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Microeconomics theme 3 > Market structures, efficiency and contest-ability. > Flashcards

Market structures, efficiency and contest-ability. Flashcards

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1
Q

What is the 3 firm concentration ratio?

A

Adding together the percentage market share of the top 3 firms in the market.

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2
Q

What does it mean if a market has a high concentration ratio?

A

It means the power is concentrated with the top 3 firms, therefore it is less competitive.

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3
Q

Give 3 examples of markets with high concentration ratios?

A

Banking,

Telecommunication,

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4
Q

How to calculate 3 firm concentration ratio.

A

EE 20% + O2 15% + Vodafone 20% = 55%

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5
Q

What is meant by product differentiation?

A

When a firm changes the design, features of perception of a product to increase its appeal.

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6
Q

In what was has Pizza Express differentiated from Pizza Hut.

A

Pizza express uses more quality ingredients compared to Pizza Hut.

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7
Q

In what way is a Nokia phone differentiated from an iPhone.

A

iPhones can connect to many more devices like AirPods whereas Nokia are less compatible.

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8
Q

Define oligopoly?

A

A market structure where a few large firms dominate the market.

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9
Q

Gives 4 illustrated examples of oligopolistic markets.

A

Banks: Barclays, HSBC, NatWest and Lloyds

Airlines: BA, Virgin, Emirates and Easyjet

Supermarkets, Morrisons, tesco, sanisubrys and waitrose.

Mobile phones and handdsets- Iphone

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10
Q

What would you expect the concentration ratio of a monopolistic market to be?

A

High (few large firms dominating the market)

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11
Q

What characteristics would you associate with a monopolistic market?

A

Interdependence of firms,
High barriers to entry or exit.
Differentiated products,
High concentration ratio.

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12
Q

What kind of behaviour do you expect in an oligopolistic market?

A

Non-price competition and collusion.

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13
Q

What is meant by non-price competition, and name three ways a firm can engage in non-price factors.

A

Comparing quality of good or service,
Collusion,
By advertising,
By R and D.

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14
Q

What is meant by a cartel?

A

When a group of firms come together and make decisions as if they are together.

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15
Q

Give an example of a cartel

A

OPEC (oil)

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16
Q

What is meant by price leadership?

A

When one firm is dominant in a market, and when it changes price all other firms follow regardless of if it is a rise or fall.

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17
Q

Give an example of price leadership?

A

British Gas in Uk sector, when they change prices all will follow.

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18
Q

What is meant by collusion?

A

When firms share information and agree not to compete.

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19
Q

Name two ways that firms can collude?

A

Price collusion- when firms agree on price

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20
Q

Give two example of firms guilty for collusion?

A

Iveco, Volswagen agreed on medium and heavy vehicle prices.

BA and VIrgin agreed on the fuel surcharge on price.

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21
Q

Why is collusion in the public interest?

A

Because firms not agreeing to compete with each other, as it decreases choice and consumer surplus. (increases price).

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22
Q

What factors increase the chance of collusion.

A
  • The fewer firms that exist in the industry and it is easier to coordinate.
  • The more mature the industry is as employees will know.
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23
Q

What is meant by a price war?

A

When one firm decides to drop price and all other firms follow and drop it. Then the original firm further drops it, and is followed again. Until a firm decides to return to the original price. (damaging to all firms).

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24
Q

What does interdependence mean?

A

When a firm must consider the actions of another firm when making a decision. Or when the actions of a firm impacts other firms.

