5 - Competitions and Monopolies Flashcards
(223 cards)
1
Q
What are the main objectives of firms?
A
Profit maximisation, sales revenue maximisation, business growth/ market power, business survival, not for profit enterprises.
2
Q
When does profit maximisation occur?
A
When MC=MR. Marginal cost = marginal revenue.
3
Q
What is marginal revenue?
A
The change in total revenue from selling an extra unit.
4
Q
What is marginal cost?
A
The change in total cost from producing an extra unit.
5
Q
What happens if MR>MC?
A
Selling an extra unit adds to profit.
6
Q
What happens in MR<MC?
A
Selling an extra unit lowers profit.
7
Q
When are revenues maximised?
A
At an output level where marginal revenue = 0.
8
Q
When is price elasticity of demand coefficient?
A
When revenue is maximised - unity.
9
Q
What does sales growth maximisation focus on?
A
Generating the highest possible level of sales within a given period, potentially as part of a wider objective.
10
Q
What happens as sales increase?
A
A business could take advantage of economies of scale, leading to lower average costs.
11
Q
What can strong sales figures do for a business?
A
Attract investor interest, making it easier for a business to secure finance.
12
Q
When does sales maximisation occur?
A
When Price per unit = Average cost.
13
Q
What environmental and social obligations do businesses have?
A
Corporate social responsibility, reducing carbon emissions, waste reduction, engaging with local communities.
14
Q
What is corporate social responsibility?
A
The importance of pursuing environmental and social objectives.
15
Q
What are many companies doing to reduce carbon emissions?
A
Setting targets to reduce carbon emissions.
16
Q
What can businesses do to reduce waste?
A
Minimise waste generation and promote recycling to improve sustainability.
17
Q
How can businesses engage with local communities?
A
Through initiatives such as funding education programmes, building infrastructure, supporting healthcare.
18
Q
How can businesses contribute to Philanthropy?
A
Businesses often contribute to charities and social causes.
19
Q
Who are the stakeholders of a business?
A
Shareholders, managers, employees, suppliers, customers, creditors, government, community.
20
Q
What is the difference between shareholders and stakeholders?
A
Shareholders own shares of a company, representing ownership. Stakeholders are partners with an interest in the company’s operations.
21
Q
How do shareholders respond to profit maximisation?
A
Firm makes the highest profit, increasing returns for shareholders.
22
Q
How do consumers respond to profit maximisation?
A
Higher prices and lower output lead to a lower level of consumer surplus.
23
Q
How does the community respond to profit maximisation?
A
Profits provide funds for investment, more tax revenue for government.
24
Q
How do shareholders respond to sales revenue?
A
Profits are lower than with profit maximisation - a gain in consumer surplus.
25
How do consumers respond to sales revenue?
Lower prices than profit maximisation - gain in consumer surplus.
26
How do the community respond to sales revenue?
Nearer allocative and productive efficiency at a lower price, higher output - community benefits.
27
How do shareholders respond to sales maximisation?
Normal profit earned - shareholders usually receive lower dividends.
28
How do consumers respond to sales maximisation?
Prices are lower than profit maximisation, customers benefit.
29
How do the community respond to sales maximisation?
AR=AC. Firm maximises output, which could benefit employment at the firm.
30
What is marginal profit, as a concept?
The increase in profit when one more unit is sold.
31
What is the equation for marginal profit?
The difference between MR and MC.
32
What happens if MR>MC, to marginal profit?
The firm could increase profit by raising output.
33
What happens to marginal profit is MR
The marginal profit is negative, the firm should decrease output.
34
When are profits maximised?
When marginal profit=0.
35
What is satisficing?
Involves owners of a business setting minimum acceptance levels of achievement of revenue.
36
What does satisficing mean?
Means a business is making enough profit to keep shareholders happy, or is sufficient for investors to maintain confidence in management.
37
What is the difference between satisficing and maximising?
Maximisers behave in a rational way, satisficers examine a limited set of alternatives, choose the best option. Satisficers could be managers who are more concerned with increasing sales revenue.
38
What is perfect competition?
The lowest form of market concentration.
39
What are the characteristics of perfect competition?
