Booklet 8 - theory of the firm

• Cartel

  A group of producers that agree to limit production in order to keep the price of goods or services high
• Contestable market


  A market is contestable if it’s easy for new firms to enter the market
• Hit and run 


  when firms enter the market while supernormal profits can be made and then leave the market once prices are driven back to normal
• Oligopoly


  A market dominated by a few large firms that offer differentiated products , with high barriers to entry
• Oligopoly firms are interdependent and may use competitive or collusive strategies
• Sunk cost


  This is an unrecoverable cost of entering the market. Can act as a barrier to exit
• Dynamic efficiency 


  Improving efficiency in the long term by carrying out research and development or investing in new technology and training to improve production process
• Static efficiency


  Occurs when allocative and productive efficiency are both achieved at a particular time
• Concentration ratio


  Shows how dominant firms are in the market
• Deregulation


  Removing rules imposed by the government that can restrict level of output in market
• Competition policy


  Government policy aimed at reducing monopoly power in order to increase efficiency and ensure fairness for customers
• Government failure

  When gov intervention in a market causes misallocation of resources
• Privatisation 


  When a firm or a whole industry changes from being run by the public sector to private sector
• nationalisation


  an industry owned by government gains funds through taxes
• Creative destruction


  Innovation leads to demise of outdated industries
• Advantages of price discrimination:

  • increased revenue
  • caters to different groups
  • efficient allocation of resources
  • encourages consumption
• Disadvantages of price discrimination:

  • unfairness
  • market distortion
  • exploitation if markets
• collusion


  Where firms secretly agree to fix prices , limit competition or manipulate market for financial benefit
• Price leadership 


  Where one leading firm sets the price for a product and other firms follow suit to maintain market stability
• Price wars

  Firms lower price to gain market share
• Cooperation 


  Legal and voluntary collab between firms to achieve common goals like innovation or efficiency
• Oligopolist firms are interdependent as each firms decisions directly affects other firms and causes strategic changes from other firms to the market
• Advantages of oligopoly:

  • economies of scale
  • innovation
  • price stability
  • product variety
• Anti-competitive behaviour refers to actions by businesses or organizations that reduce competition in the market, leading to negative effects on consumers and the overall economy.
• What are some common forms of anti-competitive behaviour?

  • price fixing
  • monopolization
  • collusion
  • predatory pricing
• How can anti-competitive behaviour harm consumers?

  It can lead to higher prices, reduced product quality, limited choices, and stifled innovation, negatively affecting consumer welfare.
• A complex monopoly is a market structure where a single entity or a group of entities colludes to dominate the market, leading to anti-competitive practices that harm competition and consumers.
• While a simple monopoly involves one firm controlling the market, a complex monopoly can involve multiple firms collaborating to restrict competition and manipulate market conditions.
• Characteristics of a complex monopoly:

  • high barriers to entry
  • collusive behaviour
  • price fixing
  • market control of supply and demand
• Interdependence refers to the mutual reliance between firms, industries, or countries, where the actions of one party affect the economic decisions and outcomes of another.
• The kinked demand curve is a model used in oligopoly theory to illustrate how a firm’s demand curve can become kinked at the current market price, reflecting competitors’ responses to price changes.
• The kink occurs because firms expect competitors to match price decreases (making demand more elastic) but not to match price increases (making demand less elastic).
• Non-price competition refers to strategies used by firms to attract customers without changing the price of their products, focusing on factors like quality, service, branding, and advertising.
• What is the significance of non-price competition in oligopolistic markets?

  firms may avoid price competition to prevent price wars, opting instead to compete through non-price factors to maintain profitability.
• Price fixing is an agreement between competing firms to set prices at a certain level rather than letting market forces determine them, which is illegal in many jurisdictions.
• Product differentiation is a marketing strategy where a company distinguishes its products from those of competitors through unique features, quality, branding, or design.
• Regulation refers to rules or laws created by governmental or regulatory authorities to control and manage the behaviour of businesses and protect public interests.
• Regulatory capture occurs when regulatory agencies are dominated by the industries they are supposed to regulate, leading to regulations that serve the interests of the industry rather than the public.
• What are the potential consequences of regulatory capture?

  • lack of consumer welfare
  • lax enforcement of regulations
• Public ownership refers to the ownership of assets, resources, or enterprises by the government or the public sector, as opposed to private individuals or corporations.