microeconomics a2

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business objectives

profit maximisation- pharmaceuticals often run high profits- Pfizer 43% margins, hepls research and dev spending, pfizer 9.36 bn on R+D, Amazon used profits to acquire new companies eg twitch bought for 970m while lovefilm bought for 310m 
Gain Market share- mobile phone industry- samsung 31.8%, apple 22.9%, samsung spends 1/3 more than apple marketing per product, grocery's sector in UK, aldi overtaken waitrose in market sales, attempt to battle for mkt share, carbonated soft drinks, coca-cola vs pepsi
revenue max- shell and wal-mart are largest companies in terms of revenue in world, over 470bn
sales max- achieve rapid growth and move into new markets price closer to normal profit, example- amazon, grown quickly due to managers wanting business to expand quickly, 270 million customers active accounts, attempt to create long run profits, only 1 in 4 spotify users pay 
penetrate new markets- smart watches- will apple be able to break into market dominated by samsung and fitbit etc 
battle for dominance- HBO and netflix, companies sacrifice profit for long term gains as if they can dominate the market then profits will begin to flow 
profit satisficing- companies will look to make adequate profit in order to fulfill their needs 
social enterprises- feel they have obliagtion to help community 'social bite' taking on homeless people as part of social sustainability 

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contestable markets

conditions- pool of potential enterants, no sunk costs, access to tech, no consumer loyalty, lack of legal barriers to entry/exit, when economies of scale require massive output eg natural monopoly market is less contestable, other key barriers include vertical integration, brand loyalty, expertise and repuation.
government policy needed in order to create a more contestable market as they cannot control costs 
soft drinks- coca-cola, pepsi and dr pepper have large loyalty, mkt not conestable, may be more contestable on local scale eg irn bru 
when drug patents expire companies attempt to sell drug, much of this only comes from a few firms, however market can be contestable at local level due to fact products can be licensed to retailer eg tesco own brand 
Mobile MKT - smasung and nokia- 50% mkt share in 2009, now 30% (2014), rise of apple, huawei, lenovo
UK coffee shops- costa has dominance nationally, 1552 outlets, about 2x as many as starbucks but contestable at local level eg independant coffee shops
policies- deregulate industry eg parcel delivery, open up of monopolies- openreach in southend, tough rules on pred pricing eg royal mail and whistl

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royal mail example

increasing comp- access comp- where operate collects mail, sort it, transport it to royal mail who deliver it, 40% mail covered by access competition. 
end-to-end comp- other operator undertakes who process, whistl attempted this but anti competitive tactics by royal mail forced them out of the market
privatisation- 30% shares to government, 10% shares to workers, created £1.9bn in sales
royal mail share of parcel sector is 52%, more contestable than letters, share of revenue is 38%, smaller operaters charge more eg small bespoke delivers 
royal mail faces comp from all angles- amazon set up own delivery service, verticle integration
case for privatisation- raised income for government, allowed business to access equity, improve productivity, improve efficiency, need to make commercial decisions in wake of competition, more corp tax in long run due to efficiency
against privatisation- opposed by unions, sold off cheap, job cuts as private sector looks to streamline, could have improved profitabilty inside public sector with better managment, government could have provided investment for royal mail to become more productive 
Royal mail has UNIVERSAL SERVICE OBLIGATION- has to deliver to each adress each day, new enterants do not have this so can focus on profitable urban areas instead 

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monopoly power in markets

google- 90% market share, usually 25%= working monopoly
samsung = monopoly in uk 31.8%, apple close 
dominant monopoly has at least 40% of given market, they also have price making power 
VW has working monopoly in EU 
monopolies can be evaluated by global/national/regional/local data, could also be done by segment eg letters and parcels 
regional monopolies for water eg trent water 
pubs- rural vs urban areas 
key features of monopoly- price setting power, barriers to entry, price disciminate, imperfect info, profit max (usually) 
efficiency- not allocative or productively efficient, less competition= higher prices, could lead to x-inefficiency, less drive for new products due to no comp, monopolies could experience diseconomies of scale 
Pfizer- 43% profit margins 
case for- profits for r+d, economies of scale, domestic monopoly = intl competitive, monopoly firms regulated, price discrimination could bring some into mkt 
case against- service lacking, prices high, efficiency is non exsistant, impact on consumer welfare with higher prices 

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inequality in the UK

Branko Milanovic- 8% people have 50% world income, 1% have 15% 
richest 300 in the world have more wealth than poorest 3billion
the gini co-efficient of the world is 0.7 

