F584 Transport Economics June 2012

please please please please someone upload or email me the jan 2012 transport paper or mark schemer (or both) ? much appreciated

Got a question. Oligopolies have the feature that they are interdependent, which can be portrayed by the bottom half of the kinked demand curve. If they lower prices, others will follow. Why then, if they raise their prices, would competitors not raise prices if they are interdependent, as well as price makers.

Not 100% sure of a right answer, but i have a go!

Say collusion takes place at point P,Q where demand turns from elastic to inelastic then this explains the ideal price to charge, hence price rigidity in oligopolistic markets. If one firm increases their prices, then consumers will switch to others firms within the same market. Despite being interdependent some firms would not co-operate and collude/price fix or match the prices in order to profit maximise because they ultimatley want to be market leaders. So they would undercut in order to gain market share which should also allow them to maximise their profits as they would see a greater level of output due to their prices being slightly lower than that of other firms.

Hope that helps!
Grace

That's quite a good explanation, thanks. Also, what is the difference between monopolistic competition and contestable markets and perfect competition?

Perfect competition and Monopolistic competition are market structures. Contestable Markets or Contestability IS NOT a market structure, it is a CONDTION.

In perfect competition, products are the same (homogenous) and firms are price takers as they take the price given by the market. As a result they only make normal profit in the long term.

For monopolistic competition, products are differentiated and firms are price makers. In the short term, they are able to make supernormal profits. However. these supernormal profits attract hit and run entrants and this means in the long term only normal profits are made.

For a perfectly contestable market, entry and exit must be costless, there must be the absence of sunk costs and the provision of perfect information. However in reality this NEVER happens. So for a market to have an element of contestability, there are three vital condtions needed. These are low barriers to entry, threat of new entrants and access to the same technology/information as incumbents. To put it into context, it means that monopolistic competition is a contestable market because there are low barriers to entry, it is competitive so there is threat of new entrants, they all more or less have the same access to information. This is a contrast to a Monopoly (e.g rail) where there are high barriers to entry in terms of sunk costs, no threat of entrants due to the franchising arrangement etc.

Sorry for making it long winded, but that is the only way i could explain it. If your still stuck, look at this man, he is an economics GOD!
http://www.youtube.com/user/BrynJonesOnline

That's quite a good explanation, thanks. Also, what is the difference between monopolistic competition and contestable markets and perfect competition?

Hm, ok so i'm actually looking at the difference between perfect competition and monopolistic competition. The only differences are that monopolistic competition produces differentiated products. They are also price makers

The similarities are that they both have pools of potential entrants and that entry and exit barriers are supposedly non-existent?

What's the difference between a natural monopoly and monopoly? Thanks in advance