Theme 3 Flashcards
(164 cards)
1
Q
Why do businesses grow
A
Shareholder pressure
Increase profit
Increase market share
New locations
Survival
Innovation
Gap in the market
Achieve EoS
Meet demand
2
Q
Organic growth
A
Refers to a business growing gradually with their own resources.
New customers - opening new outlet
New products - developing a new range of products
New markets - finding customers in a different location
Franchising - allowing other businesses to trade under your name
3
Q
Advantages of organic growth
A
Less risky and much cheaper (finances through retained profits rather than borrowing or share capital) than inorganic growth - everything already established
Retain control of the business
Less likely to experience diseconomies of scale
4
Q
Disadvantages of organic growth
A
Slow pace of growth - harder to please shareholders
May get left behind if rivals are growing faster
Can’t access knowledge and expertise of other businesses as would be the case with inorganic growth
5
Q
Types of inorganic growth
A
Merger - join for mutual benefit
Takeover - Hostile or voluntary - one business acquires another along with its assets
6
Q
Horizontal integration
A
Merging with a business at the same level of supply chain - can create EoS due to synergy
7
Q
Forwards vertical integration
A
Taking over a business that you sell to
e.g. a retailer moving up the supply chain
Producer can determine how products are promoted and can build relationship with customer. e.g. Ebay
8
Q
Backwards vertical integration
A
Taking over a business that supplies materials/parts
Allows business to acquire materials without additional mark-up from manufacturer
9
Q
Conglomerate
A
Taking over a business in a different market - spreads risk
e.g. Virgin
10
Q
Advantages of inorganic growth
A
Increased market share and assets
Additional skills and expertise of new staff
Easier to obtain capital when needed
Increase in market share
EoS
Brand name becomes established
Greater profitability
11
Q
Advantages of vertical integration specifically
A
Control of the supply chain
Improved access to key raw materials (←)
Profitability by cutting out distributors (←)
12
Q
Advantages of horizontal integration specifically
A
Cost savings from rationalisation of business
Creates a wider range of products
Reduces competition by reducing a big competitor
13
Q
Disadvantages of inorganic growth
A
May be additional debt acquired
Possible large upfront costs
Management challenges with integrating acquisitions
More regulation (Sainsbury’s Asda got stopped due to high market share)
Resistance to change from customers or workers
14
Q
Disadvantages of vertical integration specifically
A
Often create new problems of communications and coordination
15
Q
Disadvantages of horizontal integration specifically
A
Reduced flexibility - legal accountability
Risk of DoS if there are clashes in management and corporate culture
16
Q
Limits to business growth
A
Regulatory hurdles - H+S regulations like PPE and inspections, UK General Data Protection Act, red tape and delayed planning due to planning permission
Finding skilled staff
Threat of competition from new technology - London black cabs threatened by Uber, e-commerce posing a threat to brick and mortar businesses, traditional media threatened by social media
Financial constraints - limited access to capital - small business have higher I/Rs on loans, high debt levels, cash flow issues
Size of market - businesses that rely on local customers, custom-made niche products, regional cultural products, high prices (luxury cars)
17
Q
Economies of scale
A
Economies of scale are cost advantages reaped by companies when production becomes efficient.
18
Q
Economies of scope
A
Efficiencies formed by variety, not volume e.g. Supermarket sells different products
19
Q
Diseconomies of scale
A
Occur when a business grows so large that the costs per unit increase
20
Q
Size of a firm can be measured by
A
Market share
Profit (growth or absolute)
Number of employees/outlets
Market power
Diversification (risk spread)
21
Q
Principle-agent problem
A
Refers to the divorce of ownership between principle and agent
e.g.
Shareholders and managers have different objectives which may conflict. Managers might choose to make a personal gain, such as a bonus, rather than maximise the dividends of the shareholders
22
Q
Public sector
A
Controlled by government to provide a service for a population
23
Q
Profit Maximisation
A
MC=MR
Traditionally firms wish to maximise profit.
