding (makes product more attractive but might incur sunk costs) 1. Improved quality of customer service - longer opening hours, locations 1. Loyalty programmes and special offers 1. Firms might merge instead of competing (more eos and market share) (Shift MR AR to the right)

Answer 17

* Expensive - Opportunity costs of advertising, product development, improving service. * Can be copied by rivals - E.g. Sainsbury's introducced a new nectar card * Won't work if customers are already loyal to other brands * A merger might be blocked by the CMA (above 25% of market share)

Answer 18

Predatory pricing is used to eliminate existing competitors

Answer 19

By setting price below AVC to drive out competitors. (P2) Prices are increased once competitors are removed (due to losses from lost consumers) Profits increase for the original firm.

Answer 20

Drives the market price down. Other firms cannot sustain the losses (no build up of savings) and leave.

Answer 21

* Driving out competitors means there are less competitive. * The firm builds up monopoly power and demand becomes more inelastic * Then they can raise prices and achieve higher supernormal profits in the long run.

Answer 22

* Predatory pricing is illegal - if competition authorities find evidence, could be fined 10% of worldwide revenue (Aberdeen journals were fined £1.3 million in 2001 for trying to eliminate competitors, Uber Faced legal action in San Francisco) * Depends on elasticities - demand will have to be elastic for consumers to switch. * The predatory firm will have to withstand losses - might also reach below shut down point

Answer 23

**Discourage new entry**: Lower prices deter competitors from entering the market, protecting profits. **Maintain demand stability**: Ensures long-run inelastic demand for their products. **Sustain supernormal profits**: Helps preserve high profits over time by avoiding competition.

Answer 24

* They set the price at sales maximising price, below the AC of potential new entrants, who have not yet built up any Economies of Scale. * No new firms will enter as they will incur losses. * In the long run, demand is more inelastic for the incumbent firms. Higher prices in future.

Answer 25

Loss of profits - less money for investment. Customers will be unhappy if prices rise later Potential anti-trust investigation

Answer 26

* Both are very difficult to prove. (Asymmetric information) * Fines may not be high enough to deter firms from using these stratergies * Investigations take a long time (time lag). CMA does not have enough resources - phase 2 merger investigations take around 6 months * Regulatory capture

Answer 27

Incumbent firms set prices below normal profit-maximizing levels (but above competitive prices) to deter new entrants, protecting monopoly power and supernormal profits. * **Purpose**: Acts as a barrier to entry by making rival entry unprofitable. * **Strategy**: Sacrifice short-term profits to block rivals, charging below rivals' estimated AC. * **Outcome**: Potential entrants avoid risks of losses (unable to sustain until economies of scale). * **Market Impact**: Sustains market concentration (few dominant firms) with long-term P > AC profit

Answer 28

No - they charge above allocatively efficent price. There is a deadweight loss.

Answer 29

When a leading firm sets a price and other firms follow the price to avoid starting a price war.

Answer 30

* When there is no formal collusion, but it is implied. An 'understanding' between firms. * For example, in the supermarket industry, firms know that competing reduces revenues for all * E.g. Price leadership

Answer 31

When firms have a formal agreement to market share or price fix

Answer 32

10 construction firms have been found by the CMA to be rigging bids. They were fined a total of £60 million In 2023. They were involved in offering public services like asbestos removal.

Answer 33

* Discussing prices with competitors for a contract - the agree a minimum price. (Cover bidding) * Often firms agree to not bid for a certain contract, so that they can earn the highest possible price from the government * In 2023, CMA found ten contruction companies were colluding to rig bids for public sector works. They were fined a combined £60m.

Answer 34

* When two or more firms agree not to compete for each other's customers * Sometimes by location - 'carving up the market'

Answer 35

When firms agree to all charge higher prices, in order to avoid competiting and maximise industry profits

Answer 36

* TO MAXIMISE INDUSTRY PROFITS AND REVENUES by making demand more inelastic. * Firms that work together act like a monopoly and exploit consumers for higher profits. * Avoids a price war and competition * Easy to co-ordinate in an oligopoly as there are few firms * Oligopolies have high barriers to entry, which stops other firms from competing. * Collusion is hard to prove. * There is an incentive to collude - e.g. pass on higher costs. * Investment could be used to erect new barriers

