Economics Unit 3 - Concentrated markets

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Why might a firm decide to try and grow?
Cost saving, Economies of scale, Shareholder value
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What is internal (organic) growth?
Occurs when a business gets larger by increasing the scale of its own operations rather than relying on the integration with other firms
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What are the advantages of internal growth?
Develop new products, Invest in the capital/labour, Export to foreign markets
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What are the advantages with external growth?
Faster access to new products, Increased market share, Economies of scale, Overcome barriers to entry
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What is horizontal integration?
2 business' in the same in the same industry, at the same production stage, become 1
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What is a benefit of horizontal integration?
Cost saving (fewer workers)
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What is vertical integration?
2 business in the same industry, at different production stages, become 1
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What is a benefit of vertical integration?
Better control of the supply chain
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What is forward vertical integration?
Closer to the final consumers of the product
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What is backward vertical integration?
Closer to the raw material of the supply chain
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What is conglomerate integration?
When 2 business' have no obvious relationship
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What is lateral integration?
When 2 business' join together, that produce similar but non competing products
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What are the risks of merging companies?
Clash of ideas, Loss of human capital
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Why might 2 firms decide to merge?
Better profits, Reduce competition
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What is a monopoly?
A firm that has 25% or more market share?
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What are the 5 barriers to entry associated with a monopoly?
Patent laws, Nationalisation, Limit pricing, Sunk costs, Ownership of scarce resources
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What are the 2 barriers to exit associated with a monopoly?
Closure costs, Loss of business reputation
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What are the sources of monopoly power?
No. of competitors, Advertising, Degree of product differentiation, Barriers to entry/exit
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What is an oligopoly?
A small number of large firms that dominate the market
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What are the features of an oligopoly?
Possess monopoly power, Highly concentrated, Non-price competition, Price wars, Entry barriers
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What is a concentration ratio?
A tool for measuring the market share of the top 5 firms in an industry
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What is interdependence?
Cannot act independently of each other
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What is a cartel?
When 2 or more firms enter in to an agreement to restrict supply or fix the price of a good
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Why do cartels tend to breakdown?
Because firms have an incentive to cheat on their quotas to benefit from high prices/output
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What are the 3 conditions that will make the cartel more likely to stay?
Small number of firms, Penalties for cheating, Easy observation of others
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What is price leadership?
Firms look up to 1 dominant firm to set prices
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What is game theory?
A study of how game players react to changing circumstances and plan their response
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What is zero sum game?
A gain by one player is matched by the loss of another
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What is risk averse?
Where one party does not take action that might promote retaliatory activity by another party
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What is collusive behaviour?
Firms recognise their interdependence and act together rather than compete
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What is competition law?
Prohibits attempt to fix prices
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What is price discrimination?
When a firm with market power charges different prices to consumers for the same product
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What are the conditions necessary for price discrimination to take place?
Market power, No resale, Segregate the market between consumers with different willingness to pay
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Explain what first degree price discrimination is. (perfect price)
Each consumer pays exactly what they are willing to pay. There is no consumer surplus
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Explain what second degree price degree discrimination is. (quantity)
Bulk-buying, 2for1, the more you buy the less you pay per unit
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Explain what third degree price discrimination is. (consumer)
Age, Time, Geographical
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What are the advantages of price discrimination?
Increase economic profit, Dynamic efficiency
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What are disadvantages of price discrimination?
Inequitable, Welfare loss
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What are the features of a contestable market?
Freedom of entry/exit, Low sunk costs, Level of brand loyalty
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What is hit and run competition?
A firm enters the market to take advantage of the supernormal profits, if the market is no longer profitable the firm will leave the market
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At what point does allocative efficiency occur?
AR = MR
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At what point does productive efficiency occur?
The lowest point on the LRAC curve
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What is static efficiency?
Both allocative and productive efficiency at the same time
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What is dynamic efficiency?
Reduce costs by new production processes
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What is consumer surplus?
The difference between what what the consumer is willing to pay and what they actually pay
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Does the consumer surplus triangle sit above or below the equilibrium point?
Above
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What is producer surplus?
The difference between the price the producer is willing to sell and the price they actually sell
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What is dead weight loss?
A loss in economic welfare
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Other cards in this set

Card 2

Front

What is internal (organic) growth?

Back

Occurs when a business gets larger by increasing the scale of its own operations rather than relying on the integration with other firms

Card 3

Front

What are the advantages of internal growth?

Back

Preview of the front of card 3

Card 4

Front

What are the advantages with external growth?

Back

Preview of the front of card 4

Card 5

Front

What is horizontal integration?

Back

Preview of the front of card 5
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