Access the factors necessary for the success of a cartel.
1. A cartel is a group of firms or countries who collude with one another.
Collusion is when firms will fix an artificially high price by restricting
output and behaving as if they were a monopoly.
Market structure must be an oligopoly it would not work in another market
structure. Market must be more concentrated to make it easier to collude due
to being logistically more straight forward.
biggest firm in the market must be part of the collusive agreement for it to
succeed.
EV
Cartels break down in the long run- prisoner's dilemma/game theory – always
an incentive to break out of collusive agreement think that they can charge a
low price and gain profits at the expensive of another firm but normally both
firms end up thinking the same and both charging low prices. Always an
incentive to be a whistle blower- a snitch go to the regulator. You get no fines
while the other firms get heavy fines.
2. Good must be price inelastic demand for good is not very reactive to a
change in price. Firms will end up with more revenue.
EV
In the long run likely to become more elastic – may be new substitutes.
Evaluate micro effects of a merger in a market of your choice. (25)
Part 1 Horizontal integration two firms merge that are in the same industry
and at the same stage in the production process. Jaguar and land rover
merge.
More productively efficient merged firm are better placed to tap into the
economies of scale that exist in the market.
Economies of scale- when firms long run average costs are falling as their
output rises.
For example, they can exploit purchasing economies of scale whereby they
could bulk buy raw materials such as steel and rubber.
This would enable a firm to operate closer to its MES this translates into the
firm being more productively efficient.
This lower cost could be passed on the customer in the form of lower prices
which boosts the firm’s allocative efficiency MC=AR
EV
, May result in inefficiency- diseconomies of scale- average cost is going up as
output is rising because firm might become too big to manage – lack of
coordination.
May lead to x-inefficiency- high costs- due to lack of competition if firms
merge market becomes more concentrated and that firm becomes more
dominant don’t need to worry about minimising their costs because they
dominate the market.
Part 2 firm may become more dynamically efficient- merger leads to combined
customer base AR and MR shift out/right
Price, they charge will increase from p1 to p2. Profits increase from p1ABc1 to
p2DEc2. The additional profits may be used to invest in new technology for
example produce a range of new electric cars or more affordable cars for lower
income households. As a result, dynamic efficiency is likely to rise. May result
in lower prices for consumers and more choice over products due to more
range of goods now being produced.
EV
Merger may result in an exploitation of consumers- market is more
concentrated less firms which results in less choice PED is becoming more
inelastic due to the lack of substitutes in the market as a result the firms know
if they raise their prices there will be a less than proportionate change in
1. A cartel is a group of firms or countries who collude with one another.
Collusion is when firms will fix an artificially high price by restricting
output and behaving as if they were a monopoly.
Market structure must be an oligopoly it would not work in another market
structure. Market must be more concentrated to make it easier to collude due
to being logistically more straight forward.
biggest firm in the market must be part of the collusive agreement for it to
succeed.
EV
Cartels break down in the long run- prisoner's dilemma/game theory – always
an incentive to break out of collusive agreement think that they can charge a
low price and gain profits at the expensive of another firm but normally both
firms end up thinking the same and both charging low prices. Always an
incentive to be a whistle blower- a snitch go to the regulator. You get no fines
while the other firms get heavy fines.
2. Good must be price inelastic demand for good is not very reactive to a
change in price. Firms will end up with more revenue.
EV
In the long run likely to become more elastic – may be new substitutes.
Evaluate micro effects of a merger in a market of your choice. (25)
Part 1 Horizontal integration two firms merge that are in the same industry
and at the same stage in the production process. Jaguar and land rover
merge.
More productively efficient merged firm are better placed to tap into the
economies of scale that exist in the market.
Economies of scale- when firms long run average costs are falling as their
output rises.
For example, they can exploit purchasing economies of scale whereby they
could bulk buy raw materials such as steel and rubber.
This would enable a firm to operate closer to its MES this translates into the
firm being more productively efficient.
This lower cost could be passed on the customer in the form of lower prices
which boosts the firm’s allocative efficiency MC=AR
EV
, May result in inefficiency- diseconomies of scale- average cost is going up as
output is rising because firm might become too big to manage – lack of
coordination.
May lead to x-inefficiency- high costs- due to lack of competition if firms
merge market becomes more concentrated and that firm becomes more
dominant don’t need to worry about minimising their costs because they
dominate the market.
Part 2 firm may become more dynamically efficient- merger leads to combined
customer base AR and MR shift out/right
Price, they charge will increase from p1 to p2. Profits increase from p1ABc1 to
p2DEc2. The additional profits may be used to invest in new technology for
example produce a range of new electric cars or more affordable cars for lower
income households. As a result, dynamic efficiency is likely to rise. May result
in lower prices for consumers and more choice over products due to more
range of goods now being produced.
EV
Merger may result in an exploitation of consumers- market is more
concentrated less firms which results in less choice PED is becoming more
inelastic due to the lack of substitutes in the market as a result the firms know
if they raise their prices there will be a less than proportionate change in
