a2 econ session 2
TRANSCRIPT
A Level Economics – Year 2 (A2) Revision Workshop
Session 2Concentrated Markets and Government Intervention
12
A Level Economics – Year 2 (A2) Revision Workshop
Session 2 OutlineConcentrated Markets: Key Terms
Characteristics of Concentrated Markets
Evaluating Monopoly
Examining Natural Monopoly
Analysing Oligopoly, and Exploring Game Theory
Competition Policy and Regulation
12
A Level Economics – Year 2 (A2) Revision Workshop
Key Term Match12
Match the Concentrated Markets Key Terms to their correct definitions
A Level Economics – Year 2 (A2) Revision Workshop
Concentration Ratios13
64.8 74 61.4
A Level Economics – Year 2 (A2) Revision Workshop
Characteristics of Concentrated Markets
13
One dominant firm
High barriers to entry (and exit)
Price-making power
Aim to profit-maximise
A Level Economics – Year 2 (A2) Revision Workshop
Characteristics of Concentrated Markets
13
A small number of dominant firms
Interdependence
High barriers to entry (and exit)
Collusion or price competition; differentiated or homogeneous goods
A Level Economics – Year 2 (A2) Revision Workshop
Monopoly examples13
Local train services (regional monopoly)
Google Chrome (working monopoly)
London Underground (pure monopoly)
Rural pubs (local monopoly)
A Level Economics – Year 2 (A2) Revision Workshop
Analysing Monopoly14
Q
P
A Level Economics – Year 2 (A2) Revision Workshop
Evaluating Monopoly: Productive Efficiency
14
No – not producing at lowest average costPossibly – average costs may be LOWER than in a competitive market due to ECONOMIES OF SCALE
Monopoly AC
Competitive AC
Qm
Cm
Qc
Cc
A Level Economics – Year 2 (A2) Revision Workshop
Evaluating Monopoly: Allocative Efficiency
14
No – not producing where AR = MCPossibly – there may be legal barriers to entry (eg safety regulations) which protect the consumer; may be complete market failure without the monopoly
A Level Economics – Year 2 (A2) Revision Workshop
Evaluating Monopoly: Dynamic Efficiency
14
Possibly – supernormal profits can be used to fund R&D, and innovation to lower costs
Possibly not – many monopolies have not managed to innovate, and some had to leave the market
A Level Economics – Year 2 (A2) Revision Workshop
Evaluating Monopoly: X-Efficiency
14
No – lack of competitive pressure means no incentive to lower costs
AC1
Possibly – tight profit margins in recession drive efficiency; shareholders reduce complacency etc
A Level Economics – Year 2 (A2) Revision Workshop
What is a Natural Monopoly?14
Only one firm
Large sunk costs / large
networks
Difficult to achieve
economies of scale
A Level Economics – Year 2 (A2) Revision Workshop
Analysing Natural Monopoly14
Average Costs always falling
P
Q
Profit Max: MC = MR
Tiny supernormal profit
Highly inefficient – long way from productive efficiency
and barely any market demand met
A Level Economics – Year 2 (A2) Revision Workshop
Analysing Natural Monopoly14
OPTIONS
P
Q
Provide a subsidy to operate at allocative efficiency
Nationalise and operate as not-for-profit
Q1
P1
A Level Economics – Year 2 (A2) Revision Workshop
15
Read the Royal Mail case study and identify evidence that supports the view that the Royal
Mail is a natural monopoly
A Level Economics – Year 2 (A2) Revision Workshop
Examples of Oligopoly15
Can you think of 3 more examples of your own?
A Level Economics – Year 2 (A2) Revision Workshop
How do firms behave in oligopoly?