In the UK the top 20% take home on average 1150.40 per week while the poorest 20% have  297.10 after benefits per week 
income inequality is rising due to- skill bias due to technology, tax systems less progressive and welfare has been cut, executive pay is rising quicker than average worker pay, increasing urban vs rural inequalities

government policy to tackle inequality- national living wage, higher benefit payments eg child benefit, increased tax on earnings 100,000+, early years education and education reforms to help plug gap between rich and poor areas, minimum income scheme 

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Non-price comp in oligopoly

innovation- tech companies keep bringing out new products to help persuade customers 
quality of service- private shops can charge a premium for their service and the experience 
free upgrades- help customers feel like they are being well treated 
loyalty schemes- tesco club card- help keep consumers coming back 
branding- appeal to fashions or particular group of people 
sales promotions- 2 for 1 or free postage helps to persuade people to spend 

advertising spending UK 2014- 
BSKYB- 221million
BT 146M 

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comp policy- price regulation

not all products priced by mkt forces 
price capping- price determined by formula deduced by regulator
in the UK price capping usually occurs at inflation-X (x being efficiency savings over the year) 
in the water industry formula is inflation-X+K in order to allow for investment in the infrastructure to meet water quality standards 
price caps have been introduced on pay day loan companies such as wonga who now normally make a loss 
rail fares in the UK- about 45% fares regulated and since 2015 rate at which these can rise is at the rate of inflation
arguements for- cap power of natural monopolies from exploiting consumers, help increase consumer surplus, move productive efficiency as costs lower, can help control inflation
arguement against- price caps lead to job losses, distorts price mechanism, information may not be accurate enough which leads to regulatory failure, lower profits due to caping = lower investment 

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allocative vs productive efficiency

productive= lowest point on atc curve 
business minimises waste and is at a pareto efficient point

allocative efficiency- output makes most use of economic resources and maximises welfare of both conumers and producers 
pareto efficienct, 
market price = MC of supply 

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internal economies of scale

technical economies of scale- containerisaiton, bigger containers = more stuff = lower unit cost

special capital- replace labour eg car assembly

purchasing economies of scale- big firms get unit cost reductions through bulk buying 

large scale division of labour- more productive over time when labour is divised, bring down cost

management economies- specialist sales staff etc increase productivity

financial economies- bigger firms borrow at cheaper rate of interest, more investement 

large firms can diversify across products countries eg which can reduce risk- eg virgin

network economies of scale- uber, airbnb, MC of new consumer is almost 0, every extra user brings down av cost of fixed costs 

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barriers to entry

economies of scale and vertical integration
consumer loyalty- brand retention march 2015 apple retained 90% if its customers, samsung 77%, blackberry only 31% 
apple is worlds most valuable brand- 246.99bn 
legal barriers- licenses eg taxi's, patent protection eg drugs, state owned enterprises and franchises, import controls eg tariffs and quotas 
access to latest tech- VW and samsung lead the way with 13.5bn and 13.4bn respecively, can be a barrier if it creates a large number of patents etc 
expertise, goodwill and reputation- eg kwik-fit as consumers know what service they will recieve

strategic barriers to entry- limit price tactics, producers do not make SNP in order to warn off comp, pred pricing does not allow people into the market, brand proliferation- where existing firms expand product ranges to saturate market and make it difficult for new firms to make it in 

innovation- property rights such as IP can prevent other firms entering, first mover advantage could lead to monopoly power for first firms into mkt
however high innovation could reduce barriers as technology can rapidly advance and new firms can move into an idustry and rapidly produce next big product 

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costs and benefits of collusion

CMA- "cartels are a major barrier to competiton and can lead to significantly increased prices and reductions of output, efficiency, innovation and choice, all of whch harms consumers"
recent cartel examples- apple pays $450million to settle US case over ebook price fix

costs of cartels- less consumer welfare- higher prices, less allocatively efficient, regressive 
absense of comp- less efficient, x-ineffieciency?, less incentive to innovate, output quotas mean firms cannot expand- OPEC
reinforce monopoly power- high barriers to entry and less contestable markets 

benefits of cartels- 
bring up industry standards and social benefits- pharmaceutical research, car safety tech and accelerate new tech 
fairer prices for those in low/middle income countries, compete with powerful monopsonistic companies, reduce extreme poverty
profits- lead to investment projectsm r+d and higher wages for employees? 

