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Business Competition > Term 2 > Flashcards

Term 2 Flashcards

1
Q

What are the flows in neoclassical theory

A

Physical
Inputs - Production - Outputs

Monetary Flow
Revenue - Profit - Cost

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2
Q

What are the assumptions of Neoclassical Theory?

A

1 plant, 1 Product
PC Market
Owner = Entrepreneur
Max Profit

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3
Q

How do you max profit>

A

Set P=MC and find quantity

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4
Q

What are the criticisms of neoclassical theory?

A

Do firms really profit max?
Do we have perfect information
Is the entrepreneur the only actor

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5
Q

What is did Ronald Harry Coases theory consider?

A

Intra firm v Free market transactions

The Puzzle: if markets exist, how do we explain the existence of the firm

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6
Q

What assumptions does Coase challenge?

A

Perfect Information

Global Rational

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7
Q

What determines if a firm exists?

A

If transaction costs are greater than management costs, use firm

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8
Q

What determines the size of the firm

A

Managerial Dis economies
Misallocation of resources
Dissimilarity of Transactions

Expand until Management Costs = Transaction Costs

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9
Q

What are Williamsons Critiques of Coase?

A

No quantification of transaction cost

Multiple governance structures available

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10
Q

What assumptions does Williamson have and what are their implications?

A

Bounded Rationalisation: Satisfying instead of maximising and contracts insufficient

Opportunistic Behaviour: People are dishonest thus contracts need safeguards

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11
Q

How does williamson define a firm?

A

A governance structure

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12
Q

How do we consider a transaction

A

Identify the Attributes: Frequency, uncertainty, idiosyncratic investments

Choose the best structure: Market, Hybrid, Hierarchy

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13
Q

What are the attributes we use to consider governance structures, how does each type perform?

A 
Incentive Intensity
Admin Controls
Adaptation via Autonamy
Adaptation via Coordination
Contract Law

Market = Alternating, Strong First
Hybrid - Semi
Hierarchy - Alternating, Weak First

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14
Q

What governance structures goes best with each type of transaction?

A

Occasional and Nonspecific - Market Governance

Reccurent and Nonspecific - Market governance

Recurrent and Idiosyncratic - Unified Governance

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15
Q

What is market governance?

A

Classical Contract Law

Legally Binding

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16
Q

What is Unified Governance

A

Internal to a firm

issues sorted by entrepreneur

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17
Q

What is bilateral governance?

A

Autonomy of parties is maintained?

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18
Q

What is trilateral governance?

A

Neoclassical Contract Law

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19
Q

What are the criticisms of williamson?

A

Identification of transaction costs
Opportunism as a universal phenomenon
Reputation and prior cooperation as mechanisms to reduce opportunism
Limited predictable power

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20
Q

Define Vertical Boundaries?

A

What activities are performed internally v externally

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21
Q

What are the reasons for buying v Make?

A

Buy:
Economies of Scale and Learning
Bureaucracy

Make
Incomplete Contracts
Opportunism
Idiosyncratic Investments

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22
Q

Discuss economies of scale and learning?

A

Firms can aggregate the demand of buyers, reducing AC

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23
Q

Discuss the reduction of bureaucracy?

A

Agency Costs: Slack effort and admin controls designed to stop it

Influence Costs: The costs generated by internal resource lobbying and bad decisions

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24
Q

Discuss Contracts

A

A contract reduces the opportunity for opportunistic behaviour and protects against it
Effectiveness depedends on completeness and contract law

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25
Q

Discuss a complete contract?

A

Protects 100% against opportunistic behaviour by specifying every possible contingency

Fails in Practice due to bounded rationality and asymmetric information

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26
Q

What are the consequences of asymmetric contracts?

A

Problems in coordination of production flows
Possible leak of private information
Transaction costs

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27
Q

Discuss co-ordination problems?

A

Co-ordination rises costs
Solved by Penalties and Bonuses

If problem is that bad, vertically integrate

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28
Q

Discuss information leakage problems?

A

Using markets to source suppies can leak information

Solved by patents

If problem is that bad, vertically integrate

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29
Q

Why are incomplete contracts a problem?

A

Not in isolation, due to opportunistic behaviour

However, if one party cheats, the other can leave

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30
Q

What is the implied contracting process

A

If no bounded rationality: Planning

If no Opportunism: Promise

If no Asset Specificity: Competition

If all issues, Create a firm

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31
Q

Define a relationship specific asset

A

Idiosyncratic investments made to support a trasaction

If redeployed
Loose some productivity and a cost

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32
Q

What are the types of asset specificity?