24
Q
Normal and supernormal profits
A
Normal profit covers the opportunity cost of remaining in an industry - included in the total costs. Profits above this are supernormal; if firms are in a position to choose output and price, they will produce where the difference between TR and TC is greatest
25
Revenue maximisation
Firms may decide to increase their revenue as they have objectives of increased cashflow. Output will be set at the level where TR is the highest. This may result in them selling higher quantities than if they were profit maximising
26
Sales maximisation
This may be in order to meet growth targets. This may result in output being set at breakeven point and prices being lowered
27
LR profit maximisation
Firms may operate where they are at a loss if they believe in the LR this will gain them market share e.g. RyanAir
28
Satisficing
Managers will run the firm to meet the minimum requirements of the shareholders - illustration of principal-agent problem
29
Bounded rationality in firms and consumers
Managers can only work with the knowledge they have and set objectives accordingly e.g. can't predict tax fluctuations
Consumers often don't maximize utility perfectly but choose options that are "good enough" given their constraints.
30
Corporate social responsibility
Firms set objectives of environmental/social obligations
31
Marginal Revenue
Change in TR / Change in Q
32
Average revenue
Price
33
Motivations for revenue maximisation
Market penetration and expansion - in the early stages of a business or when entering a new market, can help the company gain market share, build brand recognition, and establish a customer base
Costs - higher output and revenue may enable the business to achieve EoS
Attracting investors and financing - businesses aiming to be acquired might focus on revenue growth to enhance their valuations
Business survival - cutting prices to increase revenue and improve cash-flow can be an important way of surviving in an economic downturn
34
Marginal cost
The change in total cost for a business as a result of a one-unit change in output
Change in TC / Change in output
35
Why is marginal cost important for businesses
Businesses aiming to make profits need to have an indication of the MC of supplying extra output. They can make higher profits providing the MC is less than the MR. If the MC of increasing output is low then a firm might benefit from expanding their production because it will lead to a fall in average cost
36
MC can be hard to measure if
Goods are produced in batches
Isn't a tangible output - e.g. the cost of one more person using a rail line
37
Total cost =
TVC + TFC
38
Average cost =
TC / Q
39
Production vs productivity
Production measures the volume/value in a given time period. Productivity is a measure of the efficiency of FoPs - measured by output per person (per hour)
Increase in production does not automatically mean increase in productivity
40
Diminishing marginal returns in SR production
The Law of Diminishing Returns asserts that as the use of one variable input increases while others are held constant, the additional output gained will eventually diminish.
e.g. farmer adding fertiliser to field will eventually reach a productive limit and additional fertiliser will not do anything unless the farmer buys more land for the fertiliser to be used on
41
Short run production
Refers to a period of time during which at least on factor of production (usually capital) remains fixed
Characterised by the limited ability to adjust certain inputs, which leads to a constrained production capacity
42
Long run
All FOPs are variable
43
Internal economies of scale
The unit cost advantage from a business expanding the scale of production in the LR
Lower average costs are an improvement in productive efficiency and can give a business a competitive advantage
Arise from within the firm itself as it expands its own operations in the LR
Movement along LRAC curve
44
External economies of scale
Arise from factors outside the firm, often related to the industry or the business environment in which the firm operates. Shared by multiple firms within an industry or geographical area.
Downward shift of LRAC
45
Technical EoS
Large-scale machines or production processes that increase productivity
e.g.
Specialised equipment
Automated production
46
Managerial EoS
Employing specialists to oversee and improve different parts of the production process
47
Purchasing EoS
Can purchase factor inputs in bulk at lower prices if it has monopsony power
48
Risk-bearing EoS
Can occur when larger business are better equipped to manage certain types of risk more efficiently than smaller ones
e.g. spreading fixed costs over many customers
49
Financial EoS
More established firms to be more credit worthy and have access to loans with favourable rates of borrowing - may be able to access more finance at a lower rate
50
External EoS - Infrastructure economies
If an industry cluster develops in a specific geographic area. firms can benefit from shared infrastructure, such as transportation networks, utilities, and specialised services.
e.g. Media City, Salford
51
External EoS - Knowledge and labour pool
There may be a concentration of skilled workers and a strong knowledge sharing environment. Firms in these regions can tap into a well trained labour force and easily access industry-specific knowledge
e.g. Cambridge Science Park
52
External EoS - Supplier networks
Clusters of related businesses can lead to a strong supplier network. The automotive industry often see this as car manufacturers benefit from well-established networks of suppliers providing specialised components.
