Exam Q Paper 1 Flashcards
(31 cards)
Access the factors necessary for the success of a cartel (12)
Or discuss why price fixing and anticompetitive behaviour may have been possible
A cartel is a group or firms collude with one another. Collusion is when firms will fix a high price by restricting their output and behaving as if they were a monopoly
One factor is needs to be an oligopoly as easier to set up cartel when fewer firms and have enough control over supply to be able to shift it in and raise market price and the biggest firm in that market must be part of the collusive agreement for it to succeed. Cartel won’t work unless eg Tesco is involved because if Tesco is not involved and others start to collude, Tescos prices will be lower than other firms colluding so people switch to tesco so no sense to collude without Tesco.
Then draw or just mention prisoners dilemma.
Eval: However games like prisoners dilemma illustrate that cartels tend to break down in the long run because there is always and incentive of one of the firms to undercut the other to gain profits and their expense and there’s also an incentive to whistleblow so they gain immunity whilst rivals get heavy fines.
Another factor is good being sold needs to be price inelastic as if demand for a good was elastic and you raise price a little bit then there will be a more than proportionate decrease in demand for your good and end up with less revenue and profit
EVAL: In LR good is likely to become more elastic eg oil used less as ppl switch to electric cars or bad reputation sees improvements like better quality in LR
When do you use kinked demand and explain it
-Use for eval for any price strategy
-Use for question like why girl not adjusting (raising/decreasing price)
-Kinked demand says it doesn’t make sense for oligopolies to try and compete with one another through prices and shouldn’t engage in pricing strategies as it’s a bad idea.
-Kinked diagram with point A
Above A it’s elastic and below is inelastic
-If Tesco raises their prices others won’t follow so they will lose customers and if Tesco lower prices then other customers will also lower prices
-If all other firms lower price then they won’t see a dramatic shift in demand so below is inelastic
Industry’s outside knowledge
> Perfect Competition
-Agriculture – e.g., wheat, corn, or other commodity markets
> Monopolistic
-Restaurants
-Hairdressers
-Retail clothing
-Small local shops
-Cafes
> Oligopoly
-Supermarkets – Tesco, Sainsbury’s, Asda, Aldi
-Telecoms – BT, Vodafone, O2, EE
-Energy suppliers – British Gas, EDF, E.ON, Octopus
-Airlines – British Airways, easyJet, Ryanair
> Monopoly
Water companies
-Thames Water (regional monopolies)
-Network Rail
> Contestable markers
-Taxi services (Uber vs black cabs)
-Online retail (Amazon vs smaller e-commerce)
-Streaming services (Netflix, Disney+, etc.)
> Labour market
-NHS (public sector pay)
-Tech companies (e.g. wage inequality in Google, Meta)
-Gig economy – Uber, Deliveroo, etc. (zero-hour contracts, worker rights)
Discuss one likely reason for the rise in BT’s profit, use cost revenue diagram
AR and MR shift out
-One factor causing profits to rise for BT is their merger with EE
-application from extract
-merger will cause them to have more market share so AR and MR shift right, so sales increase from 0e to 01, the price the charge increases from p1 to p2 and profits increase from C1P1AB to P2C2DE
EVAL:
merger= diseconomies of scale + CMA may get involved= more regulation = profits may not go up and there will be increased costs
Using a cost revenue diagram, asses the likely impact of increased monopsony power for Apple.
VC= AC AND MC shifts
FC- only AC shifts
So for Monopony power
-define monospony
-extract
-MC and AC fall= decrease price = increased sales = increased profits
- output increase from 0e to 01= increased sales , profits increase from P1C1AB to P2C2DE
- price charged fall from p1 to p2
at pax, demand is elastic so a fall in price = increased demand and so wh when prices fall = more than proportionate increase in demand increases a lot, so revenue rises and lower costs
EVAl
-CMa may intervene to limit degree of monopsony power
- farmers may merge= decrease monopsony power
- farmers may merge= decrease monopsony power as firms have less power over them if bigger
Discuss whether product differentiation under conditions of monopolistic
competition can benefit both firms and consumers. Refer to examples in your answer.