All firms have equal access to FOP, large numbers of buyers and sellers, free entry into and out of the market, perfectly elastic demand curve, profit and utility maximisation.
40
What exists in perfect competition?
A market structure, whose assumptions are strong, and unlikely to exist in most real world markets.
41
Why are economists interested in pure competition?
Because of the growth of e-commerce.
42
What type of profit do a competitive firm earn in the short run?
Supernormal profit.
43
What do most firms making abnormal profits do in the short run?
Encourages the entry of new firms into the industry, driven into the market by the profit motive.
44
How can firms do this easily?
There are no barriers to entry in the long run.
45
What do new firms in the long run cause?
An outward shift in market supply, forces down ruling market price.
46
What happens to prevailing market price?
Falls for individual firms, profit starts to fall.
47
When does this process continue until?
Price=LRAC, and firms in the industry earn normal profit, and there's no further incentive for movement of firms.
48
Where is the long run equilibrium established?
Where price=AC, output where MR=MC.
49
What are the impacts of a perfectly competitive firm making normal profit in the long run?
Entry of new firms has reduced profits - surviving firms make normal profit only. No incentive for firms to leave or enter the market.
50
What does P3 show on a short term loss diagram?
The less than average variable cost, firm is making a heavy loss.
51
What will the firm lose if it shuts down, when it is making a loss in the short term?
It will lose a distance of AB per unit, it will lose AC per unit if it continues to supply.
52
What are the assumptions of the model?
Dominance in real world markets of differentiated products, highly complex products, information gaps facing consumers, impossible to avoid search costs, patents are ignored by the economic model, rare for entry and exit.
53
How do perfectly competitive firms achieve allocative efficiency?
In the short and long run, P=MC, allocative efficiency is achieved. No one can be made better off without making another agent worse off.
54
How do perfectly competitive firms achieve productive efficiency?
Occurs when equilibrium profit maximising output is supplied at minimum average cost.
55
How is productive efficiency achieved in the long run?
If a firm is producing at the lowest point of the average cost curve, the firm is X Efficient.
56
What do we assume in a competitive market?
It produces homogenous products.
57
How do perfectly competitive firms achieve dynamic efficiency?
There is little scope for innovation designed to make products differentiated from each other.
58
What is monopolistic competition?
A market structure where a large number of firms place differentiated products, where there are low barriers to entry and exit.
59
What are the examples of monopolistic competition?
Coffee shops, hairdressers, pizza delivery businesses, sandwich bars, corner grocery stores.
60
What are the characteristics of monopolistic competition?
Many producers, many consumers, non-price competition, some pricing power, low barriers to entry, no supernormal profit in the long run.
61
What does product differentiation allow firms to do?
To charge a different price to reflect unique qualities of their product.
62
What are monopolistically competitive firms able to do?
Price makers - have a downward sloping demand curve, a lower price brings greater demand.
63
What is PED, and why is it like this?
It's relatively elastic, and has a large number of competitors, so market power is relatively weak.
64
What happens to PED if a firm uses non price competition?
It becomes less elastic, as brand loyalty increases, market power increases.
65
What are the characteristics of a monopolistically competitive diagram?
Other firms within the market produce partial not perfect substitutes. Demand curve is more elastic, profit maximising level is located below point A.
66
What happens to profit maximisation under a monopolistically competitive structure?
The profit maximising position shrinks with less customers as more firms enter the market, there is a deadweight loss to society.
67
What is the production of the firm in an MC diagram?
It isn't producing at the minimum point on the AC curve.
68
Is a monopolistically competitive market structure allocatively or productively efficient in the long run?
Neither.
69
Do monopolistically competitive firms have supernormal profit?
No, so they are not dynamically efficient.
70
Which factors affect pricing power of an individual firm in monopolistic competition?
Many competitors with similar producers or services, PED is elastic, price is more competitive.
71
What do low barriers to entry mean for price?
A firm has to price competitively.
72
What happens to monopolistic competition in the long run?
Barriers to entry are low, supernormal profits are available. Other firms enter, supply in industry increases.
73
What happens to demand in monopolistic competition in the long run?
Each incumbent firm loses demand, has a lower level of demand.
74
Why is a stable LR Equilibrium unlikely in the long run?
