5 Perfect Competition, Imperfectly Competitive Markets and Monopoly Flashcards
(417 cards)
1
Q
What is market structure?
A
Organisational and other characteristics of a market that can be used to help analyse market conduct.
2
Q
What are the 8 features of market structure?
A
- Barriers to entry
- Concentration ratios
- Number of firms in the market
- Costs incurred
- Sales revenue earned by firms in the market
- Information accessibility
- Product differentiation/non-price versus price competition
- Interdependence between firms.
3
Q
What are the 7 characteristics of perfect competition?
A
- Perfect information
- No barriers to entry or exit in the long run
- Homogenous product
- Ability to sell as much as one wishes at the ruling market price
- Unable to influence market price
- Large number of buyers and sellers
- Price takers.
4
Q
True or false - perfect competition has no barriers to entry.
A
False, there are barriers to entry in the short run.
5
Q
What should monopolistic competition be described as?
A
“Imperfect competition among the many.”
6
Q
What should oligopoly be described as?
A
“Imperfect competition among the few.”
7
Q
Define oligopoly.
A
A market of a few interdependent firms with high concentration ratios who exhibit a degree of interdependence, needing to take account of the reaction of rivals before making marketing decisions.
8
Q
What is a pure monopoly?
A
1 firm with 100% market share.
9
Q
Monopolies are…
A
Price makers.
10
Q
What is the main thing that changes along the spectrum of competition?
A
Number of firms.
11
Q
Are any markets in the world really perfectly competitive?
A
No, some are very close, for instance the FOREX markets.
12
Q
What are 3 ways the FOREX markets approximate perfect competition?
A
- Homogenous product
- Vast array of buyers and sellers
- Perfect information.
13
Q
What goods market is close to perfect competition?
A
Farming.
- Homogenous product
- Many buyers and sellers
- Perfect information.
14
Q
What is the most common type of pure monopoly?
A
Regional monopoly - in 2004, KCOM had 100% market share in Hull according to the European Commission.
15
Q
What differentiates entry and exit barriers between more and less competitive markets?
A
In more competitive markets, entry barriers exist only in the short run. In less perfectly competitive markets, they exist in the long and short run.
16
Q
What is an entry barrier?
A
A cost borne by firms entering a market, but not those already incumbent in the market.
17
Q
What is an incumbent firm?
A
A firm already established within the market. Often benefits from consumer loyalty and economies of scale.
18
Q
What is arguably the most important determinant of market structure?
A
The significance of barriers to entry and exit.
19
Q
Which market structure needs barriers to entry and exit?
A
Monopoly, since otherwise the abnormal profit would be competed away and the monopoly destroyed.
20
Q
Can monopoly exist without barriers to entry and exit?
A
Yes - but only if the monopoly limit prices.
21
Q
What are the two main types of entry barrier?
A
Natural and artificial.
22
Q
What is a key point for an essay about making markets more competitive?
A
Some entry barriers are natural and some are artificial. We can only really surmount the artificial ones in making markets more contestable.
23
Q
What is a natural barrier also called?
A
An innocent barrier.
24
Q
Define natural barrier.
A
A barrier to entry or exit which is not caused by the deliberate actions of firms within the market.
25
Define artificial barrier.
A man-made artificial barrier used to protect market incumbents.
26
What are 3 types of natural barriers to entry and exit?
1. Economies of scale
2. Indivisibilities
3. Sunk costs.
27
What graph should be drawn while explaining natural barriers to entry and exit?
Economies of scale graph.
28
Why can monopoly occasionally be more productively efficient?
Producing at a lower point on their LRAC than newcomers by capitalising on economies of scale - hence minimising average costs and being able to outcompete new firms.
29
Why is contestability often better than competition?
Because firms may be able to capitalise on economies of scale when they are not broken up, allowing them to lower LRAC for the good of consumers, so long as limit pricing is employed.
30
What are artificial barriers also known as?
Strategic barriers.
31
What are 5 types of artificial barriers to entry?
1. Patents
2. Product differentiation
3. Advertising
4. First mover advantage
5. Limit pricing and predatory pricing.
32
Give an example of a patent.
Drug prices fall by 70-80% after the patent expires.
33
How long is a patent?
Ordinarily 20 years.
34
Give an example of a patent monopoly.
Enbrel, an autoimmune drug developed by Amgen, has developed $70bn in sales, but the patent ends in 2029.
35
What is a patent thicket?
When we obtain additional patents on spin-offs of the original product.
36
How are product differentiation and patent thickets linked?
We can develop specific branded goods and trademark them to illegalise direct competition.
37
Why is product differentiation considered an artificial barrier to entry?
We can create a branded product that fits within the market but is not directly competitive with other products.
38
Give an example of how advertising represents a barrier to entry.
Coke and Pepsi combined spend $7.3bn on advertising, including a 1995 campaign which involved offering a Harrier jet as a reward for customer loyalty.
39
What does first mover advantage capitalise on?
People's bounded rationality and status quo bias - make the default choice your product.
40
Is predatory pricing illegal?
Yes.
41
Is predatory pricing easy to prevent?
No - hard to detect, and hard to find proof of intent.
42
Give an example of an exit barrier.
Can't sell specialised capital.
43
When is limit pricing used compared to predatory pricing?
Predatory pricing is used when firms have just entered the market.
44
What are 2 ways to product differentiate?
1. Within the market - market fragmentation and the like
2. Across markets - firms product differentiate when they have multiple product lines.
45
Give an example of successful market fragmentation product differentiation.
iPhones of all different types marketed to different market segments.
46
What is total profit?
Total revenue - total cost.
47
What is the profit max condition?
MC=MR.
48
For what units could profits be increased if output was increased?
Those for which MR>MC.
49
For what units could profit be increased if output was decreased?
Those for which MR
50
Firms only change price when ____ is disturbed.
The equilibrium point where MC=MR.
51
MC=MR applies to what market structures?
All of them.
52
What is the divorce of ownership from control?
The separation between the owners of a firm and those who manage it. Often between shareholders and company directors.
53
In theory, why should the divorce of ownership from control not happen?
Poorly performing managers can be removed by shareholders.
54
What is a board of directors?
The group of individuals elected by shareholders to oversee management of the business.
55
What is the principal-agent problem?
The principal-agent problem occurs when the principal (the owner) and the agent (the director) have different objectives and pursue them against one another.
56
Is the principal-agent problem the same as the divorce of ownership from control?
No. The principal-agent problem is a consequence of the divorce of ownership from control.
57
What do directors have?
A monopoly on technical knowledge.
58
Give an example of how director and shareholder objectives may differ.