53
Diseconomies of scale
Increases in the average cost of supply in the LR due to a decreasing returns to scale
Means that a business has moved beyond their optimum size in the LR. Businesses are suffering from productive inefficiency perhaps because of organisational slack.
54
Reasons for DoS
Complexity + coordination - as an organisation grows, it may become more complex, with more layers of management
Bureaucracy - larger organisations often develop bureaucratic structures to manage the increased complexity. Innovation may slow down as managers become risk-averse
Cultural + organisational issues - as an organisation grows, maintaining a cohesive culture and shared values can become more challenging. This can impact employee morale, motivation, and have a damaging effect on labour productivity
55
Allocative efficiency
No one can be made better off without making someone else worse off. Occurs when the value that consumers place on a good equals the marginal cost of factor resources used in production
56
Characteristics of monopoly
One large, dominant firm
Price makers - control over price or output
Huge barriers to entry/exit
Highly differentiated goods - few substitutes so price inelastic
57
Price discrimination
Happens when a firm charges a different price to different groups of consumers for an identical good or service. Price discrimination occurs in all imperfectly competitive markets and is most common in monopolies and oligopolies. It requires a supplier to have some pricing power
58
Productive efficiency
A firm is producing at the lowest possible LRAC - maximum output with no waste/inefficiencies
59
Market structure characteristics
Degree of power (market concentration)
Number of firms
Barriers to entry/exit
Knowledge
Degree of product homogeneity
Profit levels
60
Perfect competition
Completely homogenous products - perfect substitutes
Firms have equal access to FoPs
Many buyers and sellers
Sellers act independently - no collusion
Costless entry and exit to the market
Perfectly elastic demand curve
Perfect knowledge for buyers/sellers
Profit maximisation assumed as objective and consumers assumed to be utility maximisers
61
Firms investigated for monopoly power
May be investigated for monopoly power when market share exceeds 25%
Sainsbury's + Asda proposed a merger but wasn't allowed as it was seen as anti-competitive as it would have a 32% market share
62
Origins of monopoly
Natural monopoly
Geographical factors - where a country or climate is the only source of supply of a raw material
Government-created monopolies
Through growth of the firm - amalgamation, merger or takeover
Through acquiring parent or license
Through legal means - nationalisation
63
Aims of price discrimination
Increased revenue - extracting consumer surplus and turning it into increased producer surplus for the seller
Higher profits - total profit will rise providing the marginal profit from selling to extra customers is positive
Using spare capacity - can help a business make more efficient use of their supply capacity
e.g.
Cinema pricing, student discounts, car insurance
64
Negative effects on consumer welfare of price discrimination
Dual pricing in insurance where loyal customers are charged more than new customers exploits imperfect information and consumer inertia
Reinforces monopoly power which can lead to higher LR prices and loss of allocative efficiency
Algorithms increase potential to to discriminate between consumers - AI driven discrimination
65
Benefits of price discrimination
Makes fuller use of spare capacity
Helps generate extra cash flow which can ensure survival during a recession
Can fund cross-subsidy of goods and services - premium prices for some can fund discounts for other groups, allows for continuation of loss-making services like rural bus routes
Higher monopoly profits can finance investment and R+D, driving dynamic efficiency
Can be a progressive policy - charging different prices for drugs in advanced and developing nations.
66
Natural monopoly
One firm can produce a good at a lower AC than multiple firms could - it is more efficient for one firm to be the sole provider of a good or service due to EoS
Many natural monopolies are regulated/state-regulated to ensure fair pricing, quality of service, accessibility which may help maintain consumer welfare
Large fixed/upfront costs, small variable/marginal costs
e.g.