The firm makes normal profit, a stable equilibrium may not be reached, and the market may be in a constant state of flux.
75
What happens to existing products within a market in the long run?
They go through a product life cycle, affecting the growth and volume of sales. The length of the product life cycle varies from market to market.
76
What are the types of goods and services in monopolistic competition?
Differentiated.
77
Do firms have control of prices in monopolistic competition?
Some.
78
Is marketing important in monopolistic competition?
Yes.
79
What are the examples of non-price competition?
Innovations, customer service, after-sales service, loyalty schemes, branding, packaging, promotions, marketing.
80
How is the gin industry an example of monopolistic competiton?
Lots of producers, small scale output, fast growth in the industry, low barriers to entry, differentiated product.
81
How is the taxi and private hire industry an example of monopolistic competition?
75,000 taxis, 226,000 private hire vehicles, 37% of all taxis are in London, 80% of taxis are small businesses, 2% of drivers are female, Average pay is £21,167.
82
What is the structure of a black cab?
Entry restricted to those with licences, and who have passed 'the knowledge.'
83
What is the structure of an uber?
Restricted to people with a car and a phone - 45,000 Uber drivers in London alone.
84
What is the structure of private hire vehicles?
Can't be hailed from down the street, must rely on telephone and internet bookings.
85
What are the examples of price competition in the taxi industry?
Pre arranged prices, different prices for different times, different price for hail vs pre booked, buy 2 get one free.
86
What are the examples of non price competition in the taxi industry?
Luxury cars, disabled access, late pick up times.
87
What are the limitations of monopolistic competition?
Information may be imperfect in the real world, analysis restricted to each firm, each firm produces a differentiated product.
88
What are the limitations of monopolistic competition with entry barriers?
They're created by non price competition - gain benefits of price inelastic demand, model focuses on price and output decisions - firm will also have to decide on variety of product.
89
How does advertising serve as a barrier to entry?
Monopolies use saturation advertising to prevent small firms entering the market. Small firms are unable to enter the industry, they can't afford the minimum level of advertising necessary, mass advertising crowds out newcomers.
90
What is the 3 firm concentration ratio of supermarkets?
56%.
91
What is the 5 firm concentration ratio of supermarkets?
74.8%.
92
Why is Tesco different to other supermarkets?
Market share has stayed high over time, and has nearly double the market share of its' competitors.
93
How much market share do other supermarkets have?
25.2%.
94
What is interdependence?
There are few sellers in a market structure, each firm is likely to be aware of the actions of others. This means the decisions of one firm influence, and are influenced by the decisions of other firms.
95
What must firms in an oligopoly do as a result of interdependence?
Take into account the likely reactions of their rivals to changes in price.
96
What does interdependence cause for oligopolistic industries?
To be at risk of tacit or explicit collusion, can lead to allegations of anti competitive behaviour.
97
What are the impacts of a price increase in an oligopoly?
Competitors prices are likely to stay the same, market share decreases, revenue goes down, PED is elastic.
98
What are the impacts of a price decrease in an oligopoly?
Competitors prices are likely to go down, market share remains, revenue goes down, PED is inelastic.
99
What is the market share of firms in the banking system?
Barclays - 30%. HSBC - 25%. Lloyds - 17%. Natwest - 12%. Nationwide - 10%. Virgin - 4%.
100
What can firms do if they're in a cartel?
Agree to charge a price which keeps the least efficient firm in the market.
101
What do cartels allow firms to do?
Enable inefficient firms to stay in the market, while more efficient firms enjoy abnormal profit.
102
What do cartels show?
The restriction of choice, shows the disadvantages of an oligopoly.
103
What type of profit do oligopolies make in the short run?
Supernormal profit.
104
Why are cartel agreements illegal?
Because they're anti competitive.
105
What can firms do instead of cartel agreements?
Joint product development, built using many shared components.
106
How are the different types of collusion seen?
Overt collusion is seen as good, price collusion is seen as bad.
107
What price making ability do oligopolies have?
Firms have price setting power, but may not want to use it.
108
What are the impacts of a kinked demand curve?
Rivals are unlikely to match a price rise, rivals likely to match a price fall. If a firm is settled on a price, there is no point changing it. Even if costs change, there is price rigidity in an oligopoly.