Answer 37

X-inefficiency due to a lack of competitive pressure

Answer 38

* **Dynamic efficiency** - money for investment and lowering LRAC * **Economies of scale** - larger firm means lower long run average costs * **Depends on barriers to entry** - if there is a threat of new entry then firms will be incentivised to keep prices down for avoid profits being competed away. If they collide to fix prices high then potential entrants will have a larger incentive to enter * **Depends on how many firms** - if there are many firms in the industry it is likely that the agreement will break down and firms will charge low prices

Answer 39

* In 2007, Asda and Sainsbury's and other surpermarkets were fined £116m after they were found price fixing the price of milk, cheese and butter. * Passing on price rises to consumers * The scandal cost consumers £270m

Answer 40

* Was recently overtaken by Aldi * Shoppers are trying to save money amid plummeting living standards. * Suggests that oligopoly can be disrupted by new entrants

Answer 41

* McColls * The CMA said that there were competition concerns in only a small number of areas. * But, they allowed it to go through. £190m rescue deal as McColl's went into administration

Answer 42

* **Collusion & Meeting**: BA and Virgin met to agree on extra fuel surcharges in reaction to soaring oil prices. * **Penalty & Impact**: Between 2004-2006, surcharges jumped from £5 to £60 per ticket. In 2007, British Airways was fined £270m by the Office for Fair Trading—this fine was modest compared to BA's annual profit of £611m. * **Leniency Granted**: Virgin received leniency for reporting the collusion, highlighting the challenges in enforcement.

Answer 43

When one firm does not honour the collusion agreement

Answer 44

Other firms will retaliate by also lowering prices and starting a price war. After this, firms agree to start a cartel and the game starts again

Answer 45

* Large fines from CMA - 10% of Worldwide revenue * Collusion won't be effective if there are substitutes for the good * If new firms can enter the market, then the cartel firms will lose revenue. Barriers to entry must be kept high. * Raising prices could reduce revenue if demand is price elastic. * Demand needs to be inelastic to encourage a cartel

Answer 46

* Fines of up to 10% of worldwide revenue * Shareholders will sack managers if caught. * Prison sentences for directors. * Bad for reputation and can lose them business. * Fines are reduced for firms that co-operate and admit to collusion. CMA granted 'leniancy' for Virgin airlines for whistleblowing

Answer 47

* Fines - very profitable firms will be able to afford fines or pass them on to consumers. The benefit of collusion probably outweighs the fine. * Resources - the CMA has very limited time and resources to investigate. * Asymmetric information - firms can claim that they charge the same price due to similar costs. The CMA won't know * Time lag - investigations take a long time - 6 months for merger investigations * Regulatory capture/bribery.

Answer 48

* Firms become complacent - X-inefficiency * Competitors outside the cartel may innovate and gain market share. Penetrate the market * Consumers move away from firms in the cartel to cheaper substitutes.

Answer 49

Average costs fall for all firms (spillover effect)

Answer 50

* **Cluster effect** - If firms locate in a similar area, this makes it more efficient for suppliers to meet a larger base of purchasers. * **Skilled labour** - If industry develops in a particular region it will encourage skilled labour to seek work in the region (Bankers in the City, Silicon Valley in San Francisco) * **Transport links** - Will be developed to lower costs of operating. E.g. government builds railways to support indsutrial areas. * **Supportive legislation** - If it becomes important then legislation will treat it favourably

Answer 51

1. Anti competitive practicies by incumbents - predatory and limit pricing. 1. Economies of scale 1. brand loyalty 1. Legally imposed barriers - patents 1. Sunk costs - E.g. Advertising. 1. High start up costs

Answer 52

The exploration of how the reactions of one player changes the strategy of the others.

Answer 53

* Weak regulation in the market * Good info. about competitors

Answer 54

When one option is always the best, no matter the other firms' behaviour

Answer 55

Neither player can improve their position by changing their strategy while the other player's strategy remains fixed.

Answer 56

The concept of interdependence between firms in an oligopoly

Answer 57

A collective agreement to reduce competition

Answer 58

* Reduces CS, higher price * Maximisation of profits in the LR for colluding firms

Answer 59

1. Lower Quantity prod. + higher price = loss of AE. 1. Reinforces monopoly power ↑ barriers to entry. 1. Absence of competition = loss of efficiency (potential X-inefficiency).

Answer 60

* Saves on duplicate R+D. * Collaboration on tech. ↑ standards. * ↑ size, ↑ EoS * Excess π may increase efficiency in LR - dynamic.

Answer 61

OPEC - controls 70% of worlds oil supply + fixes output.