Monopolistic competition is where there is imperfect information and there are large amount of buyers and sellers which are relatively small and independent. In monopolistic competition in the LR firms make normal profits this is because new firms enter due to profit incentive which makes demand for firms already operating more elastic which shifts AR to the left so normal profits are made
Differentiation allows firms to gain brand recognition and brand loyalty which makes price relatively inelastic as consumers are less likely to switch when brand loyalty is high because they are used to that product and therefore buy it. For example, in the fast food industry mcdonalds and burger king sell similar products but their strong brand mage and unique selling menu items allow them to attract a wider customer base. Additionally differentiation allows firms to charge a premium price for their products.
A benefit for consumers is that they will get a wide variety of choice as they will have many products to choose from therefore their consumer surplus will increase. For example, in the clothing industry brands like adidas and nike offer different styles and fits. These different options will allow consumers tastes and preferences to be met.
However, monopolistic competition may not be good as resources are not used fully and firms are not productively efficient because they dont produce at the lowest point on the AC curve unlike firms in a competitive market. Additionally, firms in monopolisitic competition waste resources on non-price factors like branding and advertising, this si so they can make their products stand out from other competitors which increases costs for firms and decreases abnormal profits, or these firms might pass these higher costs onto consumers through higher prices
Discuss the effects of firms of cutting prices in an oligopolisic market(use game theory)
One effect of firms reducing prices in response to the advertising ban is to retain their market share.This so because as walkers , also as walkers is a massive firms they can bulk buy massive quantities so cost per unit falls = can charge low price the advertising ban makes the market more contestable as a result firms may adopt limit pricing to deters new entrants into market= increased profits and maintain market share. Limit pricing is selling price below average cost of potential entrant to market
Eval- kinked demand curve
From pe to p2 = massive reduction in price but tiny increase in deman d= doesnt make sense to reduce prices as by reducing prices from pe to p2 other firms will also reduce their prices= less than proportional increase in demand so revenue and profits are likely to fall
Mobility of labour
Geographic , look out for
- transportation costs, low costs = easier to move from one area to another to take up a job eg HS2
- housing costs, eg may subsidise housing if you go work at a specific place
-martial status and family
- family, martial status
EVAL- less of issue as alot of jobs enable you to work from home= geographical immobility= less of issue
Occupational immobility
-gov can invest into education and training schemes = improves occupational immobility as workers gain skills required to go into that sector
Limit pricing
-where a firm that already in market doesnt maximise profits
- set low price = economies of scale
- if theres s threat of compeition= decrease price (limit pricing) eg tesco can tap into purcasing
Monopsony definition and examples
Monopsony - single buyer in the market
Examples:
- In the UK NHS is a monopsony as they buy services of doctors and nurses, of if they decide to reduce wages they pay nurses and doctors; they can’t do much because most jobs available are through the NHS.
- Supermarkets in the UK i.e., a small number of supermarkets in the UK so if, e.g., Tesco wants lower prices from farmers, farmers don’t have bargaining power, so farmers have to accept the lower price.
Assess the degree of monopsony power in the supermarket industry.
High monopsony power:
- Look at the concentration ratio; if only a small number of big supermarkets = high power.
- Profits of suppliers fall as supermarkets pushing down prices, so decreased profits for suppliers = some may leave the market
- Variable costs for supermarkets falls = pass onto consumers through lower prices, AC and MC will fall
- If many sellers, ie farmers, supermarkets have the power to choose to buy from other sellers/farmers
- If goods are homogenous, the supplier doesn’t have much bargaining power as supermarkets can buy products from anywhere so farmers have to accept it = high monopsony power
Low monopsony power
- If they have strong brand loyalty, e.g., Tesco cant fight Coca-Cola
- If suppliers decide to merge = bargaining power is stronger for suppliers; if fewer sellers/ farmers = limits monopsony power
- If profits are falling doesnt mean monsosony power is high as it could be for other reasons like supplier having bad efficiency
- CMA can intervene to limit monopsony power
Effects of monopsony power
- Fall in variable cost so AC and MC fall = increased abnormal profits = can pay off shareholders = can invest these supernormal profits into new technology like new self-checkout machines = makes the market less contestable = increases market share and dominance as other firms struggle to compete with Tesco
EVAL:
- However CMA may intervene to lower monopoly power so may not see a significant fall in their variable costs
For suppliers
- Prices forced down = increased costs = decreased abnormal profits = cant pass onto supermarkets = some may leave the market and shut down which can actually increase prices for consumerss
EVAL:
- Some suppliers may merge, and also some suppliers may have monopoly power, e.g., brands like Coca-Cola, = not affected as they are unlikely to see their prices forced down.
