Monopoly oligopoly and collusion Flashcards
(24 cards)
Divorce of ownership and control
The growth of PLCS have led to vast amounts of financial capital being raised to fund modern cooperation D which had led to a growth in the number of shareholders who have out their money into the firm to max profit
Monopoly power economies
Monopolies exploit economies of scale so that there is no firm or potential entrant producing at a lower cost
Reason for revenue max
Managers may receive sales related bonuses and managers might increase sales up to the point where MR=0 and total revenue is maximised
Inability to profit maximise
Assumes that firms have perfect information about costs and benefits of each option and make a rational choice
Rational choice hairy
Where all costs and benefits are considered before a decision is taken
Problems of profit max
Experiment in price is needed until they find profit max shich would lead to a loss of custom for other firms
Natural time lag between accumulating and processing information which means that important decisions may be made too late to profit max
Firms are likely to satisfied as opposed to max because
they will not waste resources and seek optimal solution if shareholders are happy
Organisational theory
Profit max is not
the major driving force of a firm so output can be selected that ensures the product will achieve market penetration rather than pm
Long run profit maximisation
Neoclassical theory suggests that firms will react to every shift in the market and alter price and output accordingly
Profit maximisation suggests
all firms react in the same way and we accept some firms may respond differently
There is pressure in the short run to keep shareholders happy and maintain the price of company shares
Kinked remand curve
Price increases are elastic
Price few creases are inelastic
Cutting competition is a trade off with
Allocative efficiency
Interdependent
when the actions of one firm impact the sales and revenues of anther
Reactive behaviour
oligopoly, the action taken by one firm is in response to a change in behaviour of a competition
Restrictive agreements
Where firms collude to indulge in anti competitive policy
Refusing to supply outlets which sell below the agreed price to simply agreeing to all increase prices of selected producers
Aim of restrictive practices is to
Maximise joint profits as opposed to individual profits
Joint profit is where firms agree to maximise shared rather than individual profit
Collision
Reduces uncertainty of competing firms who have a high interdependence as this may divide the market on an area basis where one area is seen as a possession of a certain firm
Restricting supply
Process of new firms moving into a PC market
is a result of competitive pressure and will continue until supernormal profit is eliminated
when MP falls on diminishing returns
it becomes more expensive to produce an additional unit of output so MC and AVC event tally starts to rise
Break up of monopoly
break up into smaller firms if they believe it heavily affects the competitiveness of the market
by breaking up an oligopoly into two or more smaller firms the amount of firms in the market this will reduce barriers to entry as small firms are less able to influence the market and charge low prices to kill a competitor off through predatory pricing
means firms are less able to influence the market and become more like a PC with increased output and a fall in the price to become allocativelly efficient
Collusive oligopoly may be unstable because
The most efficient firms will be tempted to break ranks by cutting prices in order to increase market share
Contestable markets
can provide the theoretical benefits of perfect competition but without the large number of firms
Collusion
Where oligopoly is defined by conduct as some form of agreement exists between the meh firms in the industry about price and output policies
Game theory
Describes any situation when all of the participants in s game are pursuing their best possible strategy given the strategy of all other participants