Shareholders are concerned about short-term profit max, and directors may be more concerned about long-term strategy, company prestige or self-aggrandisement.
59
What concept is closely linked to the principal-agent problem?
Moral hazard - agents can take greater risks when they are insulated from the consequences of their decisions.
60
What are 2 problems that create the principal-agent problem?
1. Where the benefits are less for the agent than the principal - in this case, the agent is demotivated
2. Where the potential risks for the principal are greater than those for the agent - here, moral hazard can occur.
61
What are 2 reasons principal-agent persists?
1. Costs outweigh benefits for sacking the agent
2. With a monopoly on technical knowledge, it is hard for non-institutional shareholders to know whether poor performance is actually the manager's fault.
62
What are 2 ways we could eliminate principal-agent?
1. Profit-linked pay - not necessarily fair if profit driven by other workers, and potentially unfair if economic circumstances drive down performance
2. Threat of dismissal - I think you'll find that most managers have fairly excellent severance packages.
63
What are 6 alternative motives for businesses?
1. Managerial and reputational self-aggrandisement
2. Growth maximisation
3. Survival
4. Sales revenue maximisation
5. Satisficing
6. Quality maximisation.
64
What are 4 reasons growth is sometimes the primary business objective?
1. In some industries, market power = political power e.g. TV
2. Capitalise on increasing returns to scale to create an economy of scale
3. Managerial prestige and self-aggrandisement
4. Achieve market power.
65
When is survival the most salient business objective?
When the economy is in downturn or a firm finds itself in particular trouble.
66
Is a firm necessarily making money at MR=0?
No, in an extreme case, MC could be so far above MR that the loss made on these units translates into an absolute loss.
67
What model does the satisficing principle see as the correct theory of the firm?
The behavioural model of the firm, where the firm is a coalition of stakeholders with opposing views, and we must satisfice their mutually exclusive demands.
68
Give an example of how different stakeholders in the behavioural model of the firm may have diametrically opposed views.
Shareholders may want to drive down wages and associated business costs whereas workers understandably want better working conditions and higher wages.
69
What is satisficing?
Achieving a satisfactory outcome rather than an optimal one when seeking to achieve the optimal outcome would be too difficult.
70
What are managers doing in the behavioural model of the firm?
Seeking to reconcile conflicts.
71
Why is satisficing not ubiquitous?
Only present in those markets which are imperfectly competitive enough to sustain it.
72
What is satisficing a key cause of?
X-inefficiency.
73
Why does it seem improbable that perfect competition would maximise allocative efficiency and societal welfare?
Perfect competition is concerned with an unlimited number of buyers and sellers each acting in their own unmitigated self-interest, without regard to the societal implication of their actions.
74
Who introduced the invisible hand?
Adam Smith.
75
Are entrepreneurs in competitive markets more public-spirited or motivated than those in monopolies?
No - entrepreneurs, like the other factors of production are homogenous.
76
What is the law of one price?
The tendency for a single price to dominate once a market becomes competitive.
77
Give an example of a market made more competitive by technology.
The Indian fish markets in Southern India.
## Footnote
Once fishermen could find out where the best prices were, supply equalised with demand.
78
What specifically happened which made the South Indian fish markets more competitive?
More perfect information than before.
79
When a perfectly competitive firm is making abnormal profits, output...
Exceeds that of the equilibrium price quantity.
80
In a monopoly, output...
This is the other way around.
81
How to find total sales revenue from any of the theory of the firm diagrams?
AR x Number of units = Revenue.
82
What is total cost from any theory of the firm diagram?
Average cost x Quantity.
83
When abnormal profits are made in the short run in a perfectly competitive market...
These profits act as a signal to potential market entrants, and in the long run new firms will enter the market to compete away the excess abnormal profits.
84
What is subnormal profit?
P
85
What is productive efficiency for a firm?
The level of output at which ATC is minimised, with full exploitation of economies of scale.
86
What is the verdict on perfect competition efficiency?
In the long run, it is productively efficient and allocatively efficient.
87
What is allocative efficiency?
A state where it is impossible to increase economic welfare from the reallocation of resources between markets.
88
Allocative efficiency across all markets occurs when...
P=MC.
89
What effect do the presence of economies of scale have on perfectly competitive markets?
Prevent them from existing since economies of scale represent a barrier to entry.
90
What are the 3 conditions for allocative and productive efficiency occurring?
1. All the firms in the market must be benefitting from all available economies of scale so that ATC is LRAC
2. There must be perfectly competitive markets, where P=MC, in all markets simultaneously, which seems impossible
3. There must be no externalities, positive or negative.
91
What are the 3 kinds of competition?
1. Price competition through price wars
2. Non-price competition through product differentiation
3. Cost cutting competition expressing itself through long term price cuts.
92
Why is the 'competition' in perfectly competitive markets limited?
Only concerns cost-cutting competition, and not price or non-price competition.
93
What are 3 reasons why perfect competition is not actually that perfect?
1. Disincentive factor - firms are presumed to compete with the intention to make abnormal profits, but lack of entry barriers and perfect information means this is impossible in the long run
2. Lack of real choice - homogenous products and lack of non-price competition means that there is actually not all that much 'choice'
3. When firms are atomised, how realistic is it that the kind of cost-cutting research that makes the market more productively efficient will actually be financed?
94
What does price measure?
The value in consumption placed on the last unit by consumers.
95
What does MC measure?
The good's opportunity cost in production.
96
When P>MC, societal welfare is...
Not maximised, and output must be increased since the utility for buyers of the next units exceeds the opportunity cost of its production.
97
When P
Not maximised, and output must be decreased since the opportunity cost of its production exceeds the value consumers are willing to pay for it.
98
Why might it be impossible to achieve allocative efficiency in all markets simultaneously?
If the total supply of productive resources are not enough.
99
What is the first major book which explains how competition in imperfect markets might work?
1933 The Economics of Imperfect Competition by Joan Robinson.
100
What is pure monopoly?
Literally only one firm in the market, producing 100% of market supply.
101
How are monopolies usually defined in the UK?
Firms with a degree of monopoly power from a substantial market share i.e. more than 25% market share.
102
What is a working monopoly?
Also known as a statutory monopoly - a firm defined by the CMA as having greater than 25% market share.
103
Is there a difference between long run and short run profit max in a monopoly?
No, because the monopoly is protected by barriers to entry.
104
Abnormal profits in a monopoly can be made...
In the short run and the long run.
105
Abnormal profit is also referred to as...
Monopoly profit.
106
What is monopoly power?
The ability of a monopoly to set prices above the perfectly competitive market price.