109
What does the kinked demand curve do?
Increases the importance attached to non-price competition.
110
What does a price increase mean for market share in an oligopoly?
Rivals try to gain profit and market share at the firm's market share.
111
What does an oligopoly firm expect?
Demand to be relatively elastic in response to a price increase, price rise from P1 to P2 results in a fall of demand from Q1 to Q2, which is disproportionate.
112
What do oligopoly firms expect when cutting price?
Expect rivals to react in a different way, by using a matching price cut. Each firm benefits from some increase in demand, because the market demand curve sloped downwards.
113
Is demand elastic or inelastic in response to a price cut?
Inelastic.
114
What are the disadvantages of a kinked demand curve?
Incomplete, evidence in the real world doesn't support the theory, competitive oligopoly firms don't usually respond to price changed in the way assumed here.
115
What are the advantages of oligopolies?
Firms benefit from economies of scale, meaning they can become more dynamically efficient, can pass on cost cuts as low prices to consumers.
116
How do oligopolies make it easier for consumers?
Easy for consumers to compare and choose the best option for their needs, other markets may offer too much choice. Some competition may cause oligopoly firms to continuously innovate.
117
What are the disadvantages of oligopolies?
They restrict output and raise prices, compared to a more competitive market, they combine the disadvantages of monopolies with the few benefits.
118
Why may small innovative firms find it difficult to enter the market?
The producer ends up being dominant rather than the consumer.
119
How does price leadership work in oligopolies?
Imperfectly competitive firms use less formal ways to co-ordinate their pricing decisions, as overt collusion is illegal.
120
When does price leadership occur?
When one firm becomes market leader, other firms follow its' pricing example.
121
How do price agreements work in oligopolies?
They can be made between firms and their suppliers, between firms and customers. It's usually good for a specified period of time.
122
How do price wars occur in oligopolies?
They take place in monopolistic competition and oligopoly, and may be started accidentally, or instigated deliberately to damage competitors.
123
How could consumers benefit from a price war in the short run?
Due to lower prices, however monopoly power of surviving firms increases, which could be to the detriment of consumers.
124
What are the characteristics of an oligopoly?
Defined by the actual behaviour of firms, a market dominated by a few large firms, high market concentration ratio, products can be differentiated or homogenous, significant barriers to entry and exit, interdependent strategic decisions by firms.
125
What are the examples of oligopoly markets?
Airlines, broadband, vehicle manufacturers, banks, pharmaceutical companies, cinema chains, fizzy drinks makers, household goods, fuel retailers.
126
What is an overview of the oligopoly demand curve?
If oligopoly firms have price setting power, it may be reluctant to use it. Rivals unlikely to match a price rise. If a firm is settled on one price, there may be no point in changing it. Even if costs change, there is price rigidity.
127
What are the different methods of non-price competition?
Innovation, quality of service, free upgrades to products, exclusivity, branding, sales promotion.
128
What are the examples of price wars?
Low cost airlines, supermarkets, mobile phone tariffs.
129
Who are the winners of price wars?
Regular consumers, managers - higher sales.
130
Who are the losers of price wars?
Shareholders - lower profits. Suppliers - could be squeezed.
131
What is legal collusion?
Not prohibited if the respective agreements contribute to improving the production or distribution of goods or to promoting technical progress in a market.
132
What are the examples of business collusion?
Development of improved industry standards of production and safety, could benefit the consumer. Information sharing designed to give better information to consumers.
133
What are the aims of business collusion?
Maximise joint profits, lowers the cost of competition - no marketing wars, reduces uncertainty in a market - increases producer surplus - higher share.
134
How is collusion made easier?
When industry regulators are weak or ineffective, penalties for collusion are low, participating firms have a high percentage of total sales, allowing them to control market supply. Firms can communicate well, trust each other, and have similar objectives.
135
What are the reasons why cartels break down?
Falling market share during a recession, over production by some members, exposure by competition authorities. Entry of non-cartel firms into industry.
136
What are the penalties for cartels in the UK?
