within firms Flashcards
(23 cards)
What is virtue signalling?
An alternative theory of the firm where firms appeal to the public.
What is the Principle Agent Problem?
The divorce between ownership and control in a firm.
Who owns a business and appoints directors and managers?
Shareholders own a business and appoint directors and managers to run it on their behalf.
What are the different objectives of shareholders and managers?
Shareholders want to maximize profits for dividends, while managers may have different motives.
What is the profit maximization condition?
Profit max is mc=mr.
What is the sales maximization condition?
Sales max is ac=ar.
What is the revenue maximization condition?
Revenue max is mr=0.
What is allocative efficiency?
Allocatively efficient is p=mc=ar.
What are solutions to the Principle Agent Problem?
Bonus and share option.
What is cost plus pricing?
AC + mark up.
What is psychological pricing?
$9.99 looks like less.
What is drip pricing?
Base fare entices you to consume the good/service, but there are hidden costs.
What is limit pricing?
Reducing the price of a good to just above average cost to deter new firms.
What is predatory pricing?
Drives existing firms out of the market by setting prices below competitors’ AC.
What is loss leading?
Selling below AC for future profits.
What is skimming?
Cutting the price of older models to attract more customers.
What is contestability?
The degree to which new entrants find it easy to enter the market.
What does contestable markets theory state?
Potential competition is more important than actual competition.
What are the characteristics of perfectly contestable markets?
0 sunk costs, therefore no barriers to entry or exit; could have as little as one firm.
What is a sunk cost?
Cost that cannot be recovered when exiting the industry.
What is discretionary government intervention?
A merger is looked at on a case by case basis by the authorities.
What are the aims of UK competition policy?
To promote the interest of the consumer and to promote competition wherever possible.
When is a merger looked at?
When the combined market share of merging parties is more than 25% or total revenue is greater than 70 million pounds.