107
Is monopoly power only in monopolies?
No, it can occur to a lesser extent in oligopoly markets.
108
What did the chairman of GlaxoSmithKline say about drug patents?
They have investigated people infiltrating patents before using private detectives, and that breaking patents totally discourages R&D.
109
What is dynamic efficiency in monopoly?
The incentive to research and re-invest.
110
What are 2 advantages of monopoly?
1. Economies of scale
2. Dynamic efficiency.
111
What is a natural monopoly?
A market that runs most efficiently, from an economies of scale perspective, when one monopoly firm supplies all the market supply.
112
Example of a natural monopoly?
Broadband - inefficient to have multiple firms duplicating fixed infrastructure.
113
How to illustrate a natural monopoly in an exam?
Use a LRAC curve.
114
Why is competition in natural monopoly markets bad?
It is productively and allocatively inefficient. Resources are misallocated duplicating fixed capacity, meaning that firms incur higher than necessary fixed costs.
115
What are 2 main disadvantages of monopoly?
1. Allocatively inefficient since P=/=MC
2. Productively inefficient since ATC is not minimised.
116
What is the evaluation for the argument that monopoly firms are productively inefficient?
If only a monopoly is able to achieve MES then it may be more productively efficient.
117
Monopoly firms are said to profit satisfice. What is this a counter to?
Profit-satisfice.
118
Why did free marketeers argue for the privatisation of natural monopolies?
Because they profit-satisficed instead of using their abnormal profits to invest to the point of minimum LRAC.
119
What is X-efficiency?
Occurs when a firm eliminates unnecessary production costs.
120
X-inefficiency is another example of...
Profit satisficing.
121
What are 2 examples of profit satisficing in monopolies?
1. Refusing to invest to capitalise on increasing returns to scale
2. X-inefficiencies from inefficient business practices.
122
Why can monopoly firms profit satisfice?
They are protected by entry barriers.
123
Example of a firm with X-inefficiency in a monopoly market?
BT.
124
Evidence that privatisation might have some beneficial effects on natural monopolies?
BT's contribution to public funds annually went from £625 million to £2.4 billion annually after privatisation according to the CPS.
125
Is there evidence that making a natural monopoly private increases competition?
Some. E.g. BT contribution to public funds rose from £625 million to £2.4 billion before and after privatisation.
126
What are 3 main arguments for the privatisation of natural monopolies?
1. To improve competition - not a good thing when MES is high in a natural monopoly
2. Reduce X-inefficiency through competition - lack of evidence, cite Thames Water
3. Encourage investment to achieve MES and prevent market entry - still evidence markets are uncompetitive and investment has not been there.
127
When was the water industry privatised?
1989.
128
What is another hazard of privatisation? Evidence?
Regulatory capture or weakness. Macquarie loaded £2billion of Cayman Islands debt into Thames Water, despite telling Ofwat it wouldn't.
129
Example of regulatory capture in the water industry?
In 2024, it was revealed that the chair of Ofwat had received four undocumented dinners with the operators of Severn Trent, South West, Wessex and Yorkshire Water.
130
Example of imperfectly competitive behaviour in the privatised pure monopoly markets?
After Macquarie, an Australian investment bank, bought Thames Water, it loaded £2 billion of its Cayman Islands debt into the company, knowing it could help service the debt using a price hike on consumers which competitors in the market would not match.
131
Evidence of X-inefficiency in a privatised pure monopoly - evaluative comment?
In 2015, CEO of Thames Water received a 60% pay rise despite environmental problems with sewage dumping. This would actually be less likely in a state run monopoly because the taxpayers could check such greed.
132
What are 3 ways monopolistic competition resembles perfect competition?
1. Large number of firms in the market
2. No long run barriers to entry or exit
3. Only normal profits are made in the long run due to threat of competition.
133
What are 2 ways monopolistic competition resembles monopoly?
1. Downward sloping AR curve
2. MR
134
Why is the AR curve sloping down in monopolistic competition?
Because the products produced by competitors are partial but not perfect substitutes. There is PRODUCT DIFFERENTIATION.
135
Overall though, monopolistically competitive markets are closer to...
Perfect competition.
136
Draw a short-run profit max for a monopolistically competitive firm?
Monopoly.
137
Allocative efficiency implies what about externalities?
There are no externalities, either in production or consumption.
138
What are 2 evaluations which are bad for monopolistic competition?
1. Still productively inefficient because not producing at the lowest point on the ATC curve
2. Still allocatively inefficient since P=ATC, not P=MC.
139
What is the productive inefficiency in monopolistic competition?
Excess capacity - min ATC is at a level of output above MC=MR.
140
What are 2 ways monopolistic competition can be evaluated in a positive light?
1. Gives consumers more choice - Kelvin Lancaster
2. Monopolistically competitive firms may not be at the lowest ATC due to returns to scale and marginal returns; nevertheless, they eliminate X-inefficiency.
141
What is the Kelvin Lancaster argument?
The number of differentiated products in a monopolistically competitive markets will continue to expand until the marginal cost of a further differentiated product exactly equals the marginal utility gained.
142
What goes on in monopolistically competitive markets?
PRODUCT DIFFERENTIATION.
143
What are 2 kinds of advertising and evaluation?
1. Informative advertising - INCREASES COMPETITION by providing more perfect information
2. Persuasive advertising - DECREASES COMPETITION by reducing PED for the target good/service.
144
How does persuasive advertising reduce PED?
Makes substitutes appear imperfect.
145
Persuasive advertising often goes hand in hand with...
Saturation advertising.
146
What is saturation advertising?
When advertising is used to inundate consumers with so much information as to prevent market entrants from being seen as acceptable substitutes.
147
What is the evaluation of saturation advertising?
1. Saturation advertising is persuasive advertising. It makes demand more price inelastic for the target good because substitutes are seen as unacceptable.
2. Furthermore, it creates a barrier to entry. Other firms may not be able to afford the entry cost.
3. Even if other firms enter and advertise, they can be crowded out because the incumbent firms have first-mover advantage.
148
Example of an industry where saturation advertising is prevalent?
Coca-Cola - PepsiCo duopoly.
149
Simply how does saturation advertising work?
Makes substitutes imperfect.
150
What is price competition?
When prices are reduced in order to sell more of a good or service.
151
What are 2 ways price competition increases demand for a good or service?
1. Consumers substitute to this good from within the same market
2. Consumers enter the market from substitute markets.
152
Why might firms not like price competition? Evidence?
Leads only to self-destructive/profit-eroding price wars. Easier to collude.
153
Where is price competition least common?
