Oligopoly, growth/rationalisation .3.

Question 1

market share

Answer 1

the proportion of sales revenue in a market taken by a firm or a group of firms

Question 2

concentration ratio

Answer 2

the combined market share of the n largest firms in the industry

Question 3

if the concentration ratio is high it is described as …

Answer 3

highly concentrated. oligopoly or monopoly

Question 4

if the concentration ratio is low it is described as …

Answer 4

dilute. monopolistic competition or perfectly competitive

Question 5

oligopoly

Answer 5

a market where a small number of interdependant firms compete with each other

Question 6

characteristics of oligopoly

Answer 6

• high barriers to entry and exit
• dominated by a few firms
• firms are interdependant on each other
• differentiated products

Question 7

3 types of PRICE competition

Answer 7

• price war = firms lower prices to outcompete other firms and gain market share
• predatory pricing = illegal strategy where a firm sets price bellow average variable costs in the short run to force out rivals from the market
• Limit pricing = price is set low enough to deter new entrances into the market

Question 8

Non-price competition

Answer 8

firms investing in advertising, branding and research and development to make them stand out and gain more of the market share rather than changing prices

Question 9

kinked demand curve theory

Answer 9

demand curve is kinked providing price stability, shows the effect of a change in price on other firms (interdependant)

Question 10

why is there no point raising price above p1 on the kinked demand curve

Answer 10

other firms keep their price at p1. The firm that raised the price to p2 has a large fall in sales due to elastic demand so their revenue falls from p1 x q1 to p2 x q2

Question 11

why is there no point cutting price to p3 on the kinked demand curve

Answer 11

other firms may also cut the price. if demand is inelastic ,all firms see their revenue fall, from p1 xq1 to p3 x q3

Question 12

collusion and reasons for it

Answer 12

collective agreements between producers which restrict competition, overt (open) or tacit (silent)
reasons for :
- profit maximisation
- prevent price and revenue instability

Question 13

reasons for non-collusive behavior

Answer 13

• desire to increase market share and achieve market dominance
• regulators and punishments act as a deterrent to collude

Question 14

what is overt or formal collusion

Answer 14

firms make agreements among themselves to restrict competition by raising prices, via comunication

Question 15

what is tacit collution

Answer 15

firms collude without any formal agreements or communication

Question 16

cartel

Answer 16

an agreement between firms on price and output normally with the intention of maximising their profits

Question 17

conditions for an effective cartel

Answer 17

• cheating prevented (firms dont cheat so that they can keep making extra profit)
• all firms in the market must agree (otherwise demand goes to cheapest firm)
• potential competition must be restricted
• demand is fairly price inelastic (necessities, otherwise people will go without)

Question 18

diagram to show cartel

Answer 18

monopoly diagram

Question 19

example of price collusion

Answer 19

Scania fined 880 EUROS for price collusion in 2017, collusion with 5 other truckmakers

Question 20

benefits of collusion

Answer 20

• increased profits due to increased prices
• increased barriers to entry

Question 21

evaluation/disadvantages/limitations of collusion

Answer 21

• only when few firms dominate
• illegal = 10% of global revenue if they get caught
• decreased competition and therefore decreased innovation
  CARTEL MORE STABLE IF:
• high barriers to entry
• few firms dominate
• cheating is punished
• demand is inelastic

Question 22

what is the dominant strategy of each firm in the game theory

Answer 22

to set a low price as they will make more profit whatever strategy the other firm chooses

Question 23

what is the outcome if both firms collude

Answer 23

if both firms collude they may both set high price and gain more profit. However this is unstable (less stable than low price) because neither firm can trust each other and so a firm may cheat and lower the price to gain more profit.