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survival of small firms in an oligopoly

99% of all business in the UK are classed as small
small firm examples- Brompton bikes, wiggle, collective dairy 

median profit of small firms in UK in 2014 was just £8,000, they stay in business as: 
1- smaller firms act as sub contractors eg construction industry 
2- exploit high income elasticity niche products which can be sold at a higher profit 
3- aviod diseconomies 
4- smaller firms usually lifestyle industries, look to satisfice rather than maximise 
5- usually more flexible in responding to mkt conditions eg changing tastes 
6- more people willing to buy online, which reeduces entry barriers eg start ups 

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monopoly power examples

working monopoly- samsung- 31% of mobile market, just ahead of apple on 21%, these are working monopolies 
dominant firms- 40%+ mkt share, coca-cola has 42% in the USA and has had for many years, AB In-BEV have more than 40% in a number of countries, including usa 46.4% and argentina- 78.1% 
internet browsers- chrome now has over 40% of market
VW has a working monopoly in the EU- 25.5%

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arguments against and for price discrimination

against- exploits the consumer, consumers will usually pay more than mc of supply, extract surplus and turn it into profit 
nurofen fined for attempting to sell different painkillers at different prices even though they contained same ingredients 
can be limit pricing tactic to create entry barrier 
can reinforce monopoly power and the dominance of incumbents 

arguments in favour- 
potential cross subsidy eg drugs more expensive in the developed world to make it cheaper in the developing world 
make better use of spare capacity- off peak times, better use of the space left which on trains can have no marginal cost to fill will help to increase profit and reduce unneccessary environmental impact 
Brings in new consumers to market who would otherwise be excluded before, people can get good deals through hurdle model of price discrimination eg nearly new products, coupons, buy a once used game, go to store on day to get special deal
price discrimination=more profit=dynamic efficiency gains

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cartels and price fixing

easy to do when- 
industry regulator is weak or ineffective 
penalties for collusion are low 
participating firms have high amount of market supply 
firms can communicate well and trust eachother, if trust breaks eg OPEC then cartel could fall apart 
industry can easily measure output, OPEC can easily measure number of barrels for example
brand loyalty strong and people will not switch when prices get high 

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aims and conditions of price discrimination

firms must have sufficient monopoly power 
be able to identify market segments 
be able to separate different groups 
be able to prevent re-sale and being undercut 

hypertargeting- amazon attempted it by collecting data on customers, late rooms have also tried to target potential consumers online by creating digital profiles of consumers and offer bespoke prices 

aims- create extra revenue, create higher profit, improve cash flow, use spare capacity 

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functions of profit

finances capital investment and researchc, retained profit key source of finance for investments 
market entry- signalling function of profit helps people move into the market as they realise there is money to be made 
signal about health of economy- increased profits could show more supply side improvement, could also be as a result of increased AD. 
gives government more tax return, could be hampered by aviodance 

samsung- spends about $14bn per year on r+d, mainly due to massive SNP they achieve each quater, r+d has followed profits up 

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a conglomerate hs a number of diversified business interests eg 3M and Siemens as well as TATA. 
samsung for example makes electronics, white goods, military hardware, apartments, ships and owns an amusement park
worlds leading conglomerate in terms of makret value is general electric, with 253.5bn market value last year, followed by other USA firms united technologies and 3M, siemens is the only non USA firm in the top 5 

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economies of scale prices and profits

economies of scale occur as the output increases and we move along the LRAC curve 
MC and AC will both move further down the mr and ar curves to create a greater output and lower price 
under economies of scale- output=higher 
profit max price=lower 
total profit= higher
producer and consumer surplus= higher 

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summary of pricing behaviour

break even price- when price = av total cost, normal profit 
cost plus pricing- firm fixes price by adding percentage profit margin on top of production costs, if demand is inelastic then mark may be higher 
limit pricing- firm sets low enough price to discourafe new enterants 
peak pricing- when business raises price at time when demand reaches peak due to fact MR will be higher at these times 
penetration pricing- used to enter new market, usually prices set low to attract new consumers 
predatory pricing- set price below cost artificially to warn off competition

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oligopoly- fuel pricing by supermarkets

tesco, BP, shell, esso and sainsburys have more than 60% market share. 
tesco dominates this at 16.5%
out of top 7 retailers, 4 of them are supermarkets (tesco, sainsburys, morrisons, asda) 
supermarket prices are usually lower than UK average, sometimes by 3/4p per litre. this is due to- 
1- supermarkets have monopsony power, discount passed on 
2- happy to accept lower profit as it pulls people into store 
3- supermarkets own sites and already have staff so operating costs lower than other stations 
4- UK average includes smaller independant retailers often in rural areas do not have economies of scale so cannot pass on savings 
5- could supermarket fuel be inferior quality (shouldnt be as needs to conform to EU standards) 

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