NOT oligopoly. Competitive oligopoly can have price wars. But in perfect competition - the ruling market price means there are not price wars.
154
What are 3 areas for non-price competition? Common feature?
1. Marketing e.g. getting affiliated sellers
2. Use of persuasive advertising
3. Product differentiation i.e. improving the product.
155
Where does non-price competition occur?
Oligopoly and monopolistically competitive markets.
156
Monopolistic competition is...
"imperfect competition among the many."
157
Abnormal profits in monopolistic competition?
Possible in short, but not long run.
158
Why do firms in monopolistic competition face a downward sloping AR curve?
Because substitutes are seen as imperfect substitutes.
159
Why is oligopoly hard to define?
How much is 'a few'?
160
How do we define oligopoly?
Concentration ratios are now used.
161
What is the x-firm concentration ratio?
Combined market share of the top x firms.
162
Example of non-price competition?
Within the oligopoly market for supermarkets, Tesco cannot compete on price with Aldi. Aldi stocked 1500 lines and had used vertical integration to minimise LRAC. Aldi also had 90% own brands. Tesco had large costs from dealing with outside firms. Aldi committed to staying 15% cheaper than Tesco forever. So instead Tesco competes on quality.
163
Why are prices in inner city Tesco Expresses higher than suburban Tescos?
Less competitive - fewer shops selling fewer goods and generally higher PED as a result.
164
What is market conduct?
The pricing and marketing policies pursued by firms.
165
What is market performance the same as?
NOT market conduct. Market performance measures, well, performance, but conduct measures behaviour and strategy.
166
What is competitive oligopoly?
When firms are: 1. Interdependent with regards to their market strategy 2. Independent in how they make marketing decisions.
167
In competitive oligopoly, what prevails?
Uncertainty. Because we must make independent decisions not knowing completely how other firms will react.
168
Example of interdependent oligopoly behaviour?
Should an oligopoly firm raise price? If other firms follow suit then yes, but what if they cut prices and gain market share?
169
Why are oligopolies prone to becoming cartels?
The uncertainty inherent in oligopolistic markets can be eliminated by joining a cartel.
170
What is a cartel?
A collusive agreement by firms, usually to fix prices. Sometimes there is also an agreement to restrict output and to deter the entry of new firms.
171
What is a price ring?
Subset of cartels, just one concerned with price behaviour first and foremost.
172
What are 2 reasons price rings are the worst?
1. Cartels have all the disadvantages of monopoly so far as allocative and productive inefficiency are concerned.
2. But it doesn't have any of the allied benefits in terms of dynamic efficiency or economies of scale.
173
What is the opinion of regulatory authorities on cartels and why?
Should be illegalised and smashed because of the negatives expounded above.
174
When is oligopoly permissible? Example?
When it is collaboration, not collusion. E.g. Mazda 2 and Ford Fiesta - produced using shared parts between 1974 and 2015. This was more productively efficient since resources were not duplicated building components and factories at both firms, so economies of scale were achieved.
175
What are 3 reasons oligopoly collaboration may be good?
1. When it is more productively efficient e.g. Toyota Aygo in 2001
2. When it improves dynamic efficiency through R&D
3. When it improves safety.
176
Example of oligopoly collaboration in the public interest?
2001 - Toyota and Peugeot-Citreon agreed to develop the Toyota Aygo, which improved the safety of the car.
177
Example of a time when collaborative oligopoly improved pace of R&D?
Development of WebKit when Apple, Samsung, Google and Nokia collaborated, which made the base for many browser engines.
178
Who theorised oligopoly collaboration and where?
2014 - Jose Teixeira and Tingting Lin - 'open coopetition.'
179
Why do regulators find it hard to spot collusive oligopoly?
Happens in private, often by tacit agreement.
180
What is joint-profit max in an oligopoly?
Where a number of firms decided to act as a single monopolist but retain their individual identities.
181
Why is it in the firm's interest to eventually break the oligopoly agreement?
Because, for the individual firm, MR>MC at the restricted level of output.
182
What other thing makes it very hard for oligopolists to develop a market strategy?
There is information failure about the shape of their demand curve because it is hard to know with interdependence.
183
Explain the kinked demand curve model?
1. When firms raise prices, they expect other firms not to follow suit, because those firms wish to gain market share and hence profit at the firms expense. So demand is elastic above the ruling market price.
2. When firms cut prices, they expect firms to follow suit and cut prices to maintain market share.
184
Notes on language for kinked demand curve theory?
RELATIVELY elastic or RELATIVELY inelastic, with reference to a MORE THAN PROPORTIONATE change in demand. Note the ASYMMETRIC reaction.
185
Why is the best thing firms can do in oligopoly to keep prices unchanged?
Because here maximum revenue is achieved.
186
What are 2 reasons the kinked demand curve theory is now no longer universally accepted?
1. Incomplete - does not explain how firms reach the position in the first place.
2. Real world not like this.
187
How is the real world not like the kinked demand curve world? Eval?
Whereas price is constant where demand is cyclical and relatively stable, prices tend to fluctuate dramatically when large changes in demand or cost of production occurs.
188
Oligopoly is hard to define because...
It covers any market with a small number of firms and interdependence, which is many of them.
189
What are 3 advantages of oligopoly?
1. Behavioural economics point - people experience bounded rationality. They are less likely to be held back if they fully understand the whatnot.
2. Firms benefit from economies of scale, which can increase productive efficiency (dynamic efficiency).
3. In competitive oligopoly, the fruits of scale (large retained profits) must be re-invested to maintain market share so innovation continues.
190
Example of a competitive oligopoly market that combines the best of both worlds as regards competitive pressure and dynamic efficiency?
Smartphone market - fold phones etc.
191
What are 3 price behaviours practiced by oligopoly firms?
1. Price leadership
2. Price agreements
3. Price wars.
192
What is price leadership? Eval?
The setting of prices in a market, usually by a dominant firm, which is then copied by other firms. More common because easier to prove is collusion.
193
What is a price agreement? Eval?
Formal agreement between economic agents (NOT JUST BETWEEN FIRMS AS FOR A PRICE RING) to set prices, usually for a fixed period of time.
194
What are price wars? Eval?
Extensive price cutting to try and win market share. Good for consumers in the short run, but in the long run may lead to the accumulation of monopoly power.
195
What is retail price maintenance an example of? Eval?
Price agreement - a restrictive practice by today's standards, but legal.
196
What has Amazon done in the book market?
Undermined RRP (unenforced price agreement). Fewer than 1000 independent UK bookshops and between 2500-3000 in France.
197
Oligopoly can be summarised as...