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25
How does interdependence create uncertainty in monopolistic markets? What does this do?
As firms are unsure about the consequence of their actions, as they do not know how competitors will create. This makes firms look for non-price strategies like differentiating the product.
26
What are the assumptions behind the kinked curve?
Assumes interdependence. That when a firm raises price OTHERS will. That when a firm drops prices others will.
27
What is game theory?
A mathematical model that looks at the payoffs for firms in an Oligopoly market structure based on the decisions they make and how the firm responds.
28
How can game theory be used to explain why firms in an Oligopoly keep prices stable?
As you can see in the matrix, the best outcome is if both firms charge a high price (bottom right corner). However, there is an incentive to cheat on the arrangement for short run profits.
29
According to game theory, how might co-operation and collusion improve the outcome for each of the above firms?
If firms collude then they can formally agree to maintain the bottom left corner so that the best option can be maintained.
30
With reference to game theory, explain why collusive agreements often break down?
There is always an incentive to make short run profits by undercutting or breaking the agreement, particularly if they are a whistleblower. If they act as a whistle blower, they can often avoid a fine, so they can access the high payoff in the short run without financial penalty. However, this still does not solve the issue that when the collusion breaks down, both firms end up in the top left quadrant.
31
What is monopsony?
When there is a single dominant buyer who holds the power.
32
What are the characteristics of monopsonistic markets?
- A single firms buying all the output in the market. | - No alternative buyers
33
Give an example of two markets that are monopsonistic
- NHS has power over hiring workers. | - Supermarkets have power over the suppliers.
34
What are the advantages and disadvantages to consumers of a monopsony?
- ADV lower prices for consumers. - Monopsonists can dictate a low price and will pass this low price over to consumers. - DIS lower quality for consumers. - As suppliers have to cut corners with cost the overall quality will be lower.
35
What are the advantages and disadvantages to producers of a monopsonistic market?
ADV- they only have to deal with one customer. | DIS- they have to agree on terms with monopsonist.
36
What are the advantages and disadvantages to suppliers/ monopsonists themselves?
ADV- they can drive down prices which will lead to higher profitability.
37
Give 3 examples of price discrimination?
- National railway peak and off peak - Cinemas OAP - Retail outlets on motorways charging more.
38
What are the conditions for successful price discrimination to take place?
- Must have different elasticities in each sub market. - Must be able to prevent arbitrage (buying in cheaper market and selling in more expensive). - Markets can be separated by time. - Age - Time - Gender - Geography - Nature of item
39
Identify and explain 2 benefits to producers from price discrimination?
- increase profits as the increased profit as the sum of the profits in the two sub markets is greater than the original market. - Increased revenue as there is a price fall in the elastic market and a price rise in the inelastic market. Consumer surplus is expropriated into producer surplus.
40
Identify and explain 2 benefits to consumers from price-discrimination?
- Lower prices in elastic market will increase consumer surplus in the market. - Inelastic market can be used to cross-subsidise the elastic market. This can allow the consumer to enjoy the product even if they are loss-making.
41
Define consumer surplus
The difference between the price they are willing to pay and the price they actually pay/
42
Define producer surplus?
The difference between what they would have accepted and what they sell it for.
43
What is the impact on the consumer of price discrimination?
-Converts consumer surplus to producer surplus. | -
44
What is a contestable market?
-Ones where barriers to entry and exit are low, new firms can enter and leave a market with ease. There is perfect information so they are aware of this.
45
What impact does contest ability have on performance of firms in an industry?
-Incumbent firms will have to be more efficient in order to protect themselves from hit and run competition. Firms in a perfectly contestable market will be allocatively and productively efficient.
46
What is meant by sunk costs?
-Sunk costs are costs that cannot be recouped from exiting the market, if firms know there are high sunk costs then it is riskier to enter the market.
47
Give two examples of sunk costs?
- Advertising - Rent - Wages
48
What is meant by hit and run competition?
-Firms who enter a market when there are super-normal profits, undercut incumbent firms and leave when super-normal firms are eroded.
49
What may you notice if a market is contestable?
- Low levels of supernormal profits. - High degree of price competition. - cost-cutting activities - low brand activities - New firms joining and existing
50
To what extent is a supermarket contestable?
- Price competition - New firms have entered the market. - falling profits.
51
What factors make supermarkets less contestable?
- Some brand loyalty - Relatively high profits are being made - High barriers to entry such as purchasing economies of scale.
52
What is meant by a barrier to entry?
-Makes it difficult to enter a market.
53
Name 5 different barriers to entry.
Economies of scale- this is because a new firm would have to have a high output. Brand Loyalty- new firms would find it hard to tempt from incumbent firms. High start up costs- new firms may find it hard to secure finance. Patents-this is a barrier Licenses. -Regulations -Limit pricing -Predatory pricing.
54
What is meant by productive efficiency?
-a firm is productively efficient when they produce at the lowest point of the ATC. Total cost= min atc.
55
Draw a diagram to illustrate productive efficiency.
-See notes attached.
56
What is meant by allocative efficiency?
-When a firm produces to Price= marginal cost.
57
Draw a diagram to illustrate allocative efficiency?
-See notes attached.
58
What is meant by dynamic efficiency?
-Increase in efficiency over time caused by research nd development.
59
Name three factors that would influence dynamic efficiency?
- A firm can only be dynamically efficient if they are able to make super-normal profits in the long run and do one of the below with the profits. - Investment in research and development into capital improvement- this might improve the productivity of capital and hence reduce average costs over time. - Investment and research into production processes- this might also improve productivity as there is a better way to complete a task. - Investment into new products and services- dynamic efficiency is often associated with improving productive efficiency, but investment into new and better products can improve as the welfare generated by these products can improve over time.
60
What is the diagram of dynamic efficiency?
-see notes attached
61
What are the efficiencies in perfect competition.
- Allocative efficiency (short and long run) - Productive efficiency (Long run only) - Dynamic efficiency (no) - X-inefficiency (no)
62
What are the efficiencies inn monopolistic competition?
-Allocative efficiency (No) slightly in short and long run. -Productive efficiency (no) -Dynamic efficiency (no) only normal profits in the long term. -X-inefficiencies (No).
63
What are the efficiencies in oligopolistic competition?
- Allocative efficiency (no) - Productive efficiency (no) - Dynamic efficiency (Yes) supernormal profits are present. - X-inefficiency (yes)
64
What are the efficiencies in a monopoly?
- Allocative efficiency (no) - Productive efficiency (no) - Dynamic efficiency (no) - X-inefficiency (Yes).
65
What is meant by x-inefficiency?
- Also known as organisational slack, a firm is x-inefficient if it is not producing on its lowest ATC curve. - In other words at its chosen level of output. There are unnecessary costs in the business that could be removed without impacting on the biscuits.
66
Draw a diagram to illustrate x-inefficiency?
-if there are high barriers to entry, then the firm is protected from the threat of competition and therefore it makes it more likely for x inefficiency will exist. The number of existing firms is also important as if there are many firms, then an x-efficient firm is likely to be beaten on price.

Microeconomics theme 3 (6 decks)

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