Web Search, Air Traffic Control, Channel Tunnel, London Underground, Rail Network, Energy Grid
67
Entering into a natural monopoly
The shape of the LRAC for a natural monopoly can mean that it is tough for smaller challenger firms to enter a market profitably but it might be possible to successfully enter the market at retail level providing "final mile services"
e.g. Electricity distribution
Distinct from retail distribution services from energy businesses such as OVO and Octopus
68
Monopolistic competition
A market that shares some characteristics of both monopoly and perfect competition
There are many firms producing similar, but not identical (homogenous) products
e.g. cafes, hairdressers, hotels
69
Key characteristics of monopolistic competition
There are many producers and many consumers in a market - low concentration ratio
Producers and consumers act independently
Low barriers to entry and exit
Firms are short-run profit maximisers
Consumers see that there are non-price differences among competitors' products - differentiation
Producers have some control over price so they are price-makers
70
Concentration ratio
The n firm concentration ratio is the market share of the n largest firms in the market
71
Characteristics of oligopoly
Few firms dominate the market
Interdependent
High concentration ratio
Differentiated goods, so price makers
High barriers to entry/exit
Profit maximisation not sole objective
72
Concentration ratios of different market structures
0% - perfect competition
1-50% - monopolistic competition
50-75% - monopolistic/oligopoly
81-100% - oligopoly/monopoly
73
Assumptions of oligopoly
Other firms will not follow a price rise - PED is elastic above P1
Other firms will follow a price fall - PED is inelastic in SR
74
What does oligopoly encourage
Collusion (illegal) as all firms benefit from profit maximisation at Q1P1
75
Competitive oligopoly
Engage in price wars or non-price competition
When there are lots of firms in the market (for an oligopoly)
Lower barriers so firms attracted to supernormal profits
Similar goods
Acts like a competitive market
76
Collusive oligopoly
Can be overt (public) or tacit (discreet)
Fix prices high to ↓ competition and maximise profit
Controls output by fixing supply
↑ barriers to entry
Ineffective competition policy
Small number of firms dominating
Consumers may still be loyal regardless or they might not know or care
77
Monopsony
A single buyer in a market
78
Monopsony characteristics
Profit maximisers
Can negotiate lower prices with suppliers
Set market price
Both in product and labour markers
79
Examples of monopsony
Nuclear arms - only governments buy
NHS - worlds seventh largest employer
80
Advantages of monopsony
Can reinvest profits and innovate due to lower prices
↓ prices may be passed on to consumer
Can give power to consumer in the face of monopoly supply of resources - can force monopolies to cut prices
81
Disadvantages of monopsony
Suppliers can be squeezed out of business
Limited choice for consumers as monopsony acts as a barrier to entry
↑ profits for monopsony can mean inequality
May be investigated by competition authorities
82
Supermarkets as a monopsony example
2015
↓ 25% in the price that farmers are paid for milk
Farmers receiving as little as 23p per litre, often below cost of production
Supermarkets often use milk as a weapon in the price war, cutting prices - Morrisons cut price of 2-pint from 89p → 74p
83
Role of technology and contestability
Technology has reduced barriers to entry, increased pool of potential entrants and improved information
84
Demand for labour
Shows how many workers will be hired at any given wage rate over a period of time
Labour is a derived demand
85
Determinants of demand for labour
Change in demand for final product
Change in price of final product
Change in labour productivity
Changes in price of capital (substitute for labour)
86
Determinants of elasticity of demand for labour
Responsiveness of labour demanded given a change in the wage rate
S - ease and costs of factor substitution
E - elasticity of demand for final product
C - labour costs as a % of total costs - more elastic if high %
T - time period - easier for firms to switch factor inputs
87
Individual supply of labour
Key choice between work + leisure
88
Income effect
Rise in income as wages rise with potential to reach target income. At higher wages, they may choose to work less hours as can maintain the same SoL for less work
89
Substitution effect
Opportunity cost of leisure time increases as wages increase
90
Factors affecting supply of labour
Wage rate / value of leisure time
Migration
Training
Trade unions
Benefits and taxes
Non-monetary benefits
Barriers to entry
Wage in substitute occupation
Occupational/geographical mobility
91
Reducing occupational immobility of labour in UK
Investing in training schemes for the unemployed to boost their human capital
Subsidise provision of vocational training by private sector firms
92
Reducing geographical immobility of labour in UK
Affordable housing initiatives
Specific subsidies for people moving to areas with shortages of labour
Improving infrastructure - HS2
93
Wage elasticity of supply of labour
Responsiveness of labour supplied given a change in wage rate
94
Factors impacting wage elasticity of supply of labour
Nature of skills required ( ie. length of training period) - firms may ↑ wages by a lot but not enough supply of skilled workers
Nature of job - may not be in it for the pay
Time - e.g. notice periods - SR inelastic → LR elastic
95
Labour in competitive markets
Many workers
Labour is homogenous
Perfect information
Firms are wage takers
No barriers to entry
96
Labour with a monopsony power
One dominant employer of workers
Can set wages low, keeping them below market rate
97
Sticky wages
Wages can increase but it's very hard to decrease them
98
Positives of minimum wage
↓ poverty
↓ inequality, wage differentials between rich and poor
Incentive to work
Fiscal benefit to gov.