A

Site: Side by side location

Physical Asset: Design characteristics specific to a transaction

Dedicated: Made based on a relationship, if fail spare capacity

Human Asset: Employees gain skills dealing with a customer

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33
Q

What are the consequences of asset specificity?

A

Fundemental Transofmraiton: Locked into relationship

Rent and Quasi-Rent

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34
Q

What is Quasi rent?

A

Profit earned from deploying an asset in its intended use - Its next best

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35
Q

How do you calculate rent, Quasi-Rent and Relationship specific investments

A

Rent:
X∗(P∗−C)−I

Quasi-Rent:
X∗(P∗−Pm)

Relationship:
I−X*(Pm−C)

P*: price of the good 
X*: quantity 
Pm: next best price 
C: variable cost
I: cost of the specific investment
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36
Q

What is the hold up problem

A

If a good has a large quasi rent, their is the possibility of falling victim to opportunistic behaviour -renegotiating

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37
Q

What is the difference between the neoclassical and TC apprach

A

Neoclassical Emphasise production costs
Views the firm as a transaction

TC Approach
Focuses on TC
Firm is viewed as one governance structure

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38
Q

What are the two major efficiency that make up a decision?

A

Technical and Agency

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39
Q

Discuss Technical Efficiency?

A

Efficiency in the physical produciton of the good

Effected by economies of scale

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40
Q

Discuss Agency Efficecy?

A

Efficiency of transacting - Choosing the best governance structure

Effected by vertical integration

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41
Q

Discuss the heuristic model graph

A

Y Axis: Difference between cost of internal organisation v market
X Degree of asset specificity

42
Q

Discuss Technical Efficiency in the heuristic model

A

In house production - Market Production

As asset specificity increases, markets economies of scale fall

Downwards sloping but also positive

43
Q

Discuss Agency Efficiency in the heuristic model

A

Transaction costs when firm is VI

As asset specificity increases, the market becomes worse as there is less competition

44
Q

Discuss total efficiency in the heuristic model

A

Overall difference between VI and the Market

To left of vertical intercept, use market

45
Q

Discuss the effect on an increase in the market size?

A

Delta T moves ight
Delta A pivots anti clock

Delta C pivots clockwise

46
Q

What are the implications of heuristic model

A

Market provision with low AS

Pay attention to economies of scale

If firm is large VI

If high coordination VI

If market is competetive VI

47
Q

Discuss VI under neoclassical theory?

A

Firms either remove market power or create market power through VI

48
Q

Discuss Successive Monopolies

A

Upstream monopoly manufacturer and downstream monopoly retailer

Without VI both firms have to make a profit

49
Q

What is the double markup problem?

A

Both firms have to make a profit

50
Q

What are the consequences of successive monopolies

A

The MR of the retailer is the demand for the supplyer

The price sold is the MC
This creates a vertical externality

VI results in higher Q, lower P, more surplus

51
Q

Discuss monopolisation?

A

VI as a method of creating market power in downstream competetive markets

52
Q

Discuss the effectiveness of VI under monopolisation?

A

If inputs are used in fixed proportions, no incentive to VI as monopolist can already fully control the market

If not fixed, downstream can substitute

53
Q

Discuss VI for price discrimination?

A

A firm integrates to segment the downstream firms

A method of preventing arbitrage

Buy the most elastic firm

54
Q

Discuss VI for free Riding

A

Horizontal externalitys created as retailers must provide a service that the manufacturer did not account

Thus under invest

55
Q

Define vertical restraints?

A

Contractual limitations placed by the manufacturer on the

56
Q

Give some example of Vertical Restraints

A 
Resale Price Maintenance
Exclusive Dealing
Exclusive Territories
Quantity Fixing
Two Part Tariff
57
Q

What is the purpose of Vertical Restraints

A

Alternative of VI when
Double markup problem
Free Riding Distributors / Manufacturers

58
Q

How can Vertical Restraints remove the double markup problem?

A

Price ceiling to remove the retailers profit

Quantity fixing in a similar fashion

59
Q

How can vertical restraints fix free riding

A

Exclusive Territores to promote advertising

RPM price floor to force them to compete on other aspects

60
Q

What are the bad points of vertical restraints?

A

Limits competition by:
Cartelizing an Industry - Causing Collusion

Prevent Entrance

61
Q

What are the good points of vertical restraints

A

Improve Competition
Lower prices
Fix any issues its designed to (elaborate)

62
Q

Evaluate Vertical Restraints RPM

A

Removes Spill Over Effects of Retailers Decisions

63
Q

What are horizontal boundaries and how can they change?