Businesses can face fines of up to 10% of their worldwide turnover, people convicted of a cartel offence can face up to five years imprisonment, unlimited fines, director disqualification. Advantages for whistleblowers, immunity from penalty fines when a company is the first to bring the cartel to the CMA.
137
What are the benefits of collusion?
General industry standards can bring social benefits, fairer prices for producer countries in lower and middle income countries. Profit could be used for capital development, higher wages for employees.
138
Who are the losers of collusive behaviour?
Damages consumer welfare, absence of competition hits efficiency, reinforces the cartel's monopoly power.
139
How does collusive behaviour damage consumer welfare?
Higher prices, lower consumer surplus, loss of allocative efficiency, regressive in nature.
140
How does collusive behaviour damage competition?
Higher unit costs, less incentive to innovate, output quotas hurts firms who want to expand.
141
How does collusive behaviour reinforce monopoly power?
Harder for new businesses to enter the market.
142
What is game theory?
The study of how people and businesses make decisions in strategic situations.
143
What does a game consist of?
Players, strategies, payoffs, a pre commitment.
144
What is the prisoners' dilemma?
Both players are assumed to select their own dominant strategies for short sighted personal gain, they reach an equilibrium where they're both worse off than they would have been if they choose an alternative strategy.
145
What does the Nash equilibrium do?
Describe any situation where all of the participants are pursuing their best possible strategy.
146
What is the outcome of the game?
Outcome of a game that occurs is when player A takes the best possible action given the action of player B.
147
How is there a long term tendency towards oligopolies?
Economies of scale - large minimum efficient scale, caused by a high ratio of fixed to variable costs of production. Mergers and takeovers - consolidation of industries through acquisitions. Rise of dominant brands in the industry.
148
What is price discrimination?
Occurs when a firm charges a different price to a different group of consumers for an identical good or service.
149
Where does price discrimination occur?
In all imperfectly competitive markets, is most common in monopoly and oligopoly.
150
What are the conditions for using price discrimination?
Market power - The ability to influence prices without worrying about competition. Preventing Arbitrage - resale of goods through secondary markets at inflated prices.
151
What happens without competition?
Consumers have fewer options, so are more likely to pay higher prices if they want the product.
152
How can monopolists increase their power to discriminate?
Use their market power to keep new firms out of the market, increasing the ability to discriminate.
153
What are the aims of price discrimination?
Increased revenue, higher profits, using spare capacity.
154
How is increased revenue a form of price discrimination?
Extracting consumer surplus and turning it into increased producer surplus for the seller.
155
How are higher profits a form of price discrimination?
Total profit rises, providing marginal profit from selling to other customers is positive.
156
How is using spare capacity a form of price discrimination?
Price discrimination can help a business make more efficient use of their supply capacity.
157
What are the different types of price discrimination?
1st degree, 2nd degree, 3rd degree.
158
What is first degree price discrimination?
Charging each individual consumer the maximum price they're willing to pay.
159
What is second degree price discrimination?
Charging different prices depending on quantity bought, time period, use of coupons.
160
What is third degree price discrimination?
Charging different prices to groups of people with a different PED.
161
What are the examples of third degree price discrimination?
Cinema pricing - Ticket prices vary by age, time of film, location of cinema. Student discounts - Many venues offer price discounts for students, who have more of a price sensitive demand. Car Insurance - Price walking - long standing customers faced higher prices when renewing policies.
162
What are the effects of 3rd degree price discrimination on consumer welfare?
Higher prices - Reduces consumer surplus. Dual pricing exploits imperfect information. Price discrimination reinforces monopoly power of firms, can lead to higher prices in the long run.
163
What does 3rd degree price discrimination do to allocative efficiency?
Higher prices in the long run, loss of allocative efficiency.
164
What do algorithms do to increase discrimination?
Increase potential to discriminate between consumers - widespread use of AI driven price discrimination.
165
Who does multi purchase purchasing favour?
Higher income people at the expense of single people. Can encourage food waste, creating external costs.
166
What are the arguments supporting price discrimination?
Makes fuller use of spare capacity, leading to less waste. Generates extra cash flow for businesses, can ensure survival during a recession. Can fund cross subsidy of goods and services - premium prices for one group to help other groups.
167
What are the examples of price discrimination?
