4.2.1 Markt Power & Failure
Collusion
o Collusion more likely to happen when fewer firms in the market
o Firms in oligopoly are most likely to collude as there are more incentives
o Overt Collusion
Formal agreements made between firms.
Works best when there are only few dominant firms so one does not refuse
It is illegal
Leads to price fixing
Profit maximisation and reduced competition
o Tacit Collusion
Non formal agreement but still colluding
Price wars
Cartels
o Group of two or more firms who agree to control prices, limit production
o Leads to higher prices for consumers and restricts output
o Divide market for own benefit
o Stops them competing against themselves
Price Leadership
o One firm changes their prices and other firms follow
o Usual occurs by the most dominant firm in market
o Other firms are often forced to change their prices
o If don’t change prices they risk losing market share
Price wars
o Firms continue to cut it lower than their competitors
o Repeats in a cycle until it cannot go any lower
o Firms that do not have economies of scale cannot compete so forced out of market
o Benefit customers
o Affects businesses
o Non-Price Competition
Aims to increase the loyalty to a brand
Makes demand for a good more price inelastic
Makes firms focus on quality and customer service
Keep shops open longer as it is more convenient for consumers
BOGOF or discount deals attract customers
Barriers to entry
o Try and drive the competitors out of the industry to increase their own market share
Monopsony power
o Single buyer in a market
o Supermarkets have monopsony power when buying from farmers
o They are profit maximisers
o Able to negotiate lower prices
o Can set the market price
Collusion
o Collusion more likely to happen when fewer firms in the market
o Firms in oligopoly are most likely to collude as there are more incentives
o Overt Collusion
Formal agreements made between firms.
Works best when there are only few dominant firms so one does not refuse
It is illegal
Leads to price fixing
Profit maximisation and reduced competition
o Tacit Collusion
Non formal agreement but still colluding
Price wars
Cartels
o Group of two or more firms who agree to control prices, limit production
o Leads to higher prices for consumers and restricts output
o Divide market for own benefit
o Stops them competing against themselves
Price Leadership
o One firm changes their prices and other firms follow
o Usual occurs by the most dominant firm in market
o Other firms are often forced to change their prices
o If don’t change prices they risk losing market share
Price wars
o Firms continue to cut it lower than their competitors
o Repeats in a cycle until it cannot go any lower
o Firms that do not have economies of scale cannot compete so forced out of market
o Benefit customers
o Affects businesses
o Non-Price Competition
Aims to increase the loyalty to a brand
Makes demand for a good more price inelastic
Makes firms focus on quality and customer service
Keep shops open longer as it is more convenient for consumers
BOGOF or discount deals attract customers
Barriers to entry
o Try and drive the competitors out of the industry to increase their own market share
Monopsony power
o Single buyer in a market
o Supermarkets have monopsony power when buying from farmers
o They are profit maximisers
o Able to negotiate lower prices
o Can set the market price
