Concentrated Markets Flashcards
What are the pros and cons of monopolies?
PROS:
•economics of scale
•dynamic efficiency which can reduce price in long run
CONS:
•higher prices to consumers
•lower quality products
What is a natural monopoly?
=because of resources they are monopolies
•high capital costs to set up
•MES high as econ of scale do not diminish
What is price discrimination and what are the conditions needed?
=the action of selling the same produce at diff prices to diff buyers, in order to max sales and profits
- market power
- no resale of goods
- segregate market between consumers+diff elasticities
3rd degree= consumer group (age, time of purchase)
2nd= quantity (bulk buy, 2 for 1)
1st= perfect price discrimination (haggling)
What’s the 1st degree graph?
- axis= price and quantity
- ATC
- MC
- MR=AR no consumer surplus as every consumer is paying their own price
- lots of P1, Q1 and P2, Q2 etc
What are the pros and cons of price discrimination?
PROS: •increases economic profit •dynamic efficiency •can provide cheaper goods/services •provide a good/service where none was available
CONS:
•Loss of consumer welfare
•inequitable (unfair)
What is the monopoly graph?
What is the monopoly market?
- axis= price and quantity
- AR (D) to the right of MR
- MC tick
- barriers to entry= patents, nationalisation, dominance of resources
- greater profit margins to expand advertising
- original products which involve expensive capital equipment (natural)
What is the definition of an oligopoly?
An industry shared by a small number of firms, limiting competition.
In the UK it is a 5 firm concentration ratio of more than 50%.
What is the kinked demand curve?
What is the theory?
- axis of price and quantity
- elastic and then inelastic A
- parallel MR
- MC at 2 points of discontinuity
- if a firm charges higher (elastic) consumers will go to rivals; if firm charges lower (inelastic) rivals will follow
- “sticky price” at point A
- discontinuity of MR between B and C= can have MC at any point+won’t effect revenue as MR=MC prof max.
What is collusion?
Where firms act like a monopoly and want to remove uncertainty by agreeing on price or output.
What is formal collusion?
What is informal collusion?
Formal= where an agreement exists between key firms in industry about price and output (illegal)
-VW refused to supply dealerships that didn’t sell to agreed price
Informal= one firms acts as a price leader who signals change to other firms in cartel
Usually dominant firm, barometric is when smaller firm is leader
Tacit is following the industry norm
What is a cartel?
A group of companies colluding to isolate from other suppliers creating high entry barriers with the aim of joint profit max.
Firm can only make individual profits if it defects
What is transfer pricing?
What is cost-plus pricing?
Transfer= large multi national companies can alter costs+prices to gain from diff tax levels in diff countries
Cost-plus= firm calculates AC of producing a given level of output
What is game theory?
Nash equilibrium?
=analysis of how game players react to changing circumstances and plan their response Players= firms Game= market Strategies= change in price/output Payoff= profits
Nash E.= optimal outcome of a game is one where no player has an incentive to deviate from his or her chosen strategy
What is zero sum game?
Where a gain by one player is matched by a loss by another firm.
What is the prisoners dilemma?
=to obey cartel agreement (reduce output to monopoly level) or cheat and over produce.
(to confess and get immunity or not)
