c
-Less incentive to be efficient/innovative/produce new products
-More resources to protect market dominance by raising barriers to entry
+More funds for investment and R&D
+Reserves to overcome short term difficulties (eg: stability to employment)
c
-Higher prices, lower output for domestic consumers
+Financial muscle to compete effectively against multinational firms
-Productively inefficient(MCтAC)
+Economies of scale: AC likely lower than most efficient perfectly competitive firms (MC=AC)
-Misallocation of resources (PтMC) (Less choice/Lower quality)
+Avoid unnecessary duplication of capital (eg: airport runway / railway track / electricity/water
distribution network)
-Wastes resources as profits from one sector is used to finance losses in another
+Increased range of goods (eg: provision of essential loss-making services: rural bus/mail services)
-Raise producer surplus, reduce consumer surplus/welfare
+Raise firm͛s total revenue(TR) to allow survival of essential services
-Complacent monopoly raises entry barriers by limit/predatory pricing
+Supernormal profit acts as incentive for rival firms to breakdown monopolies through creative
destruction by investing in R&D and innovations
: Firms agree to restrict competition between themselves by fixing prices and restricting output
to secure joint profit maximisation.
Price fixing, restrict output (allocating market share)
Limit advertising budget
Share market/technical info
Firms have an understanding on pricing and output decisions often through price leadership (eg:
Other firms follow pricing decisions of market leader)
Oligopolistic market structure (so few major firms to reach an agreement)
Effective monitoring system to prevent cheating
No potential competition (eg: hit-and-run) /no effective competition
Similar cost structure for similar pricing decisions
Stable, mature industries (eg: steel)
Same prices
Raise prices by same amount at the same time
High supernormal profits
High share prices
:
-Competition Commission: -Fines up to 10% of annual revenue/ Imprisonment for directors
-Whistle blowers protected by competition law
-
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-Cartels tend to breakdown due to cheating
-Independent firms (competition) gain market share at expense of cartel members
-Similar cost structures: firms are innocent, just responding to increases in production costs
-technological change (internet) undermines price/output agreements
-Tacit collusion: - hard to prove
-long investigation means collusion still goes on
-opportunity cost of investigation: funds/time
-Welfare loss depends on magnitude of price fixing
+Share R&D costs=wider range of products, higher quality, more choice
+Less wastage on advertising
+Share technical info=improve safety of products/ safety of workers
-higher producer surplus, prices
- lower consumer surplus, quality, choice=welfare loss
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/services
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Firm is allowed to increase prices k% above rate of inflation
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Firm is allowed to increase prices X% below rate of inflation
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+More accurate revenue estimation (price cap =stable, steady revenue)
+Better idea of efficiency improvements needed
+Easier to plan investments
-Technological change/external shocks=difficult to predict appropriate level of profits,
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