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Edexcel Economics: Unit 3 Business Economics and Economic Efficiency (June 2014) EC03

Pricing and non-pricing strategies would be very good

Pricing -limit pricing -predatory pricing -
Non pricing- advertising, brand loyalty, loyalty cards and increase in quality

Reply 141

molly2947

2

also when would you know to write about the labour market or product market when asked about a monopsony?

Reply 142

PatBateman

1

Original post by molly2947

okay im really getting confused with the difference between monopolistic and monopsonist! anyone care to help a friend out? :biggrin:

Monopsony is defined as when sellers face powerful buyers. An example would be farmers (sellers) face powerful supermarkets. The monopsony power of the supermarkets allows them to squeeze low prices out of the farmers.

Monopolistic competition is a market very much like perfect competition apart from the fact that there is some product differentiation e.g. hairdressers and cafes, which is largely done by advertising. Because of this the AR curve is downward sloping unlike in perfect competition when it is perfectly elastic. As a result, firms make SNPs in the short run but these are competed away in the long run because of low barriers to entry.

Reply 143

PatBateman

1

Original post by Paddyspower

Pricing and non-pricing strategies would be very good

Pricing -limit pricing -predatory pricing -
Non pricing- advertising, brand loyalty, loyalty cards and increase in quality

You can also get a good amount of marks for saying why pricing strategies do not work i.e. kinked demand theory can get 4 evaluation marks for not very much work. You can also talk about collusion with game theory in either the pricing or non-pricing section.

Reply 144

AdzyN

6

Help on game theory? :frown:

Reply 145

peter qwert

Original post by AdzyN

Help on game theory? :frown:

Do you have to know natural monopoly diagram?

Reply 146

Dilzo999

19

Original post by AdzyN

Help on game theory? :frown:

When it says "Refer to game theory" that just means draw a matrix.

Reply 147

molly2947

2

how can you use natural monopolies as an evaluation point for monopolies? regards

Reply 148

PatBateman

1

Original post by AdzyN

Help on game theory? :frown:

Game theory is a pretty good one to know. For a 16 marker if it says 'refer to game theory' you can actually get 8/8 KAA for a well-developed game theory analysis.

You need to learn the pay off matrix, simplest way to do this is by doing a quadrant as such.

High Price Low Price
High £3 £3 £10 £1

Low £1 £10 0.50p 0.50p

This basically shows that if each firm sets a high price they will maximise their profits. You then would talk about prisonners' dilemma. This is firms not knowing the decisions of other firms (because of imperfect knowledge) and how this means that often firms end up in the third quadrant i.e. making 0.50p each. Then you talk about the incentive to 'whistleblow' i.e. revealing the collusive agreement to the competition commission. This will lead to a damaged reputation of the other firm and a fine for the other firm whilst the whistleblower receives no punishment, strengthening its own market power at the expense of the punished firm. You could evaluate that by saying that perhaps the whistleblower's reputation will also be damaged.

Then for general evaluation you basically say that collusion is illegal and it is more likely that firms will compete on a non-price basis because of the price rigidity shown by the kinked demand curve. The curve outlines that an increase in price will have little effect because of the elasticity of demand which arises from close substitutes in an oligopoly. Also it shows that a decrease in price will reduce output disproportionately because other firms will retaliate, leading to a price war. That could probably get you 16/16. Maybe in need of one more evaluative point.

Reply 149

Paddyspower

Original post by PatBateman

You can also get a good amount of marks for saying why pricing strategies do not work i.e. kinked demand theory can get 4 evaluation marks for not very much work. You can also talk about collusion with game theory in either the pricing or non-pricing section.

was just revising this this morning so that's good to know, thanks!

Reply 150

mhassan

11

Is competition policy and competition commission the same thing?. Also in section B what types of questions test you on regulation. I never no whether to write about CC/competition policy or the regulations such as price capping.

(edited 9 years ago)

Reply 151

AdzyN

6

June 2012 is such a nice paper.
Though I struggled on the 12 marker regarding monopsony power. Can anyone help me out with this one? - Thanks

Reply 152

PatBateman

1

Original post by mhassan

Is competition policy and competition commission the same thing?. Also in section B what types of questions test you on regulation. I never no whether to write about CC/competition policy or the regulations such as price capping.

Yes they are the same thing. Competition policy is carried about by the competition commission and it aims to promote competition. Examples of competition policy or fines to deter anti-competitive behaviour, legislation i.e. passing laws to promote competition, privatisation i.e. selling government firms to the private sector and prevention of mergers that would result in a firm having an unfair amount of market share.

Regulation is used by a regulatory body to prevent firms from abusing monopoly power (i.e. used to regulate the nationalised utilities) and to act as a surrogate for competition.