Imperfect competition among the few.
198
What is price discrimination?
Charging different prices to different customers for the same good or service, based only on their willingness to pay and not any differences in costs of production.
199
What makes second degree price discrimination more unimpeachable than the other types?
Could actually be.
200
What is an unenforced price agreement?
Determined RRP.
201
How many independent bookshops are there in the UK?
Fewer than 1000.
202
How many independent bookshops are there in France?
Between 2500-3000.
203
What is the intention behind securing market power?
To raise prices again.
204
How can oligopoly be summarised?
Imperfect competition among the few.
205
What is price discrimination?
Charging different prices to different customers for the same good or service based only on their willingness to pay.
206
What makes second degree price discrimination more unimpeachable?
Reductions in average unit costs due to economies of scale.
207
What must be possible for price discrimination to occur?
Segregation of the market according to price elasticities of demand (PEDs).
208
Why do firms price discriminate?
To maximize profit.
209
What assumption must be made for the third degree price discrimination diagram to hold?
Marginal cost (MC) is horizontal.
210
Why is first degree price discrimination favored?
It eliminates all consumer surplus.
211
What are the three conditions for price discrimination?
1. Market power to prevent substitutes. 2. Identifiable different PEDs for each customer group. 3. Prevention of seepage.
212
What is seepage?
Circumventing a price discrimination situation by using reselling arrangements.
213
Give an example of arbitrage.
Higher prices paid on UK cars could be circumvented using specialist importers.
214
What are two reasons competition is conventionally assumed to be good?
1. Weeds out high-cost inefficient firms. 2. Consumers benefit from lower prices.
215
Does creative destruction increase or decrease competition?
May decrease it in the short run as the innovating firm gains market share.
216
In a situation of increasing/decreasing returns to scale, what is the relationship between LRMC and LRATC?
Falling and below LRATC for increasing returns; rising and above LRATC for decreasing returns.
217
What is the central theory of modern economic evolution?
Creative destruction.
218
What is the shutdown price?
The point where price equals average variable cost (P=AVC).
219
What is the shutdown point?
The point where price is less than average variable cost (P
220
What does non-price competition link to?
Innovation.
221
What institutionally makes Apple's continual creative destruction easier?
Nimble management style with a single executive board.
222
How was oligopoly market failure dealt with pre-contestable markets theory?
Extensive regulation and nationalisation.
223
What tradeoff exists in traditional policy making concerning monopolies?
Recognizing benefits of retained profit and dynamic efficiency while mitigating monopoly power.
224
What is contestable market theory?
The theory that potential competition is sufficient to induce competitive behavior by incumbent firms.
225
What are the necessary conditions for perfect contestability?
1. No entry or exit barriers, particularly sunk costs. 2. Perfect information on product innovation.
226
Give three examples of contestable market theory.
1. Removal of licensing. 2. Privatisation. 3. Removal of price controls.
227
How might the removal of licensing make markets less contestable?
Government can check a firm's competitiveness using licensing procedures.
228
Give an example of a market made contestable by more licensing.
Ventia - South Australian contractor used by Government to manage public buildings.
229
What is a key evaluation for contestable markets?
1. No sunk costs. 2. No entry/exit barriers.
230
What is the difference between fixed costs and sunk costs?
Fixed costs needn't be sunk if they can be sold on.
231
What is a key example of a sunk cost?
Advertising.
232
What is hit-and-run competition?
A firm temporarily enters a contestable market to bid away abnormal profits before withdrawing.
233
What can contestability do?
Cause limit pricing to prevent the threat of hit-and-run competition.
234
Why might the tendency of contestability to eliminate excess profits not be beneficial?
1. Dynamically inefficient. 2. Not allocatively efficient.
235
What is a specific entry barrier unlikely to be eliminated in contestable markets?
Economies of scale.
236
What is static efficiency?
Efficiency measured productively and allocatively at a particular point in time.
237
How can dynamic efficiency increase long-run competition?
Through creative destruction.
238
How can consumer and producer surplus be used?
To evaluate market structures.
239
What is consumer surplus?
A measure of economic welfare enjoyed by consumers; the surplus utility received over and above the price paid.
240
Is consumer surplus present in competitive markets?
Yes, for all consumers who would be willing to pay more.
241
What is producer surplus?
A measure of the economic welfare enjoyed by firms; the surplus profit over and above the minimum price the firm would be willing to accept.
242
What happens to surpluses as a monopoly is created?
Producer surplus rises and consumer surplus falls.
243
For a monopoly, what is the market supply curve the same as?
The firm's marginal cost (MC) curve.
244
What diagram shows market failure in monopoly?
One showing the deadweight loss created by the transferring of surplus.
245
What is a key note for the diagram considering surplus transfers and losses in a monopoly?
Linear average revenue (AR) curve represented as the market demand curve.
246
How is consumer economic welfare measured?
By consumer surplus.
247
Describe first degree price discrimination in terms of surpluses.
All consumer surplus is eliminated and turned into monopoly profit.
248
How can first degree price discrimination lead to cross-subsidisation?
The firm's average revenue (AR) curve becomes its marginal revenue (MR) curve.
249
Give an example of a positive impact of a price discriminatory situation.
May enable a village doctor to stay in operation.
250
Why is AR horizontal in perfect competition?
AR equals price, and firms are price takers.
251
What does the total revenue (TR) curve look like in perfect competition?
A straight line up, like a supply curve.
252
Why is MR steeper than AR in imperfect competition?
The firm must drop its prices to sell more units.
253
What happens to the price charged by imperfectly competitive firms as quantity increases?
It falls.
254
For an imperfectly competitive firm, what is the demand curve also?
The average revenue (AR) curve.
255
How do you draw total revenue when a firm is in imperfect competition?
1. AR and MR for an imperfectly competitive firm. 2. Below this, a total revenue graph.
256
What is the symbol for profit?
Pi.
257
What is total cost (TC) made up of?
Explicit costs (physical costs) and implicit costs (opportunity costs).
258
What is accounting profit?
Total revenue minus implicit costs.
259
What is economic profit?
Total revenue minus both implicit and explicit costs.
260
What assumption underlying economic profit could be critiqued?
Opportunity cost depends on factor mobility.
261
If a firm makes a profit of 90,000 selling product A and could make 100,000 selling product B, what are the economic and accounting profits?
Economic profit is a loss of 10,000; accounting profit is 90,000.
262
What does 0 economic profit indicate?
Normal profit.
263
+ve economic profit indicates?
Abnormal/supernormal profit.
264
-ve economic profit indicates?
Subnormal profit.
265
What is normal profit?