Answer 62

When different groups of consumers are charged different prices for the same g/s. E.g. higher P for peak gym membership. Adult + child cinema tickets.

Answer 63

To maximise their overall profits.

Answer 64

Drug companies charging people on higher incomes more may allow losses to be made to those on lower incomes to access drugs at a cheaper price. (Yielding positive externalities in the LR - more peope have access to PCE).

Answer 65

1. Bid Rigging 1. Price fixing 1. Market sharing - Common with construction companies.

Answer 66

Firms will increase market share but face reduced profits (as they sales max). Means firms compete on price, lower prices = lower profits, could mean limit pricing.

Answer 67

When firms in an oligopoly compete. (Rather than making agreements to reduce competition).

Answer 68

To maximise joint profits (However, there is always an incentive to cheat on collusive agreement, due to game theory)

Answer 69

Less uncertainty over levels of retained profits, increases share prices, increased capital base (dynamic efficiency)

Answer 70

Research joint ventures between firms. Could lead to better quality products in the market. (Not all forms of collusion are bad).

Answer 71

EU introduced R&D Block Exemption Regulation. (For research joint ventures). (As collusion in research can bring product improvements).

Answer 72

Firms in an oligopoly compete against each other, rather than making agreements to reduce competition.

Answer 73

Drive prices down. When firms have weak brands and consumers are price conscious

Answer 74

* Some industries have very high fixed costs, due to infrastructure * Once the fixed cost is paid, there are few other expenses. * E,g. the cost of having an extra passanger is very small. * This means that their marginal costs are very low. * Duplication and competition in natural monopoly is wasteful E.g. Thames water, National rail, British Telecoms.

Answer 75

* Once the fixed cost is paid, AC is constantly falling * Very low marginal costs * The more passengers on the train, the lower the costs of production per passenger * The larged fixed cost is spread between more people/units of output * One large firm is best

Answer 76

* Because, if you have multiple firms all operating at P1Q1, then you have unnecessary and wasteful duplication. * It is better to have one large firm at Q2, - lower costs and therefore prices. * If we had competition and had smaller firms producing at Q1, costs and prices would be higher. * We need one firm which is suffienctly large enough to exploit the economies of scale available E.g. several train tracks would not bring any benefits

Answer 77

* Price capping * Profit capping/controls (rate of return regulation) * Quality/performance targets

Answer 78

* Sets price at allocatively efficient point (P2) instead of profit max (P1) - increse consumer surplus * Rail - Price increases restricted to RPI-X . RPI is the rate of inflation and X is the % of expected efficiency savings

Answer 79

* X-inefficiency cannot be passed on through price rises - any x inefficiency will reduce profits, if it cannot be passed on to the consumer * Incentive to be more efficient - cutting costs by more than X% target means more profit * Lower consumer prices

Answer 80

* Products are different - price is not the only factor which consumers take into consideration * In the real world, prices do change. * Firms may not seek to maximise profits, but prefer to increase market share and so be willing to cut prices, even with inelastic demand. * Some firms may have very strong brand loyalty and be able to increase the price without demand being very price elastic. * The model doesn’t suggest how prices were arrived at in the first place

Answer 81

Interdependence means: when a single firm raises their price, there is a big change in Qd of original firm. (As other firms won't react). When a single firm drops their price, everyone drops price ∴ there will be a small change in Qd of original firm.

Answer 82

* Price cap could be set too low due to regulatory capture and prices then rise too quickly. * Rail fares are up 35% between 2008 and 2016 * Asymmetric informatoin - Regulator does not know where P=MC is or what efficiency savings could be made * Could be too strict and prevent the firm from making enough profit for investment.

Answer 83

* A Profit cap - * Involves a regulator setting a maximum % of profit that the monopolist can earn - anything above is taxed at 100%. * It is calculated as a % of total asset spending (machines, buildings, equipment etc) in the firm * Usually introduced in industries were supernormal profits are considered excessive. May be necessary where little competition exists or where collusion ins possible.

Answer 84

Firms will have to switch from profit maximisation to sales or revenue maximsation to reduce profit - increase consumer surplus and allocative efficiency to meet the cap

Answer 85

* No incentive to cut costs as profits won't rise (X-inefficiency) - higher costs and prices. * Less money to reinvest - Reduces dynamic efficiency. Encourages * Regulatory capture - Cap might be set too high, no effect, customers still exploited. * Asymmetric information - Firms may overstate the value of the investment in the firm to increase permitted profits.