↑ productivity from morale boost
Incentive for firms to boost human capital - higher cost
Counter monopsonist employer
99
Negatives of minimum wage
Real-wage unemployment - consider elasticity
Youth lose out the most
Those not on minimum wage may ask for ↑ wages to sustain differential
Cost to businesses
Government may be the one employing low-wage workers
100
Reasons for wage differentials
Qualification - paid more for same job with better qualifications
Gender - women have more career breaks (men get paid 17% more in UK)
Discrimination - gender, age, race
Zero-hour contracts and the gig economy
101
Wage differentials
Refers to people being paid different amounts to do the same job
102
Issues in the labour market - migration
Migration increases the supply of labour which ↓ wage rate but ↑ population may ↑ AD → ↑D for labour
People coming into the country tend to be males 18-35 - no impact on health services + tax revenue
↑ competition for jobs incentivises people to work harder
Bring in skills
103
Issues in the labour market - public sector
Public sector in developed economies employs millions of workers
Gov therefore has major influence on wage rates both for public and private sector workers
It can manipulate wages to influence inflation etc.
- freeze public sector wages between 2010-19
Women in public sector get paid 8% more than in private sector
104
Policies to tackle labour market immobility
Trade union power
Rate of universal credit
Housing affordability
Infrastructure
105
Advantages of trade unions
Collective bargaining
Wage increases → ↑job satisfactions
Improved working conditions
Assume trade union has all workers in a labour market ('closed-shop') - monopoly supplier
106
Disadvantages of trade unions
↓ employment as wages ↑
Higher costs for businesses
107
Issues in the labour market - youth unemployment and market failures
Young workers have a lack of experience
Skills mismatch - STEM + IT (information failure as workers don't know what careers are in demand)
Young workers are often first to be laid off in a recession
Automation + offshoring reduce demand for low-skilled labour
Can lead to economic scarring due to limited career development
108
Methods of price regulating monopolies
Firm can only increase prices at the rate of RPI inflation in a year
RPI-X: can raise prices by a certain price based on how efficient they are (encourages firms to be efficient)
RPI±K: based on the investment that they make
109
Advantages of price regulation to control monopolies
Brings prices closer to allocative efficiency - chains of reasoning
110
Evaluation of price regulation to control monopolies
How does the government decide the level of X or K
If firms keep increasing efficiency, the government will keep raising the value of X - acts as a disincentive
Cost of regulation
111
Quality control to control monopolies
Trains - target for how many trains have to be on time
NHS - GPs see a certain amount of patients per hour
Leads to unintended consequences - extending train journeys on timetable to decrease delays, doctors rushing to see patients
112
Windfall tax
Higher tax levied by the government on specific industries when they experience unexpected and above-average profits.
For example, UK windfall tax on energy companies in 2022 due to increased prices of oil (Russia-Ukraine war)
Increased total tax to 75%
113
Advantages of windfall tax to control monopolies
Revenue generation -spending on societally beneficial goods
Increase equality
Responsible corporate behaviour - not benefiting from crises
114
Disadvantages of windfall tax to control monopolies
Could lead to ↑ costa of production
Under-reporting of profits
Tax evasion
↓ Dynamic efficiency as less capital for R+D
115
Benefits of competition
Lower prices
Better quality
Innovation
Greater choice
Economic growth
116
Negatives of competition
Price wars where companies sell products below cost
Unfair practices to gain an edge
Market instability can create uncertainty
Small businesses struggle
117
Government policies to promote competition - deregulation
| Def. +/-
Removing red tape creates incentive for firms to enter - lead to more choice and allocative/productive efficiency
But...