BT - Half price broadband for those on universal credit. Tesco Clubcard prices, charging a different price for the same product. 2022 - FCA announced renewal prices for home and car insurance can't be more expensive than a new customer would pay. Demand pricing for UK electricity.
168
What are the examples of first degree price discrimination?
Market haggling, educational bursaries.
169
What are the examples of second degree price discrimination?
Peak/off peak rail fares. Last minute flight prices. Last minute holiday prices.
170
What are the examples of third degree price discrimination?
Cinema ticket prices for different ages. Hairdresser discounts, educational bursaries. Male vs female razors, hospital vs high street shops. Drug prices in developing/developed world.
171
How are some parts of price discrimination good for society?
Educational bursaries help low income students have access to university, funding degrees which are useful to society.
172
How are some parts of price discrimination bad for society?
People have less disposable income due to products such as off peak rail tickets, which have lower prices.
173
What are the arguments against price targeting?
Exploitation of consumer - majority of consumers still pay more than marginal cost, allocatively inefficient. Extraction of consumer surplus turned into higher producer surplus/supernormal profit. Reinforces monopoly power of existing firms.
174
What is a monopoly?
One firm which holds over 25% of market share, and has the ability to set prices.
175
What are the different degrees of monopoly power in the UK?
TFL - Close to a pure monopoly, but some competition. Tesco - Working monopoly, part of an oligopoly. Costa - Dominant coffee firm in a competitive market. Pepsi/Coke - Duopoly.
176
What are the characteristics of a monopoly?
Usually imperfect information, no competition, can use price discrimination, price making power, AR>MR. High fixed costs, may involve a network, firm = market. Barriers to entry and exit. Only 1 firm. Downwards sloping demand curve.
177
What are the different types of monopolies in markets?
Pure monopolist - A single supporter that dominates the entire market. CMA - Working monopoly is any firm with more than 25% of the industries' total sales. Dominant firm - At least 40% of market share.
178
What are network effects?
Create significant barriers to entry for new firms, it can be difficult for new products or services to gain a mass of users.
179
What are the examples of network effects?
Social media platforms, online marketplaces, communications platforms, payment platforms, operating systems, navigation apps.
180
What is the market share of the PC supplier industry?
Lenovo - 24.1%. HP - 22.2%. Dell - 16.8%. Apple - 7.0%. Acer - 5.7%. Asus - 5.5%.
181
What is the 3 firm concentration ratio of the PC supplier industry?
63.1%.
182
What is the 5 firm concentration ratio of the PC supplier industry?
75.8%.
183
What has happened to Coca-Cola's market share over time?
2004 - 43.4%. 2009 - 41.9%. 2018 - 43.4%.
184
What issues should be considered when thinking about monopoly?
Scope/size of the market, case by case basis, industry by segment, global/regional/local.
185
What are the features of conduct in a monopoly?
Monopoly has price making power, downward sloping AR and MR curve. Potential for using price discrimination between consumers. Firms can set price or quantity, or both. Barriers to entry help maintain SNP in the long run.
186
What is the economic case against monopoly power?
Prices are higher than under competitive conditions, leads to a loss of allocative efficiency, regressive effects on lower income households, absence of genuine market competition may lead to production inefficiencies. X-inefficiencies such as wasteful production, advertising spending.
187
How do monopolies lead to lower economies of scale?
Higher prices can limit final output in a market, lead to fewer economies of scale. The monopoly may become too big, protected markets - less drive to innovate.
188
What is a natural monopoly?
Long run average cost curve falls continuously over a large range of output.
189
What are the results of a natural monopoly?
There is only room in a market for one firm to fully exploit economies of scale. Competition may increase costs and prices in this situation, characterised by increasing returns to scale at all levels of output. LRAC is falling.
190
What are the characteristics of a natural monopoly diagram?
High MES, falling LRAC, barriers to contestability.
191
What are the examples of natural monopoly?
London Underground, water and sewage networks, local bus services, royal mail, railway tracks, electricity grid.
192
What are the characteristics of a LRAC monopoly diagram?
Very high fixed costs involved in supplying a good or service, so LRAC curve may fall continuously, as output increases.
193
What are the characteristics of a cost/revenue monopoly diagram?