15
• Homogeneous goods• Price wars• Price leadership
Price Competition
• Homogeneous goods• Illegal, if not tacit collusion• Maximise joint profits
Collusion
• Anything other than price• Differentiated products• Brand proliferation
Non-Price Competition
A Level Economics – Year 2 (A2) Revision Workshop
Stable Prices in Oligopoly15
Kinked Demand Curve• Price elastic demand if the price is raised –
competitors do not copy• Price inelastic demand if the price is lowered – all
competitors copy• Implies a discontinuous MR curve
Stable price• Costs can change but the profit-maximising point
does not change
P
A Level Economics – Year 2 (A2) Revision Workshop
Stable Prices in Oligopoly15
Kinked Demand Curve
• Price elastic demand if the price is raised – competitors do not copy• Price inelastic demand if the price is lowered – all competitors copy• Implies a discontinuous MR curve
Stable price
• Costs can change but the profit-maximising point does not change
MC
ACMC1
AC1P
A Level Economics – Year 2 (A2) Revision Workshop
Evaluating the kinked demand curve model
15
It ignores
…
Product differentiation
Collusion (tacit or real)
Dynamics of reaching the stable price
A Level Economics – Year 2 (A2) Revision Workshop
Oligopoly Behaviour16
San Francisco – Hawaii flights (Nov 2015)
Supermarket Petrol Prices (Jan 2016)
Pizza Chain voucher codes (Feb 2016)
A Level Economics – Year 2 (A2) Revision Workshop
Oligopoly Behaviour16
LIBOR rate fixing (banking, up to 2012)
Modelling agencies & model fees (Aug 2015)
Air Cargo price fixing (2000 to 2006)
A Level Economics – Year 2 (A2) Revision Workshop
Explaining Collusion16
Why?• Maximise joint profits
How?• Restrict output / set prices high
Conditions
• Homogeneous goods• Easy to detect if a firm breaks the agreement (small number of firms, high trust)• Firms must have price-making power
A Level Economics – Year 2 (A2) Revision Workshop
Game Theory and Collusion 16
Papa Joe’s Pizza
High Price Low Price
Dynamo’s Pizza High Price (10 , 10) (3 , 12)
Low Price (12 , 3) (6 , 6)
Work out Dynamo’s Dominant Strategy
Work out Papa Joe’s Dominant Strategy
Work out the Nash Equilibrium
A Level Economics – Year 2 (A2) Revision Workshop
Game Theory and Collusion 17
Papa Joe’s Pizza
High Price Low Price
Dynamo’s Pizza High Price (10 , 10) (3 , 12)
Low Price (12 , 3) (6 , 6)
Is there a “better” option for each firm, other than the Nash equilibrium?
YES!Each firm charges a HIGH PRICE in order to
maximise joint profitsREQUIRES COLLUSION!
A Level Economics – Year 2 (A2) Revision Workshop
Game Theory and Collusion 17
Papa Joe’s Pizza
High Price Low Price
Dynamo’s Pizza High Price (10 , 10) (3 , 12)
Low Price (12 , 3) (6 , 6)
Why is this option “unstable”?
Because each firm could individually earn 12 by “defecting” and charging a low
price, compared to 10 by colluding and charging a high price
A Level Economics – Year 2 (A2) Revision Workshop
Game Theory and Collusion 17
Papa Joe’s Pizza
High Price Low Price
Dynamo’s Pizza High Price (10 , 10) (3 , 12)
Low Price (12 , 3) (6 , 6)
How can competition authorities take advantage of this instability to help tackle
collusion?
Encourage firms to defect by whistleblowing so avoiding fines
A Level Economics – Year 2 (A2) Revision Workshop
Non-Price Competition17
Legroom, flight times, entertainment, food Quality of ingredients, ambience, seasonality
Location, range of products, other services in store Durability, battery life, weight, style
Quality of ingredients, branding, availability
A Level Economics – Year 2 (A2) Revision Workshop
Anti-competitive practices18
Types
Collusion
Bid-Rigging
Full Line Forcing
Refusal to Supply
Predatory Pricing
A Level Economics – Year 2 (A2) Revision Workshop
Tools of competition policy18
Price Controls (RPI – X, RIIO, RPI – X + Y)
Reducing or eliminating barriers to entry (deregulation)
Monopoly break-up / prevent mergers
Taxation / windfall taxes / fines
Changing ownership (nationalisation / privatisation)
A Level Economics – Year 2 (A2) Revision Workshop
Regulators 19
Services that care for, and provide education for, children & young people
• School inspections – sets and monitors standards
• Funding removal for inadequate pre-school care
Firms that provide financial services to consumers (banks, mutual societies and financial advisors)
• Ban financial institutions from operating• Fine firms/individuals that break the rules
(e.g. Millburn Insurance, the boss of the London Whale)
Creating better places for people and wildlife, and supporting sustainable development
• Fines and imprisonment (e.g. Melksham Metals)
• Advice and guidance on how to meet standards
The UK’s water supply and sewerage services
• Price-capping (RPI – X + K)• Fines (e.g. Thames Water and false
flooding risk reports)• Force investment (e.g. anti-leakage)
A Level Economics – Year 2 (A2) Revision Workshop
Reasons for regulatory failure20
Reasons
Regulatory Capture
Non-experts
Lack of Funding
Bureaucracy burdens /
costly
Too close to politicians
A Level Economics – Year 2 (A2) Revision Workshop
20Regulatory
Capture?
A Level Economics – Year 2 (A2) Revision Workshop
Additional Activities21
Game theory analysis
Analysis of types of monopoly, with examples
Are concentrated markets always bad? Essay practice
Evaluating the impact of freezing energy prices – essay planning
Rail fare regulation – data response