- Could lead to creation of oligopolies and local monopolies
- Depends on SR/LR
- May be other high barriers to entry
- Negative impacts on stakeholders
118
Government policies to promote competition - privatisation
Refers to state-run firms sold off to the private sector. Profit motive in private market increases competition/allocative/productive efficiency
But it depends on the level of competition in the market - won't instantly be loads of firms entering as soon as market is privatised.
- Loss making services will be cut instead of cross-subsidised
- Loss of EoS for natural monopolies
119
Demerger
When a business decides to split into separate firms
120
Reasons for demergers
Focussing on the core businesses to cut costs and improve profit margins
Reduce risk of diseconomies of scale and scope by reducing the range of functions in a business
Raise money from asset sales
Defensive tactic to avoid attention of competition authorities
121
Diseconomies of scope
Occur when a firm produces multiple products or services, and the cost of producing them together is higher than producing them separately
Due to managerial inefficiency, complexity, brand dilution, and conflicting objectives for different products
122
Examples of demergers
PayPal splitting from eBay in 2014
Frasers Group (own Sports Direct) selling Dunlop brand
123
Impacts of demergers on businesses
LR - higher profit
SR cost of selling off part of their business
124
Impacts of demergers on employees
Expected job losses if demerger is driven by desire to cut unit costs
New jobs may be created following a successful buy-out of a demerged business
Opportunities from new managers
125
Impact of demergers on consumers
Impact on price depends on intensity of industry competition
More focussed service may result in increased quality and innovation
126
Shut down price
The minimum price a business needs to justify staying in the market in the SR
In the LR, a business needs to make normal profits but in the SR a firm will continue to produce as long as TR covers TVC. This is because a business' fixed costs must be paid regardless of the level of output and we assume their costs cannot be recovered if the firm shuts down so loss per unit would be greater if the firm were to shut down
127
Characteristics of contestable markets
Low barriers to entry and exit
Perfect information
No sunk costs
No collusion - if incumbents raise prices or restrict output, new competitors can quickly enter and undercut them
128
Implications of contestable markets
Price competition as new entrants can enter and undercut them if prices are high
Incentive to operate efficiently and innovate to maintain a competitive edge
Discourage firms from attempting to establish monopoly power as attempts to do so tend to be short-lived
129
Types of barriers to entry and exit
EoS
Capital requirements
Government regulation
Access to distribution channels
Brand loyalty
Network effects
Patents and IP
130
Sunk costs
Costs that have already been incurred and can't be recovered
When firms have minimal sunk costs, it is easier for them to leave if conditions become unprofitable
This enhances the degree of contestability as firms are not financially tied to the industry
High sunk costs can trap firms in a market even when they are unprofitable
131
Competitive tendering
| Def., advantages, disadvantages, example
Process where the government or a public entity invites bids or proposals from multiple private companies to compete for the opportunity to provide goods or services
- goal to promote competition, efficiency, and cost-effectiveness
- risk of 'race to the bottom', government may have incomplete info on which firm is best
e.g. NHS contracts given to private firms to run cleaning or catering services
132
Collusion
Agreement between competing firms to coordinate their activities to reduce competition and maximise joint profits
133
Overt collusion
Open communication between firms, often involving formal agreements like cartels, e.g. OPEC acts as a cartel
134
Tacit collusion
Indirectly coordinate their actions without explicit communication or agreements. Often achieved by observing competitors' behaviours and aligning strategies, such as following price changes by a dominant firm (price leadership)
e.g. airlines often increase prices to match rises initiated by competitors without direct negotiation
135
Price fixing
Firms agree to charge a uniform price for a product, avoiding price competition
136
Output restriction
Firms agree to limit production to create artificial scarcity
137
Market sharing
Firms divide the market geographically or by customer type to avoid competition
138
Bid rigging
Firms collude in auctions by agreeing in advance who will submit winning bid