Answer 86

* The regulatory body will set performance targets relating to customer service, quality etc. * Ofcom gives Royal Mail a target of delivering 93% of first class post the next day. * Were fined £1.5 million for missing it in 2018 * The office for road and rail gives Network Rail a target for 90% of trains in the UK to be on time * £2m fine for delayed upgrades to London Bridge Station

Answer 87

* Fines might not be high enough (regulatory capture) * Firms could lie about performance (asymmetric information)

Answer 88

* Most natural monopolies (rail, water, energy, post) are privately owned in the UK * The government could nationalise them (buy them from their private owners and run them not for profit)

Answer 89

* **Cost structure**: Extremely high fixed costs (e.g., infrastructure) but low marginal costs (adding users is cheap). * **Economies of scale**: Average total cost falls continuously as output grows (e.g., water/electricity networks). * **Market dominance**: A single firm supplies the entire market most efficiently (no competition is viable). Example: A city’s water supply—building pipes is costly, but serving extra homes is cheap. Only one provider minimizes costs.

Answer 90

* Exploit Economies of Scale - Lower prices pased on * Run at allocatively efficient point - lower prices and increased consumer surplus * More investment - not run for profit so extra revenue can be reinvested into the firm. - so better quality service * More tax revenue - government will have an income steam.

Answer 91

* X- inefficiency - no competition or profit motives. Encourages profligacy and wasteful spending. Costs rise * Principal agent problem * Opportunity cost of using taxpayer' money - expensive to buy firms * Government run firms in the UK have made heavy losses and require taxpayer subsidies

Answer 92

* When the monopolist decides to charge different groups of consumers different prices, for the same good or service. * Demand curves of different elasticities exist with each group of consumers * Market can be split and different prices can be charged. * A market with an elastic demand curve will have a lower price. * A market with an inelastic demand curve will have a higher price

Answer 93

Second-degree price discrimination occurs when firms charge different prices based on quantity purchased or consumer self-selection into product/service tiers (e.g., basic vs. premium options). Customers indirectly reveal their willingness to pay through their choices

Answer 94

* Any student discount - unidays, student beans * National rail services * Segregate the market using rail cards * Impossible for consumers to sell train tickets off to others because it is attached to ID.

Answer 95

* Consumers could benefit from a net welfare gain as a result of cross subsidisation, if they recieve a lower price. * Some consumers, who were previously excluded by high prices, might now be able to benefit from the good or service. For example, drug companies might charge consumers with higher incomes more for the same drugs, so that the less well-off can also access the drugs at a lower price. This can yield positive externalities.

Answer 96

* Usually, price discrimination results in a loss of consumer surplus. Since P>MC, there is a loss of allocative efficiency. * Consumers in the inelastic market are charged more than before. - decline in consumer surplus. Unfair. Loss of allocative efficiency. * Some groups might not be inelastic because they are wealthier but because it is a necessity - e.g. peak time train travel. Unfair

Answer 97

* Producers make better use of spare capacity. * The higher supernormal profits might be used for dynamic efficiency. * Manages demand - encourage people to travel at unpopular times to spread out demand.

Answer 98

* If it is used as a predatory pricing method, the firm could face investigation by the Competition and Markets Authority * Costs of enforcing (admin costs) might exceed the benefit. Ad * Arbitrage (selling between groups). (buyer from lower priced group selling at a higher price than they bought for)

Answer 99

1. Firm is a price maker - 1. Seperate markets - Firm can identify and seperate markets. 1. Different elasticities of demand 1. Low admin costs for the price discrimination 1. Prevention of arbitrage 1. Same costs of production for both markets. **For evaluation, question if these are realistic ambitions**

Answer 100

* However, price discrimination allows the firm to set different prices for segment A (inelastic demand) and segment B (elastic demand) * Because demand is price inelastic, segment (A) will have a higher profit maximising price (P1) * In segment (B) demand is price elastic, so the profit maximising price is lower.

