Questions

Question 1

To what extent does the threat of competition affect a firms behaviour? (4 positives)

Answer 1

Increases contestability
Lower prices (eg. Price war, predatory pricing)
Better services
Lower profits forces firms to be more efficient
Risk of firms entering forces non profit maximising strategies

Question 2

Define competitive tendering?

Answer 2

When firms bid for the right to run a service or gain a certain contract.

Question 3

Define performance targeting?

Answer 3

A goal is set by the government or a regulator for firms to achieve.

Question 4

What is the role of the regulator? (3)

Answer 4

Improving consume interests
Reducing monopoly power
Acting as surrogate for competition

Question 5

If a firms fixed costs increase by 20%, marginal costs will increase by?

Answer 5

Zero

Question 6

Define overt collusion?

Answer 6

Spoken and traceable agreement to collude, an illegal form of cooperation

Question 7

Shutdown point perfect competition? (2)

Answer 7

AVC = AR

or

AVC>AR in short run

Question 8

Define game theory?

Answer 8

Game theory looks at the interdependent relationship between 2 firms by considering the different reactions of one firm to the actions of another

Question 9

What is RPI-X?

Answer 9

The amount by which regulated industries have to cut their prices by in real terms. The X represents the efficiency they should have gained in that year, and RPI is inflation. This equation is used by the regulation authorities who are regulating natural monopolies such as water, in order to keep prices low for consumers.

Question 10

What is RPI+K?

Answer 10

The amount by which regulated industries can increase their prices by in real terms, in order to cover the cost of any investment they may need to do. This allows them to raise prices to cover costs, but only by a reasonable amount so that consumers aren’t being charged too high.

Question 11

3 evaluative points on price discrimination?

Answer 11

• If costs are slightly different it could be product discrimination not price discrimination
• Differences in actual product make is product discrimination not price discrimination
• Depends on season - if it’s Christmas people often prefer to go shopping in shops even if it’s does cost more because they are looking for ideas for presents most of the time, so they don’t already have a set idea of what they want

Question 12

What is product discrimination?

Answer 12

When suppliers differentiate their product to other similar products to allow them to charge higher prices.