A

How much of the market a firm will serve

Changed by:
Organic growth
Mergers

64
Q

What are the determinants of horizontal boundaries?

A

Economies of Scale
Economies of Scope
Learning economies

65
Q

What are economies of scale?

A

Reduction of AC as unit produced increases

To occur: LRMC < LRAC

66
Q

How do you measure economies of scale?

A

MC/AC
S<1: Economies of Scale
S=1, no more economies
S>1: Expansion involves diseconomies

67
Q

What are economies of scope?

A

Reduction in TC if a firm produces a greater variety of goods

68
Q

How do you calculate economies of scope?

A

TCA+TCB-TCA,B / TCA,B

Economies of scope >0
Diseconomies of scope <0

69
Q

What are learning economies?

A

A reduction in AC due to know how

Greater Speed
Less Waste
LEss Supervision

70
Q

How do you measure learning economies?

A

AC2/AC1

Slope of 0.80 indicates AC falls by 20% if output doubles

71
Q

What is the learning curve strategy?

A

Expand output rapidly to benefit from learning economies

72
Q

What are the differences between economies of scale and learning economies?

A

Economies of scale are reversable
Dependant on time
Dependant on capital

73
Q

What are the sources of economies of scale?

A

Production
Purchasing
Advertising
RandD

74
Q

Discuss production as a source of economies of scale

A

Short Run: Moving down AC

Long run: Moving to a lower AC

75
Q

Discuss Specalisation as a source of economies of scale?

A

As market size grows, firms can employ specialised resources that would otherwise no be available

76
Q

Discuss Inventories as a source of economies of scale?

A

Ratio : I/S

The goal is to keep the ratio low

77
Q

Discuss Physical properties as a source of production economies?

A

Squared Cubed Law

78
Q

Disucss economices of scale in purchasing?

A

Bulk discounts

79
Q

Discuss economies of scale in advertising

A

Larger firms have a lower cost per potential consumer

80
Q

Discuss economies of scale in R and D

A

Minimum feasible size of R and D projects

81
Q

Discuss dis economies of scale

A

Example:
Wages are higher in larger firms, as compensation for the preference of small firms

Conflicts of Interest

82
Q

Discuss economies of scope?

A

Shared inputs
R and D spillovers
Adverisitng

83
Q

Discuss diseconomies of scope?

A

Conflicting brand images

84
Q

What are the managers objectives?

A

Sales Max
Utility Max
Growth Max
A Quiet life

85
Q

Discuss Baumols Model?

A

A Sales max model

Managers will max sales subject to profit constraint

86
Q

What determins the profit constraint

A

Earnings to finance expansion

Dividends

87
Q

What are the applications of Baumols model?

A

Overhead costs

Non-Price competition

88
Q

How can Baumols model explain Overhead Costs?

A

Normally an increase in FC leads to a raise in price
This will not occur in neoclassical as we only consider MC

Under Baumol, shifts curve down, increasing price

89
Q

How can Baumols model explain non-price competition

A

Effect of price reduction depends on elasticity of demand

Not considered in neoclassical

90
Q

What is the main point of Williamsons model?

A

The manager maximises his own utiltiy
Salary
Power and Prestige
Job Securirty

91
Q

What will the manager prefer under Williamsons model?

A

Expansion of Staff
Emoluments - Cars
Discretionary Investments - Investments he controsl

92
Q

Discuss the Model:

A

Representend Price as:

Quantity produced, staff and epsilon

93
Q

What are the methods of controlling manager behaviour

A

Internal
Shareholders
Incentive Contracts
Internal organisation

External
Takeover Threat
Insolvency Threat
Competition
Managerial Labour Market
94
Q

Discuss shareholders as an internal constraint?

A

Manager is responsible to board of directors - financial reports

Independant Auditors

Can remove a bad manager

95
Q

Discuss Incentive Contracts

A

Linking Pay to performance

Must be a good performance measure

96
Q

What are the components of a good performance measure

A

No random component
Should encourage good activitiies
Relative and narrow

97
Q

Discuss a takeover threat

A

Either:
Dissatisfied shareholder sell shares and firm gets taken over
Bad use of resources causes value to fall

98
Q

What are the problems with the takeover threat

A

Information Asymmetries
Free riding
Short Termism

99
Q

What defences are available against takeovers

A

Green mail: buy shares of attempted takeover

Poison Pills: give rights of cheap shares to current owners

100
Q

Discuss Bankruptcy, Product Market Competition and Managerial Labour Markets?

A

Threat of liquidation encourages manageers

Can use other firms to see how your manager is doing

Being fired will stop them getting another job

Business Competition (2 decks)

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