139
Reasons for collusion
Maximising joint profits
Reducing uncertainty
Avoiding price wars
140
Challenges to collusion
Cheating - firms breaking agreements
Market entry - high prices may attract new entrants
Legal and regulatory enforcement - collusion often illegal and subject to heavy fines and penalties in many jurisdictions
141
Effects of collusion on firms
Can earn higher profits and avoid uncertainty
Risky due to potential fines
142
Effects of collusion on consumers
Might lead to price stability in markets where fluctuating prices harm consumers
Face higher prices, limited choices and decrease innovation due to lack of competition
143
Effects of collusion on market
Allocative/productive/dynamic/x-inefficiency
144
Price competition - price wars
Often short-lived and intense periods when competing businesses lower their prices in a bid to win extra market share
145
Advantages of price wars
Reduced prices for customers
Bring down inflation rate
146
Disadvantages of price wars
Decrease revenues as PED is inelastic following a price drop
Decrease dynamic efficiency
Firms may leave the market, increased market concentration
Typically the bigger firms that can withstand a price war
147
Price competition - predatory pricing
Setting an artificially low price (below unit cost) for a product to drive away competitors
148
Price competition - limit pricing
When a firm sets price low enough to discourage new entrants into to the market
149
Non-price competition
Strategies that firms use to compete without changing the price
150
Forms of non-price competition
Product differentiation
Branding and advertising
Customer service
Innovation
Loyalty programmes
151
Advantages of non-price competition
Increase profit margins
Consumer loyalty
Market stability - ↓ price wars
Innovation
↑ consumer choice
152
Disadvantages of non-price competition
High costs
Risk of failure
Barrier to entry
Consumer manipulation - heavy advertising may lead to over-emphasis or perceived differences, rather than real product benefits
153
Government intervention to protect suppliers - protection against monopsony power
The abuse of monopsony power can be a problem for smaller firms further down the supply chain
Countering monopsony:
- competition policy to block some mergers and break up monopoly businesses
- regulate (Groceries Code Adjudicator) and administer fines for exploitation of market power
- establishing co-operatives among smallholder farmers
- industry standards on ethical sourcing of raw materials
154
Government intervention to protect suppliers and employees - nationalisation
Operated and owned by the government of a country
155
Advantages of nationalisation
Ensure essential services are operated in the public interest rather than for private profit
Benefits can be more evenly distributed, including control of prices
Privatisation can often lead to job losses as private companies prioritize profit over job security
156
Negatives of nationalisation
Can lead to inefficiency
Lack of innovation
Lack of market forces leading to misallocation of resources
157
MRP
Marginal Revenue Product
Additional revenue generated for each new worker
Change in quantity x MR
158
Revenue maximising in the labour market
Firms will hire workers up to MRP=W (MRL=MCL)
159
Evaluation of trade union power
Closed shop unions are illegal
Legislation against striking
160
Social tarrifs
Companies providing cheaper prices for families on low incomes/universal credit
Example of 3rd degree price discrimination
Volunteered
Application for monopolies
e.g. BT broadband
161
Hypothecated revenues
A tax used to fund a specific thing
e.g. Sugar Levy funding primary school sports
162
Tackling issues in the labour market
2022 Way to Work campaign aimed to get 500,000 jobseekers into work by speeding up job-matching processes through Jobcentre plus
Lifelong Learning Entitlement - 2025 - will give adults access to funding equivalent to 4 years of post-18 education
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Coase theorem
If property rights are well-defined and transaction costs are zero (or very low), then private bargaining will lead to an efficient outcome regardless of who initially holds the rights.
Imagine a factory produces pollution that harms nearby residents.
If residents have the right to clean air, the factory may pay them to allow some pollution.
If the factory has the right to pollute, the residents may pay it to reduce emissions.
As long as they can bargain without cost, they will reach an efficient solution.
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Shifting cost curves
Change in fixed costs - shift in only AC
Change in variable costs - shift in both costs