Answer 101

* Increasing total revenue by turning consumer surplus into producer surplus * Increase total profit * Generate cash flow * Increase market share and build customer loyalty * Make use of spare production capacity * Reduce the amount of waste

Answer 102

1. Price discrimination is the charging of different prices to different groups of consumers on the basis of variations in people's ability to pay 2. One way that some consumers may benfit comes from third degree discrimination pricing based on age or income 3. E.g. a bus company may charge students a lower price. Students typically have lower income so their demand is more price elastic 4. This means that student passengers get a discounted ticket price which has the effect of increasing their real purchasing power 5. As a result, they can afford to travel more regularly within their budget constraint. It might make attending college more affordable 6. The consequence can be an increase in consumer surplus which is one measure of economic welfare from market activity

Answer 103

1. **Prices are higher** than they would be under competitive conditions - Leads to a **loss of allocative efficiency** as monopoly has price greater than MC - **Higher prices --> regressive impact** 1. **Absence of genuine competition leads to production inefficiencies such as X inefficiencies** 1. **Higher prices can limit output to fewer economies of scale** 1. **Protected markets to less drive to innovate** 1. **Monopolies may get too big – causing more diseconomies of scale** - rising long run AC ## Footnote Be able to compare different market structures in terms of efficiences

Answer 104

1. Profits can be used to fund investment & research which then improves dynamic efficiency 1. Natural monopoly allows for applications of large economies of scale which leads to lower prices. Therefore having one firm e.g. Network Rail, can lead to technical economies of scale and more R&D 1. Domestic monopoly businesses often face tough global competition (a key aspect of globalisation) 1. Monopolistic firms can be regulated with an industry regulator acting as a "proxy consumer" 1. Price discrimination may help some consumers if charged a lower price than the usual monopoly price

Answer 105

Google controls 90% of the UK search advertising market, worth over £7bn and Facebook around half of the display advertising market. This monopoly power raises concerns about their ability to push up prices for consumers and act as a barrier to entry for new competitors

Answer 106

* Exploitation of the consumer – most consumers still pay more than the marginal cost of supply * Extraction of consumer surplus which is turned into higher producer surplus/supernormal profits * Possible use of discrimination as a limit pricing tactic and therefore creates a barrier to entry to rival firms * Ultimately, if successful, price discrimination reinforces the monopoly power of existing firms (not always a bad thing)

Answer 107

1. Potential for cross subsidy of activities that bring social benefits, for example, pharmaceutical companies charging lower prices for drugs in lower & middle-income countries 1. Making better use of spare capacity – this can have environmental benefits such as less waste 1. It brings new consumers into market – who would otherwise be excluded by a normal higher price 1. Use of monopoly profit for research – this is a stimulus to innovation/dynamic efficiency gains

Answer 108

1. The impact depends on the extent to which price discrimination is used for socially beneficial purposes or purely to increase profit 1. The impact depends on how businesses subsequently choose to use their higher revenues and profits 1. It is difficult in practice to agree on a 'fair price' - it is a matter of perspective and may involve value judgements

Answer 109

1. Natural monopoly – it might be more productively efficient to have a monopoly supplier 1. Competition in the supply chain – possible to introduce competition at different stages of the supply chain via competitive tendering and the use of franchises 1. "In theory.... But in practice": Some economists argue that it is best to judge a monopoly on a case by case basis using an evidence-based approach to how a monopoly actually behaves in the market 1. Contestability – the threat of entry into a market can be a powerful influence on firms with monopoly power 1. Definition of the market – a business might have monopoly power in the domestic market but face significant international competition

Answer 110

Legal monopoly has over 25% of market share E.g. Apple, microsoft, spotify, amazon

Answer 111

A firm that has 100% of market share E.g. TFL

Answer 112

* Profit maximisers - MR=MR. * They make supernormal profits in the long and short run * Price makers and market power P>MC * High barriers to entry (Brand loyalty, some economies of scale, regulation, sunk costs, bilateral monopoly). * Productive and allocative inefficent

Answer 113

* Exploit more economies of scale * Supernormal profits can be reinvested in dynamic efficiency which lowers costs further or improves product quality, increasing demand and future profits. * Market power and ability to charge P > MC; allocative inefficency

Answer 114

* Likely to suffer from X-inefficiency due to a lack of competitive pressure/organisational slack-higher costs and lower profits. * Not productively efficient as output is limited to where MC=MR. * CMA investigations (fined up to 10% of WW revenue, breaking the firm up, negative press) - can only be fined for hamful or illegal practices

Answer 115

* **Dynamic Efficiency**: Monopolies may reinvest profits in R&D → innovation (e.g., patents, tech). ✅ Higher quality goods. ❌ Not guaranteed. * **Economies of Scale**: Lower LRAC from large-scale production → prices ↓ if savings passed on. ✅ Cheaper vs. competition ❌ Only if regulated. * **Consumer Surplus**: Can exist if unique goods (e.g., life-saving drugs) outweigh higher prices. ❌ Usually ↓ vs. competitive markets.