Highly allocatively inefficient, price is significantly above MC, output is restricted.
194
Why may losses be made in a monopoly?
If the natural monopoly is state owned, prices are capped at MC.
195
What is monopsony power?
Exists when a single buyer or association of buyers can dictate prices they pay to suppliers, or control other aspects of the relationship which exists between themselves and their suppliers.
196
How do monopsonists exert buying power?
Setting wages below the market equilibrium, determine the number of workers they hire - which could be below the market level of employment. Reducing security of employment by offering contracts which don't guarantee a particular number of hours.
197
What are the advantages of monopoly power?
Insufficient room in the market for more than one firm benefitting from economies of scale, a monopoly can use its' SNP to fund R and D, leading to better ways of making existing products.
198
What are the disadvantages of monopoly power?
Leads to productive and allocative inefficiency, resource misallocation.
199
What is a contestable market?
One in which new entrants can easily enter and compete with established firms, even if firms have significant market share.
200
What are the other features of contestable markets?
Where the threat of new competitors entering the market keeps existing firms on their toes, making them more efficient and competitive, leading to lower prices and better products.
201
What are the elements of a contestable market?
Low barriers to entry, freedom of exit, perfect information, no sunk costs.
202
How are low barriers to entry a sign of a contestable market?
Means that new firms can easily enter and start operating without facing significant obstacles.
203
How is freedom of exit an element of a contestable market?
Firms should be able to exit the market without incurring substantial costs or losses. The absence of significant exit barriers allows firms to withdraw from the market.
204
How is perfect information an element of a contestable market?
Market participants should have access to perfect and complete information about market conditions, prices and strategies of existing firms.
205
How are no sunk costs an element of contestable markets?
Should be minimal or non-existent sunk costs. Low sunk costs reduce risk associated with entering the market.
206
What are sunk costs?
Costs that can't be recovered if a business decided to leave an industry. Costs associated with leaving an industry.
207
What are the effects of sunk costs?
Sales of business assets and unsold stocks at rock bottom prices may be needed when a firm leaves a market. Lost business goodwill and customer loyalty can be an intangible cost to a firm leaving an industry.
208
What are the examples of sunk costs?
A company investing into a factory of outdates technology which becomes outdates, and is now unusable, cannot compete with new technologies.
209
Which recent markets have become more contestable?
Food retailing, fast food industry, hotel sector, city transport, shaving products, bookselling, retail energy market, freight.
210
What are the differences between the number of firms in perfect competition and contestable markets?
PC - Many, with a low concentration ratio. CM - No set number of suppliers.
211
What are the differences between the type of product in perfect competition and contestable markets?
PC - Homogenous. CM - Differentiated.
212
What are the differences between entry barriers in perfect competition and contestable markets?
PC - None. CM - None.
213
What are the differences between exit costs in perfect competition and contestable markets?
PC - None. CM - None, assuming no sunk costs.
214
What are the differences between pricing power in perfect competition in perfect competition and contestable markets?
PC - None - each firm is a price taker. CM - Some pricing power.
215
Which factors make a market more contestable?
Lowering legal barriers to entry such as reform of patents. Impact of new technologies such as e-commerce. Trade agreements making it easier for competition from imports.
216
Why does lowering entry barriers lift market contestability?
Economies of scale, vertical integration, brand loyalty, expertise, goodwill and reputation.
217
What is deregulation?
Removing some of the barriers to competition, such as allowing more licences for new competitors to operate, increasing market contestability.
218
How do trade barriers decrease contestability?
It limits the volume of goods and services that can come in to compete directly with domestic firms.
219
What is the most important thing in a contestable market?
The ease by which new firms can enter the market.
220
What is a hit and run entry?
When a business enters an industry to take advantage of temporarily high market profits.
221
What is the equation for normal profit in a contestable markets diagram?
AR=AC.
222
What do P1 and P2 represent on a contestable markets diagram?
P1 - Monopoly price. P2 - Price when entry threat is high.
223
What are the ways in which a highly contestable market leads to economic inefficiency?
Lower prices due to improved allocative efficiency. Incentives for firms to cut costs, due to improves x-inefficiency. Incentives for firms to innovate, due to dynamic efficiency.