- May force suppliers to increase efficiency to stay in the market
Consumer:
- Lower price
- Increased consumer surplus
- Increase allocative efficiency
EVAL:
- However, supermarket is also an oligopoly so there is no guarantee they will pass on these benefits of lower prices to consumers, so it just gives them more strength and monopoly power so in turn may charge higher prices = so decreased consumer surplus
Gov:
- Decreased tax revenue if farmers leave the market as less corporation tax
Natural monopoly and examples
Natural Monopoly - High Fixed Costs, One Firm Most Efficient
Examples:
Water supply companies like Thames Water; high infrastructure costs mean duplication is inefficient.
National Grid controlling electricity transmission.
Assess the degree of natural monopoly power.
High Natural Monopoly Power:
-High fixed costs deter entry.
-Economies of scale mean a single producer is most efficient.
-Lack of competition leads to potential for price exploitation.
-Infrastructure-heavy industries naturally lead to dominance of one firm.
Low Natural Monopoly Power:
-Government regulation can enforce price controls.
-Technological advances (e.g., renewable energy decentralization) may reduce monopoly power.
-Privatisation may introduce some competition.
Effects of Natural Monopoly Power:
For the Firm:
-High profits allow for reinvestment.
-Lower average costs over time due to economies of scale.
-Can improve efficiency through technological investment.
EVAL:
-Government-imposed price caps limit profit potential.
For Consumers:
-Potentially high prices due to lack of competition.
-Limited choice.
-Guaranteed provision of essential services.
EVAL:
-Regulation can force fairer prices and improve service.
-If natural monopoly is state-owned, consumer interests may be prioritised.
For Government:
-May require public ownership or heavy regulation.
-Ensures universal service provision.
-Can face pressure to balance efficiency with affordability.
Oligopoly and examples
Oligopoly - Few Large Firms Dominating the Market
Examples:
-UK supermarkets (Tesco, Sainsbury’s, Asda, etc.).
-UK mobile networks (Vodafone, O2, EE, Three).
Assess the degree of oligopoly power.
High Oligopoly Power:
-High concentration ratio.
-Price rigidity and potential for tacit collusion.
-Non-price competition (branding, advertising) limits consumer choice.
-Barriers to entry maintain market dominance.
Low Oligopoly Power:
-Contestable market reduces dominance.
-Price wars can lead to competitive pricing.
-Regulation to prevent collusion (CMA investigations).
-Presence of new entrants or substitutes weakens power.
Effects of Oligopoly Power:
For Firms:
-Supernormal profits.
-Can invest in branding and innovation.
-Risk of price wars reducing profitability.
EVAL:
-Price wars can lower profits.
-Firms may collude to maintain high prices.
For Consumers:
-Limited price competition.
-Higher prices than perfect competition.
-Innovation and product differentiation improve choice.
EVAL:
-Brand loyalty and quality improvements benefit consumers.
-Potential for predatory pricing reducing competition long-term.
For Government:
-Tax revenue from large firms.
-May need regulation to prevent price-fixing.
-Trade-off between dynamic efficiency and consumer welfare.
Contestability
Contestability – Market with Low Barriers to Entry and Exit
Examples:
Low-cost airlines (e.g., Ryanair, EasyJet) – New airlines can enter the market relatively easily by leasing aircraft and using secondary airports.