Answer 116

* Higher prices than in perfect competition (allocative inefficiency) * Costs of extra X-inefficiency may be passed on through higher prices

Answer 117

It assumes no diseconomies of scale, but in reality: * Bureaucracy slows decisions (e.g., British Rail’s inefficiency). * Coordination fails in large firms. * Workers become disengaged.

Answer 118

* Because, if you have multiple firms all operating at C1Q1, then you have unnecessary and wasteful duplication. * Low output for each firms means higher costs, higher prices, not profitable.

Answer 119

* It means that they can exploit all available economies of scale. * Lower prices and costs * Higher profitability

Answer 120

* Because, they have the ability to exploit the consumer. * No other alternatives means inelastic demand - they have the market power to increase prices and force consumers to charge a higher price.

Answer 121

* When a government has a monopoly, and they ban competition. * For example, British airway. * After state monopolies are privatised, they are opened up to competition.

Answer 122

In 2006, they allowed other companies process mail. In 2013, they opened it up to privatisation.

Answer 123

A single buyer in a market The govt. for teachers

Answer 124

* **Lack of resources** - Groceries code adjudicator has 4 employees. * **Time lag**- Recognition lag, decision lag, implimentation lag, effect lag. Takes a long time to investigate and accuse. * **Asymmetric information** - GCA does not have full info on how suppliers are being treated. Many suppliers do not complain out of fear of losing partnerships. * **Effect** - Firms can afford fines - The co op was fined 1.3million, but made 50million in profit * **Regulatory capture** - GCA may become excessively sympathetic towards firms they are supposed to be regulating. May issue only warnings instead of fines. * Minimum prices create excess supply/ subsidy inefficiency

Answer 125

Supermarkets buying produce from farmers, negotiate lower prices (as they're the sole buyer).

Answer 126

Their suppliers have nowhere else to sell to. (There is only one buyer)

Answer 127

Price setting power (as they're the only firm buying)

Answer 128

It should lower LRAC (purchasing EoS).

Answer 129

1. A monopsony has buying or bargaining power. For example, retailers have power when purchasing supplies from farmers 2. This means that a monopsony (in theory) can use their purchasing power to negotiate lower prices for raw materials & other inputs 3. As a result, their variable costs of production will be lower and this will lead to a decrease in marginal and average total costs 4. If the monopsony is a profit-maximising firm, then a fall in AR and MC (ceteris paribus) will lead to lower equilibrium price 5. In this way, final consumers may benefit from lower prices which will increase their consumer surplus and economic welfare 6. This assumes that the price paid by the consumer is the main determinant of their welfare. This may not tbe the case in reality

Answer 130

* Monopsony allows firms to achieve purchasing economies of scale leading to lower average costs * Lower purchase costs bring about higher profits and increased returns to shareholders * The extra profit might be used to find capital investment or research and development

Answer 131

* May experience some reputational damage for the way they treat their suppliers - supplier may be driven out of business * The continual price pressure on suppliers often results in conflict, which can be difficult to manage * In the long-run, they may drive their suppliers out of business, causing supply chain issues

Answer 132

The higher profits often result in higher wages for the monopsonist's employees Lower cost of raw materials might mean more room to pay staff

Answer 133

Employees may find it difficult to reconcile their ethics/values with the way suppliers are treated

Answer 134

* Consumers gain from lower prices – for example, supermarkets can negotiate better prices from food and drink manufacturers and other household products that are then passed on to consumers * Improved value for money – for example, the NHS can use its bargaining power to cut the prices of drugs used in treatments. Cost savings allow for more treatments within the NHS budget * Allocative efficiency and increased consumer surplus

Answer 135

The quality of the product may decrease as suppliers attempt to cut their own costs in response to the price pressure from the monopsonist

Answer 136

* Supplying to a large well-known monopoly may enhance the supplier's reputation and open up new opportunities * Supplying to a large, well-known monopoly may provide an opportunity to increase sales volume * When the supplier has market power as a monopolist it can counteract the monopsonist. * Might make efficiency savings or create a co-operative

Answer 137

* Businesses may use their buying power to squeeze lower prices out of suppliers. This reduces the profits of firms in the supply chain and causes lower incomes * Consumers might be faced with less choice or higher prices in long run if some suppliers leave the market (may be forced to due to lower profits) * The monopsonist may exploit its market power by paying less or later.