Question 24

strengths of game theory

Answer 24

• helps us to understand the benefits of collusion
  -helps us to understand why collusion may break down and firms may compete
• illustrates interdependence and uncertainty

Question 25

weaknesses limitation evaluation of game theory

Answer 25

- assumes demand is inelastic - assumes both players are rational - assumes players know the payoffs - assumes only 2 oversimplified firms with 2 options

Question 26

3 types of price competition

Answer 26

- price war = firms repeated lower their prices to outcompete other firms - predatory pricing = firms put prices bellow AVC in an attempt to force out rivals (short run) - limit pricing = firm sets prices low enough to deter new entrants from coming into its market - price discrimination - price skimming = firms set high price before other firms enter the market

Question 27

3 types of non-price competition

Answer 27

- branding - advertising - product development = investment in RnD - new production methods = investment in new technology to improve efficiency and push down LRAC - mergers/takeovers - collusion

Question 28

contestable market

Answer 28

a market with low barriers to entry and exit (perfect knowledge)

Question 29

what are the preditions of the contestability model

Answer 29

- supernormal profits can be earned in the short run - if new entrant sees existing firms making supernormal profit, it will be worth while them entering the market if there are low exit costs (sunk costs), even if they get driving out by low prices in the long run, they still earned short run profits - 'Hit and run' competition firms enter for short run supernormal profit and then leave once high profits have been exausted. NEW firms must have no competitive disadvantage. - only normal profits in the long run because new firms force price cuts - encourages established firms to keep prices down and produce as effectively as possible, EOS, new technology and X-efficient

Question 30

in the long run what does the 'monopoly diagram' look like in a contestable market

Answer 30

allocatively efficient and productive efficient, MC, AR and AC all meet at the same point

Question 31

pros of contestable market

Answer 31

- allocatively efficient AR=MC - productive efficiency MC=AC - x-efficient - job creation

Question 32

cons of Contestable markets

Answer 32

- lack of dynamic efficiency - cost cutting in dangerous areas (H/S) - creative destruction (new firms enter and destroy existing firms)

Question 33

evaluation of contestable markets

Answer 33

- length of contestability (anticompetitive and price cutting decreaseds length of contestability) - technology may not just increase contestability it may decrease it because patents and copywriting may be more common - regulation may limit cost cutting in dangerous areas

Question 34

stakeholders

Answer 34

groups who have an interest in the activity and performance outcomes of a business E.g. shareholders, employees,trade unions, consumers

Question 35

what are the 4 business objectives

Answer 35

- profit maximisation MC=MR - sales maximisation AC=AR (growth maximisation, flood the market) - revenue maximisation MR=0 (predatory pricing) - profit satisficing (sacrificing profit to satisfy as many key stakeholders as possible)

Question 36

public sector

Answer 36

owned and controlled by the state (gov)

Question 37

private sector

Answer 37

owned by individuals or groups of individuals

Question 38

benefits of small medium firms

Answer 38

- easier communication better decision making - more flexible and adaptable - small niche markets may have less competition

Question 39

evaluation of firms remaining small or medium sized

Answer 39

- big firms benefit from economies of scale and small ones are less efficient - less recourses to invest in research and development - less access to supply chains (less bulk buying power) - less brand awareness - less competition means less incentive to reinvest profits

Question 40

what are the 2 types of business growth

Answer 40

internal/organic, occurs when a firm increases in size through investment in capital or an increased labour force or external growth, occurs due to mergers or takeovers

Question 41

merger

Answer 41

integration of two firms maintaining shared ownership or control

Question 42

takeover

Answer 42

acquisition of one firm by another firm where control where control passes to the aquiror

Question 43

4 types of external growth mergers

Answer 43

vertical integration : (joining of two firms at different production stages in the same industry) - forward vertical integration e.g. retail car showroom - backward vertical integration e.g. supplier horizontal integration : integration with another firm in the same industry at the same production process Conglomerate: merger between two firms producing unrelated products

Question 44

demerger

Answer 44

when a firm splits into two or more independant businesses

Question 45

reasons for demergers

Answer 45

- to avoid diseconomies of scale from becoming to big - eliminate any culture clash - refocus on core activities

Question 46

how do demergers result in increased profits

Answer 46

lowering costs through reduced diseconomies of scale. Removed culture clashed which lead to poor decision making.

Question 47

whats the impact of demergers workers

Answer 47

pros : - job creation (new opertunities in the industry) - could be higher saleries if profits rise cons: - lower saleries if unsuccessful - less job security in a smaller firm

Question 48

examples of demergers

Answer 48

Lloyds TSB demerger 2013 to try to increase competitiveness of the banking sector