The minimum level of profit required to keep the factors of production in their current use.
266
What is the normal profit condition?
Average revenue (AR) equals average cost (AC).
267
What is the supernormal profit condition?
Average revenue (AR) is greater than average cost (AC).
268
What is the subnormal profit condition?
Average cost (AC) is greater than average revenue (AR).
269
What are four reasons profit maximization is the rational objective of firms?
1. Dividends for shareholders. 2. Re-investment for long-run profit maximization. 3. Lower costs and prices for consumers. 4. Reward for entrepreneurship.
270
What are four reasons profit maximization is not always an objective of firms?
1. Knowledge of MC=MR. 2. CMA pressure could lead to an investigation. 3. Key stakeholders could be harmed. 4. Other objectives may be more appropriate.
271
What is profit satisficing?
Sacrificing profits to satisfy as many key stakeholders as possible.
272
Give an example of how profit maximization can harm stakeholders.
Trade unions and workers may see wages fall.
273
Why is profit maximization often substituted for profit satisficing?
To avoid bad reputations and CMA investigations.
274
How can profit satisficing be a long-run form of profit maximization?
It prevents long-term alienation of consumers.
275
What is revenue maximization?
When marginal revenue (MR) equals zero.
276
What are three reasons revenue maximization is sometimes an objective of firms?
1. Achieve economies of scale. 2. Predatory pricing. 3. Principal-agent problem.
277
Why is revenue maximization a form of divorce of ownership from control?
Easier for managers to show good performance.
278
What objective of firms is more attuned to economies of scale than revenue maximization?
Sales maximization.
279
What is the sales maximization condition?
Average cost (AC) equals average revenue (AR).
280
What are four reasons for sales maximization?
1. Principal-agent problem. 2. Limit pricing to prevent market entry. 3. Economies of scale. 4. Raise market share.
281
Are limit pricing and predatory pricing legal?
No, but CMA investigations are watchdog-based.
282
Give an example of how sales maximization can become profit maximization in the future.
Sales maximization can lead to more price inelastic demand.
283
When does short-run survival occur?
In downturns or when firms enter competitive markets.
284
What are two tertiary objectives for firms?
1. Nationalized firms pricing at P=MC. 2. Corporate social responsibility (CSR).
285
What is the allocative efficiency point for firms in imperfectly competitive markets?
Marginal cost (MC) equals average revenue (AR).
286
Give an example of CSR.
Body Shop - they do not test their products on animals.
287
Where is profit satisficing on the monopoly diagram?
Anywhere between MC=MR and AC=AR.
288
What mnemonic can help remember barriers to entry?
Lloyds-TSB: Legal, Technical, Strategic, Brand loyalty.
289
What are legal barriers to entry?
Artificial barriers such as patents, licenses, regulation, and insurance.
290
What are technical barriers to entry?
Natural barriers such as economies of scale, sunk costs, and indivisible capital.
291
What are strategic barriers to entry?
Artificial barriers such as predatory pricing, limit pricing, and saturation advertising.
292
Give an example of a legal barrier to entry.
Venetian gondoliers' licenses are strictly limited by the government.
293
What are the main examples of sunk costs?
1. Highly specialized capital. 2. Advertising.
294
What is the most common way firms predatory price and why is it illegal?
Loss-making but cross-subsidizing, which drives market consolidation.
295
Give four examples of barriers to exit.
1. Undervaluation of assets. 2. High redundancy costs. 3. Penalties for leaving contracts early. 4. Sunk costs.
296
What are allocative efficiency facts?
1. Resources follow consumer demand. 2. Society surplus is maximized. 3. Net social benefit is maximized.
297
What is allocative efficiency for a firm?
When demand equals supply (D=S).
298
What is the relationship between P and MC in a business diagram?
Price equals marginal cost (P=MC).
299
What are five reasons allocative efficiency is good for consumers?
1. Resources follow consumer demand. 2. Lower prices. 3. Maximization of consumer surplus. 4. High choice. 5. High quality.
300
What are three reasons allocative efficiency is good for firms?
1. Retain or increase market share. 2. Stay ahead of rivals. 3. Increase profits.
301
What are three reasons consumers like productive efficiency?
1. Lower prices. 2. Higher consumer surplus. 3. Full exploitation of economies of scale.
302
What will dynamic efficiency do over time?
Lower long-run average cost (LRAC).
303
What is the condition for dynamic efficiency?
Abnormal profit in the long run.
304
Why is dynamic efficiency good for consumers in the long run?
Creative destruction leads to lower prices and increased consumer surplus.
305
Why is x-efficiency good for both consumers and producers?
1. Lower prices. 2. Higher consumer surplus. 3. Lower costs. 4. Higher profit.
306
What efficiency does perfect competition fall short on?
Dynamic efficiency.
307
Why does supernormal profit not persist in the long run?
1. Perfect information through price signaling. 2. No long-run barriers to entry.
308
If firms are at the shutdown point, what are they liable to do?
Keep producing due to the stakeholder model.
309
What is the detailed explanation for why firms below the short-run shutdown point should not continue production?
It would be cheaper to shut down than to continue producing when total variable cost exceeds total revenue.
310
How do firms making abnormal losses in the short run expect their situation to improve?
By other less cost-efficient firms being forced out of the market.
311
What should a firm whose TR - TC is greater than TFC do?
Leave the market in the short run.
312
What should a firm whose TR - TC is less than TFC do?
Continue producing in the short run.
313
What is the shutdown condition in the short run?
Average revenue (AR) equals average variable cost (AVC).
314
What is the shutdown condition in the long run?
Average revenue (AR) equals average total cost (ATC).
315
What is the break-even condition?
Average revenue (AR) equals average cost (AC).
316
What is the legal monopoly definition?
25% market share.
317
How can you illustrate that monopolies restrict output and raise prices?
MC=MR is to the left of allocative efficiency.
318
How can you show the benefit of economies of scale for a monopoly firm?
MC cuts MR at the point where AC is at its lowest.
319
What x-inefficiency can be shown for firms with monopoly power on the diagram?
Anywhere along the line of unit abnormal profit.
320
What is the definition of a legal monopoly?
A market structure where a single firm has 25% market share.
321
What is a statutory monopoly?
A monopoly that is legally protected from competition.
322
How do monopolies restrict output and raise prices?
MC=MR is to the left of allocative efficiency MC=AR and at a higher price.
323
How can the benefit of economies of scale for a monopoly firm be shown?
MC cuts MR at the point where AC is at its lowest point.
324
What is x-inefficiency in firms with monopoly power?