Taxi services (e.g., Uber, Bolt) – Ride-hailing apps have reduced barriers to entry, increasing contestability in the transport industry.
Assess the degree of contestability in a market
High Contestability (Highly Contestable Market):
-Low barriers to entry – Few legal restrictions, no patents, and minimal sunk costs allow new firms to enter easily.
-Low sunk costs – If firms can exit without significant financial loss, they are more likely to enter, increasing contestability.
-Hit-and-run competition – Firms can enter the market, make profits, and leave quickly, keeping prices competitive.
-Technology reducing barriers – Digital platforms (e.g., Airbnb, Uber) lower start-up costs, increasing market entry.
-Access to finance – If firms can easily raise capital (e.g., through venture capital or crowdfunding), contestability rises.
Low Contestability (Non-Contestable Market):
-High sunk costs – Industries like pharmaceuticals and energy require large upfront investments, making exit costly.
-Economies of scale – Large firms have significant cost advantages, making it difficult for new firms to compete.
-Brand loyalty – Strong consumer preference for established brands (e.g., Apple, Coca-Cola) limits new entrants.
-Legal barriers – Government regulations, patents, and licenses (e.g., in banking and healthcare) prevent new competition.
-Anti-competitive behavior – Predatory pricing and exclusive contracts can restrict new entrants, reducing contestability.
Effects of Contestability
For Firms in the Market:
Greater efficiency – Fear of new entrants forces firms to operate at lower costs and avoid X-inefficiency.
Reduced supernormal profits – Firms keep prices competitive to prevent attracting new entrants.
Increased innovation – Need to remain competitive encourages investment in R&D and product development.
EVAL:
Regulatory barriers (e.g., strict safety laws in airlines) may prevent full contestability.
Firms may still engage in limit pricing to deter entry, reducing actual competition.
For New Entrants:
Greater opportunities – Easier entry allows more businesses to enter, increasing market dynamism.
Lower risks – If exit costs are low, firms can experiment with entry without long-term commitment.
EVAL:
Incumbent firms may still dominate due to brand loyalty or economies of scale.
For Consumers:
Lower prices – More competition forces firms to keep prices low, benefiting consumers.
Greater choice – More firms mean more variety in products and services.
Higher quality and innovation – Competitive pressure encourages firms to improve product quality.
EVAL:
Short-term disruption – Frequent market entry and exit may lead to instability.
Not all industries can be contestable – Natural monopolies (e.g., utilities) have inherent high barriers to entry.
For the Government:
Encourages dynamic efficiency – More competition drives innovation and economic growth.
Higher tax revenue – More firms in the market mean higher business activity and tax contributions.
May require regulation – Governments might need to intervene if large firms engage in anti-competitive behavior (e.g., predatory pricing).
EVAL:
Difficult to measure true contestability – Some markets appear contestable but have hidden barriers (e.g., network effects in tech industries).
Regulatory burden – Ensuring contestability may require active government intervention (e.g., breaking up monopolies, enforcing competition laws).
Perfect comp and examples
Perfect Competition - Many Sellers, No Market Power
Examples:
Agricultural markets like wheat farming.
Foreign exchange markets.
Assess the degree of perfect competition.
High Perfect Competition Power:
Many firms selling homogenous products.
No barriers to entry or exit.
Perfect information available.
Firms are price takers.
Low Perfect Competition Power:
Not realistic in most industries due to differentiation.
External influences (government subsidies, trade restrictions) distort perfect competition.
Short-run supernormal profits can exist, but only normal profits in the long run.
Effects of Perfect Competition:
For Firms:
Only normal profits in the long run.
No ability to set prices.
Must operate efficiently to survive.
EVAL:
Lack of investment due to low profits.
Market may be unstable due to frequent entry and exit.
For Consumers:
Lowest possible prices.
Maximum allocative and productive efficiency.
Perfect information ensures best choices.
EVAL:
Quality may suffer due to cost-cutting.
Lack of innovation as firms have no incentive for R&D.
For Government:
No need for regulation.
Ensures market efficiency.
May need to intervene in cases of market failure (e.g., externalities, public goods).