It would be good to know some forms of regulation.

Price Capping:
This is essentially a limit on the amount a firm can raise its prices. Measured by RPI-X or RPI+K where X is the possible efficiency savings agreed with the regulator and K is the required amount of capital spending agreed with the regulator.
A price cap will:

Lower the price for consumers (allocative efficiency)
Allow the firm to plan investment spending because either K or X is fixed for five years increasing dynamic efficiency
It allows firms to increase any profits it makes that surpasses the agreed efficiency savings. Because of this, the firm is encouraged to minimise costs, resulting in an increase in productive efficiency.

Evalution:

Regulatory capture.
Size of reugaltory body relative to big large firms means that might lack power to take action.
Competition is not guaranteed (competition policy) and so a natural monopoly may form.
Difficult to know how big the fines should be.
Evaluate the stringency of policies.
If too stringent they may discourage investment.
Administration costs of the policy.
Brand loyalty may reduce the effects of competition policy.
Regulation is designed only until competition established so its effects will only be in the short-term.

Other forms of regulation include:

Rate of return i.e. profit capping. Reduce profits.

Performance targeting/monitoring. Increase quality.

Reducing barriers to entry i.e. via giving small firms grants and tax breaks.

That is basically all you need to know apart from PFI (which is absent because there was a whole data response on it last January).

Reply 153

aminkaram

Original post by molly2947

how can you use natural monopolies as an evaluation point for monopolies? regards

Depends on the question. So say your factor is going to be that market liberalisation by regulators will benefit consumers as competition lowers prices. Then evaluate saying that however the industry may be a natural monopoly. So that only one firm can become large enough to enjoy the benefits of economies of scale. They can then pass on the lower costs on to consumers. You could also throw in a really easy diagram that shows a LRAC curve with the minimum efficient scale at a large output. That's how I would do it anyway to get 3/4 marks.

Reply 154

Trilo9y

Predictions for this exam y0?

Reply 155

mhassan

11

Original post by PatBateman

Yes they are the same thing. Competition policy is carried about by the competition commission and it aims to promote competition. Examples of competition policy or fines to deter anti-competitive behaviour, legislation i.e. passing laws to promote competition, privatisation i.e. selling government firms to the private sector and prevention of mergers that would result in a firm having an unfair amount of market share.

Regulation is used by a regulatory body to prevent firms from abusing monopoly power (i.e. used to regulate the nationalised utilities) and to act as a surrogate for competition.

It would be good to know some forms of regulation.

Price Capping:
This is essentially a limit on the amount a firm can raise its prices. Measured by RPI-X or RPI+K where X is the possible efficiency savings agreed with the regulator and K is the required amount of capital spending agreed with the regulator.
A price cap will:

Lower the price for consumers (allocative efficiency)
Allow the firm to plan investment spending because either K or X is fixed for five years increasing dynamic efficiency
It allows firms to increase any profits it makes that surpasses the agreed efficiency savings. Because of this, the firm is encouraged to minimise costs, resulting in an increase in productive efficiency.

Evalution:

Regulatory capture.
Size of reugaltory body relative to big large firms means that might lack power to take action.
Competition is not guaranteed (competition policy) and so a natural monopoly may form.
Difficult to know how big the fines should be.
Evaluate the stringency of policies.
If too stringent they may discourage investment.
Administration costs of the policy.
Brand loyalty may reduce the effects of competition policy.
Regulation is designed only until competition established so its effects will only be in the short-term.

Other forms of regulation include:

Rate of return i.e. profit capping. Reduce profits.

Performance targeting/monitoring. Increase quality.

Reducing barriers to entry i.e. via giving small firms grants and tax breaks.

That is basically all you need to know apart from PFI (which is absent because there was a whole data response on it last January).

Thank you. I understand it better now. Can you advice me on how to answer a question on contestablility, 12 or 16 marker. I struggle to evaluate in those questions.

Reply 156

mhassan

11

Original post by Trilo9y

Predictions for this exam y0?

I got a feeling pricing and non pricing strategies and benefits of mergers will come up as the two big questions. Game theory seems to appear all the time aswell.

Reply 157

Dilzo999

19

You can also use natural monopoly as an analysis to a merger as to why it's good as it avoids duplication.

Reply 158

Trilo9y

Original post by mhassan

I got a feeling pricing and non pricing strategies and benefits of mergers will come up as the two big questions. Game theory seems to appear all the time aswell.

Pricing strategies wud be rlly good.

Reply 159

thestudentoffram

Hello could anyone explain why firms in monopolistic competition are allocatively inefficient and productively in the LR and SR? Also could you explain contracting out is
thank you

Edexcel Economics: Unit 3 Business Economics and Economic Efficiency (June 2014) EC03

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