Anywhere along that line of unit abnormal profit could be x-inefficiency.
325
What are two reasons monopoly firms experience x-inefficiency?
1. Very difficult to reduce average costs due to stakeholder model of the firm/size of firm.
2. Lack of competitive pressure to do so.
326
What is deadweight welfare loss?
Unrecoverable welfare loss.
327
What constitutes society welfare?
Consumer + Producer surplus.
328
How do firms find out about our PED for price discrimination?
By creating an account.
329
What happens to consumer surplus in 1st degree price discrimination?
It is entirely transferred to producer surplus.
330
What is excess capacity pricing?
A firm with fixed capacity which tends to lower prices at the last minute to fill seats.
331
What is third-degree price discrimination?
When a firm with monopoly power separates the market into different groups with different PEDs.
332
What are three cons of price discrimination?
1. Allocative inefficiency.
2. Inequality.
3. Anti-competitive pricing - frequently used to cross-subsidise and penetrate uncompetitive markets.
333
How can third degree price discrimination reduce competition?
1. A firm has monopoly power.
2. It uses cross-subsidisation to drive down prices with one group of consumers.
3. This gives it a competitive advantage over firms pricing in the more elastic market.
334
What are four pros of price discrimination?
1. Dynamic efficiency gains from more profits and producer surplus.
2. Economies of scale could be achieved by market power.
3. Some consumers see a rise in their surplus.
4. Cross-subsidisation if the firm has corporate social responsibility in mind.
335
Why should the benefits to consumer surplus from elastic consumers under price discrimination not be exaggerated?
Most consumers, on inelastic demand, lose out.
336
How can allocative inefficiency be shown in a price discrimination situation?
MC =/= P.
337
What are the four properties of a natural monopoly?
1. Huge fixed costs from very high capital requirements.
2. Enormous potentials for economies of scale.
3. Rational for one firm to supply the entire market.
4. Competition would wastefully duplicate resources and lack economies of scale.
338
What is the efficiency verdict for a natural monopoly?
1. Productive efficiency best when one firm is in the market.
2. Allocatively inefficient (probably).
339
What is the key thing for a natural monopoly?
It must be regulated to ensure that AR=MC.
340
Why do governments give private monopolies subsidies?
Natural monopolies make losses at MC=AR.
341
Why are state-run natural monopolies considered best?
At AR=MC, allocative efficiency, there is a unit loss - it needs regulating.
342
What are four cons of monopoly?
1. Allocative inefficiency.
2. Productive inefficiency.
3. X-inefficiency.
4. Inequalities in necessity markets.
343
How can monopolies create inequalities in necessity markets?
Higher prices are regressive and monopolies sometimes dominate necessity markets.
344
What are four pros of monopolies?
1. Dynamic efficiency and re-investment.
2. Greater economies of scale.
3. Natural monopolies and efficiency gains.
4. Cross-subsidisation.
345
What is the evaluation of productive efficiency for monopolies?
1. Monopolies are not innately productively efficient and may forego productive efficiency gains for profit maximisation.
2. However, larger firms are likely to capitalise on economies of scale.
346
What is a key point for an essay about the benefit of monopoly?
What market are you talking about? A market with natural economies of scale is different from one with artificial barriers to entry.
347
What is the benefit of cross-subsidisation in monopolies?
1. Monopolies may make abnormal profits.
2. They can use these profits to subsidise socially desirable loss-making goods.
348
What are eight evaluation points for monopoly?
1. Will profits actually be reinvested?
2. Returns to scale?
3. Is the objective of firms actually profit max?
4. Regulation.
5. Price discrimination.
6. Competition or threat thereof.
7. Natural monopolies.
8. Type of good or service produced.
349
How can the type of good or service aid our evaluation of monopoly?
Monopolies producing necessities are generally bad, while those producing luxuries may benefit from innovation.
350
What are four benefits of competitive markets?
1. Allocative efficiency.
2. Productive efficiency.
3. X-efficiency.
4. Jobs.
351
How can we show consumer surplus in PC markets relative to IPC markets?
Use the monopoly welfare diagram with the shift in reverse.
352
What are four cons of perfect competition?
1. Lack of dynamic efficiency.
2. Lack of economies of scale.
3. Cost-cutting in dangerous areas.
4. Creative destruction.
353
How is creative destruction an argument against perfect competition?
Constant changes can cause structural unemployment and welfare loss.
354
How do you judge the significance of the economies of scale argument against perfect competition?
What is the market under evaluation?
355
How do we evaluate whether creative destruction is likely to be severe in perfect competition?
How mobile are the factors? Can they take a job at the firm that just put them out of business?
356
What are seven evaluation points for perfect competition?
1. There may still be enough profits for dynamic efficiency.
2. Economies of scale.
3. Natural monopoly.
4. Where is cost-cutting taking place?
5. Does the market need regulation?
6. Static vs dynamic efficiency.
7. Type of good or service.
357
What is the role of regulation in perfect competition markets?
To prevent excessive cost-cutting.
358
What key point should be questioned during perfect competition evaluation?
Do we prefer static or dynamic efficiency? It may depend on the good/service being produced.
359
Is monopolistic competition considered competitive?
Yes.
360
What are the characteristics of monopolistic competition?
1. Many buyers and sellers.
2. Slightly differentiated goods.
3. Low barriers to entry and exit.
4. Non-price competition.
5. Decent information.
6. Profit maximisers.
361
In which markets do we see non-price competition?
Monopolistic and oligopoly markets.
362
What is an example of a monopolistically competitive market?
Clothing.
363
Why is the monopolistic competitive market diagram different in the long run?
Few long run barriers to entry or exit - demand is not inelastic, so demand shifts left for each individual firm.
364
How to draw a monopolistically competitive market diagram in the long run?
Draw AR and MR first, then draw the MC curve, then draw the AC curve last.
365
How to illustrate allocative inefficiency in monopolistic competition?
P>MC on the diagram.
366
What is the consumer outcome from monopolistic competition?
Allocatively inefficient with high prices, but some argue there is more choice.
367
How to evaluate allocative efficiency in a monopolistically competitive market?
1. Price exploitation is less than in monopoly - consumer surplus higher.
2. More choice due to undifferentiated products, increasing welfare.
368
How to evaluate productive efficiency in monopolistic competition?
1. Less productively inefficient than monopoly.
2. More economies of scale than perfect competition.
3. Differentiated goods mean inefficiency is not the firm's fault.
369
What are two ways monopolistically competitive markets might still be dynamically efficient?
1. Product differentiation leads to reinvestment.
2. Short-run profits may lean towards dynamic efficiency.
370
What is the form of market concentration ratios?