Answer 138

* No barriers to entry or exit, no sunk costs, and all firms have access to the same technology * If a market is contestable, the threat of a new firm entering means that incumbent firms lower their prices. * New firms don't have to enter , just the threat of entry is enough. * Contestability measures how easy it is to enter/exit and how existing firms change their behaviour as a result.

Answer 139

* No barriers to entry or exit: barriers to entry are low or non-existent and there are no sunk costs. This allows firms to easily join or leave the market * No competitive disadvantages on entry: new firms are able to setup and immediately compete with existing firms and have access to the same technology * Perfect information: There is no proprietary knowledge that would limit competition (e.g. patents) * Hit-and-run competition: Short-run supernormal profit acts as a profit signalling mechanism and new firms easily enter the market, extract profit, then leave

Answer 140

* Web based platforms makes industries more contestable * No physical premises. Costs a lot less to set up a business. * Low marketing costs * Challenger firms can enter - Monzo, N26, Starling * Taxi services - Bolt, Uber, Ola. * Selling products online - Amazon, eBay. * Takeaways - Deliveroo, ubereats. * Food retailing – Lild and Aldi * Hotel/room sharing market – Airbnb * Retail energy market – Octopus * Easy to access consumers through internet and smart phone apps - less need for marketing.

Answer 141

* A pool of new businesses who are willing, able and ready to enter the market * No significant entry or exit costs – lowers the risk of entry * Equal access to available industry technologies (includes the relative absence of patent protection) * High rates of customer switching – we assume relatively low brand loyalty among buyers

Answer 142

The threat of entry is sufficient to keep prices down to a competitive equilibrium + profits low (to reduce the incentive to enter). (Usually firm moves from profit max and limit pricing occurs).

Answer 143

At AC=AR * If a market is highly contestable, new firms will be tempted to enter the market and compete for the supernormal profit. * This is 'hit and run' entry - entering to compete for supernormal profits and later leaving the market. * The threat of competition lowers the price and increases output * This is a key evaluation to monopolies.

Answer 144

* Meausres how easy it is for new firms to enter or exit * Is there a threat of competition? Can new firms enter the market?

Answer 145

Firms will operate profit maximising price

Answer 146

* They lower their prices to sales maximising price. * They are only earning normal profits. * So firms have no incentive to enter

Answer 147

1. Threat of entry affects the day-to-day behaviour (conduct) of firms whether or not a firm actually enters 1. Firms making supernormal profits are vulnerable to "hit and run" competition 1. This then means that they are likely to behave more competitively pricing lower and not necessarily earning higher supernormal profits, to discourage new firms from entering 1. A highly contestable market may resemble perfect competition, regardless of the number of firms, since incumbents behave as if there were intense competition 1. Competition polices such as liberalisation of a market that help to open an industry to new suppliers or persuade consumers to switch in greater numbers help to increase contestability

Answer 148

1. A contestable market exists when there is freedom of entry and exit into an industry and there are limited or no sunk costs of production 2. In the absense of actual competition or threat of a rival entering a market, an uregulated firm could maximise profit where MC=MR 3. But it a market becomes more contestable - e.g. through a policy of liveralization then competitve pressures will keep prices down 4. Instead of profit maximising, existing firms would have an incentive to cut prices perhaps to a level where normal profit is made 5. This is at an ouput where price (AR)=MC. Firms are making enough profit to stay in the market without attracting rivals 6. Actual and threatened competition intensifies incentives for businesses to control their unit costs by avoiding any X-inefficiencies

Answer 149

1. **Hostile takeovers and acquisitions** – taking a stake in a rival firm or buying it up completely 1. **Product differentiation** – Through brand proliferation (developing new products and spending on marketing and advertising to reinforce brand loyalty) - decrease PED and increase loyalty 1. **Capacity expansions** – designed to achieve lower unit costs from exploiting internal economies of scale (purchasing, technical) 1. **Predatory pricing** – this happens when a dominant company sustains losses in the short run in the knowledge it can recoup them and raise prices if competition is forced to exit – Illegal

Answer 150

A market with no barriers to entry ## Footnote (where a new firm can easily enter and compete against incumbent firms completely equally)

Answer 151

Allocatively efficient

3.4 - Market structures Content Flashcards

(177 cards)