Concentrated Markets

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  • Created by: Ellie
  • Created on: 26-05-15 14:29
What is a monopoly?
A pure monopoply is when there is one firm producing 100% of output
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What are the assumptions of monopoly?
The firm is the market and there are barriers to entry
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How does the demand curve effect monopolists?
If it is a price maker the demand curve dictates the maximum output that can be sold at this price if the monopolist is a quantity setter the demand curve dictates the maximum price at which the chosen quantity can be sold
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Describe monopoly profit
It makes supernormal profit as monopolies are able to set the price for their goods and services
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What are the sources to monopoly power?
Barriers to entry, patent and copyright laws, Nationalised industries, incumbent firms exploiting economies of scale, fixed costs, control over raw materials
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Define internal growth
This occurs when a firm invests in a new capacity from scratch
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Define external growth
This is growth via take over, merging or acquisition of another firm
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Define Vertical growth
When a firm grows by expanding back up its supply chain or forward along its distribution chain it allows a firm to have greater control over its production or distribution process
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Define Backward vertical growth
This occurs when a firm decides to produce its own equipment e.g. if a car firm decided to produce its own parts
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Define forward vertical growth
This occurs if the company owns the distribution chain in which the company sells its product e.g. if a car firm owned a show room
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Explain lateral growth
When a firm diversifies into a new type of production enabling firms to gain scale economies of massed resources and risk spreading, it can cause managerial and organisational diseconomies of scale due to lack of expertise
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Explain horizontal growth
This occurs when a firm undertakes more of the activities its already involved in which can lead to economies of scale, eliminate competitors and increase monopoly power
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Define Price discrimination
This is when different customers are charged different prices based on their willingness to pay
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What are examples of price discrimination?
Student discount, advanced fare discount, off peak, lower cost for buying higher quantity
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Define first degree price discrimination
This is where consumers are charged the maximum price they're willing to pay meaning there's no consumer surplus
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Define second degree price discrimination
This is where the prices are charged depending on the quantity consumed
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Define third degree price discrimination
This is where different groups of people are charged different prices
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What are the advantages of price discrimination?
Some consumers benefit from lower costs, firms can increase revenue, increased revenue can be used for R and D which benefits consumers
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What are the disadvantages of price discrimintaion?
Some consumers end up paying higher prices, There might be some administration costs to separate the market, There is a decline in consumer surplus and those who pay more might not be the wealthiest
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Define economic welfare
Economic welfare is a measure of human happiness or satisfaction it can be split into consumer and producer surplus
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Define Consumer surplus
This is a measure of the economic welfare enjoyed by consumers and is the surplus utility received over and above the price paid for the good. When price decreases consumer surplus increases
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Define Producer Surplus
This is a measure of the economic welfare enjoyed by the producers and is the difference between the price a firm is charging and the price it would like to charge. When there is an increase in price consumer surplus will increase
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Define an oligopoly
A market in which a few large firms have the majority of the market share
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Explain a concentration ratio?
It measures the market share of the biggest firms in the market a:b where a = number of firms b= % of firms in the market
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How are small firms in an oligopolistic industry effected by large firms?
Lack of brand loyalty, high entry barriers, other firms can't compete due to bulk, other firms need to find a USP
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What are the barriers to entry in an oligopolistic market?
Multiplicity of brands (Same firms run a large number of brands meaning consumers can switch), Brand image ( large firms can say their brand is unique), Patents (more easily acquired by large firms), R & D, None price competition (having sales)
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Define Price Wars
Exist when firms competitively lower prices to increase their market share
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What are the artificial barriers to entry?
Limit pricing (The firm with the lowest costs sets their prices at a level other firms can't compete with) Predatory pricing ( when the firm sets a price that may bankrupt another firm)
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Describe a competitive oligopoly
Firms compete by if one raises its price another firm might not change theirs to gain more market share and if one lowers its price the others might lower their prices further
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Define a collusive oligopoly
Collusion is where firms cooperate in their pricing and output decisions
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Define a Cartel
A cartel is a collusive agreement to fix prices
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Why do firms collude?
Collusion removes the uncertainty of competition
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What are the conditions of a collusion?
There are high barriers to entry, the more homogeneous the product the greater the chance of success, firms make profits as a group but one firm might make more profit if it leaves, all major producers in the cartel must follow its rules
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What are the outcomes of a cartel for producers?
An increase in sales revenue and profit, investigation by the office of fair trading, increased likelihood producers will compete by none price competition, Increase in sales revenue and profit
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What are the outcomes of a cartel for consumers?
An increase in the price of a product, increased production costs for firms buying the good, reduction in consumer surplus, can lead to loyalty cards
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Describe Game theory
A mathematical approach to the study of conflict and decision making treating conflict as games with tactics and strategies
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What is the dominant strategy?
Its not the best outcome for them both but it would be the best outcome for them as an individual
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What is the nash equilibrium?
The equilibrium where each player strategy is optimal given the strategy of the other player
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What are the seven pricing strategies in an oligopolistic market?
Cost plus pricing, price parallelism, price leadership, limit and predatory pricing, price discrimination, cross subsidy, marginal cost pricing
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Explain Cost plus pricing
This is the most common method and is where firms set their price by adding a standard % of profit margin onto average unit costs
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Explain Price parallelism
When there are identical prices and price movements in a market it occurs in highly competitive markets and when there is collusion
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Explain price leadership
When one firm becomes the market leader and the other firms in the industry follow its pricing example
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Explain cross subsidy pricing
All customers pay the same price but the marginal cost of supplying the good varies between different customers e.g. sending 1st class post
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Explain marginal cost pricing
It is used when demand varies on a daily or weekly basis
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Define a contestable market
A market where there is free entry and free exit for incumbent and new firms. The lower the sunk cost of entry the more contestable the market
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What are the assumptions of contestable market theory?
Low barriers to entry, no single firm has significant share of the market, firms compete so collusion doesn't occur, firms are short run profit maximisers, firms may produce homogeneous or heterogeneous goods, there's perfect knowledge in the market
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How contestable are markets in reality?
There are many industries where it is difficult to recover sunk costs, new firms may have a temporary disadvantage as they don't have the same industry knowledge as incumbent firms, barriers to entry can be difficult to move
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What are the benefits of a contestable market?
Reduces the likelihood of government failure as government shouldn't have to intervene with the market, It can suggest a more analytical approach when trying to predict a firms pricing and output behaviour
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What are the criticisms of a contestable market?
Its got limited application as sunk costs may be high and mergers and takeovers create unachievable economies of scale, Level of technological knowledge and expertise to enter a market can be high, patents can protect incumbent firms,
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Card 2


What are the assumptions of monopoly?


The firm is the market and there are barriers to entry

Card 3


How does the demand curve effect monopolists?


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Card 4


Describe monopoly profit


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Card 5


What are the sources to monopoly power?


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