N: total market share where n is the number of firms under examination.
371
What does a 2:71 concentration ratio mean?
A duopoly in a market has 71% market share.
372
What is the market share of the Big Six?
92%.
373
What is the definition of an oligopoly?
No more than 7 firms with around 70% market share.
374
What is the most important characteristic of oligopoly?
Interdependence.
375
What is the main objective of firms in oligopoly?
To potentially prioritize market share over profit maximisation.
376
What is an example of a legally sanctioned oligopoly?
OPEC.
377
What kind of market is the airline industry?
Oligopoly.
378
What are six features of an oligopoly?
1. Few firms dominate the market.
2. Differentiated goods.
3. High barriers to entry/exit.
4. Interdependence and price rigidity.
5. Non-price competition.
6. Profit maximisation is not necessarily the sole objective.
379
How can firms in oligopoly markets have particular business objectives?
1. Achieve market power via profit max and dynamic efficiency investment.
2. Aim to maximise market share to increase oligopoly power.
380
What is the car industry classified as?
Oligopoly.
381
What are two ways to use the kinked demand curve?
1. Varying elasticity incentivises firms to keep prices constant.
2. MC discontinuity means profit-max at a range of costs.
382
How to illustrate a price war and evaluate?
Kinked demand curve shows price falls, quantity expands less than proportionate, leading to a fall in revenue.
383
What is price rigidity?
The tendency of firms in oligopoly to keep prices fairly constant.
384
What are three conclusions regarding oligopoly?
1. Price competition can lead to price wars, boosting consumer surplus short-term but reducing it if market power is attained.
2. Non-price competition is preferred.
3. There is a temptation to collude.
385
What is an example of an oligopoly price war?
Price matching at UK supermarkets or short haul airlines.
386
What is an example of non-price competition in oligopoly markets?
Pepsi and Coca-Cola.
387
What can supersede the kinked demand curve to explain interdependence?
Game theory.
388
How can game theory model oligopoly behaviour?
1. Similar to a prisoner's dilemma.
2. A payoff matrix can be drawn.
3. Both firms would win if both went high, but lose if one prices differently.
4. Incentive to collude.
5. Nash equilibrium is where both firms charge less.
389
When have you solved the game in game theory?
When the cell with two outcomes is underlined.
390
What is a dominant strategy in a game theory oligopoly market?
The strategy which is best for the firm under all circumstances, typically charging lower prices.
391
What is the conclusion regarding rigid prices in an oligopoly market?
Once at Nash equilibrium, non-price competition will prevail.
392
How can we illustrate collusion and its likely effects using a payoff matrix?
1. More profit can be earned by colluding.
2. More profit can be earned by breaking the collusive agreement.
3. Prices are likely to remain stable.
393
True or false: collusive arrangements make prices fixed in oligopoly markets.
Not really - firms have every incentive to undercut the collusive agreement.
394
What is the effect of collusion on welfare?
Likely to transfer consumer surplus to producer surplus.
395
What is the long-run analysis of oligopolies?
Unlikely to be collusive in the long-run.
396
What are two reasons firms don't tend to collude in oligopoly markets?
1. Regulators keep a close watch.
2. Incentive to cheat for short-run abnormal profits.
397
What are the two kinds of collusion?
1. Tacit (particularly price leadership).
2. Overt.
398
What are five factors that make oligopolies competitive?
1. Large number of firms makes organising harder.
2. New market entry is hard but not impossible.
3. One firm with significant cost advantage.
4. Homogenous goods lead to lower price-making power.
5. Saturated markets reduce likelihood of collaboration.
399
What are six factors that promote collusive oligopoly?
1. Small number of firms.
2. Similar costs.
3. High entry barriers.
4. Ineffective competition regulation.
5. Consumer loyalty.
6. Consumer inertia.
400
How do consumer loyalty and inertia affect the likelihood of collusion in an oligopoly market?
If consumer loyalty and inertia are low, price wars are more effective due to more elastic AR.
401
What is a contestable market?
A market with low entry and exit barriers, creating a threat of market entry via hit and run competition.
402
What are the four properties of a contestable market?
1. Low barriers to entry and exit.
2. Large pool of potential entrants.
3. Good information.
4. Incumbent firms subject to hit and run competition.
403
How has technology improved contestability in recent years?
1. Reduced barriers to entry and exit via disruptive innovation.
2. Increased pool of potential entrants.
3. Improved information.
4. Innovation incentivises market entry.
404
Is limit pricing in a contestable market always at AC=AR?
No, it is at the point where the cost of superseding barriers to entry equals the abnormal profits of incumbent firms.
405
What are four pros of contestable markets?
1. More allocative efficiency.
2. More productive efficiency.
3. More x-efficiency.
4. Job creation due to increased quantity.
406
What are four cons of contestable markets?
1. Lack of dynamic efficiency.
2. Cost-cutting in dangerous areas.
3. Creative destruction can harm workers.
4. Anti-competitive strategies.
407
What are anti-competitive measures firms in contestable markets can take?
1. Hostile takeovers and buyouts.
2. Predatory pricing.
3. Limit pricing.
4. Excessive regulation.
408
What are four evaluations on contestable markets?
1. How long is the contestable period?
2. How likely is technology to create/disrupt a contestable market?
3. Regulation affects contestability - what are the trade-offs of deregulation?
4. Is dynamic efficiency lost when a market becomes contestable?
409
What are the regulatory bodies in the UK and Europe?
1. CMA.
2. Agencies accountable to the CMA, e.g., CAA.
3. EU Competition Commission for the single market.
410
How can regulators enforce dynamic efficiency?
By forcing companies to direct abnormal profits towards reinvestment.
411
What is another role of competition regulators in common markets?
State aid must not distort competition.
412
How can regulation affect contestability?
Regulation can impact the level of contestability in a market.
## Footnote
Trade-offs of deregulation must be considered.
413
What is dynamic efficiency?
Dynamic efficiency refers to the ability of firms to innovate and improve over time.
## Footnote
It may be lost when a market becomes contestable.
414
What is the role of the CMA?
The CMA (Competition and Markets Authority) oversees competition regulation in the UK.
## Footnote
It is accountable to various agencies, including the CAA (Civil Aviation Authority).
415
What is the role of the EU Competition Commission?
The EU Competition Commission regulates competition for the entire single market.
416
How can regulators enforce dynamic efficiency?
Regulators can compel companies to reinvest abnormal profits to maintain dynamic efficiency.
417
What is another role of competition regulators in common markets?
Competition regulators ensure that state aid does not distort competition in a customs union or single market.
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