A2 Sessions

1. A Level Economics – Year 2 (A2) Revision Workshop
Session 2
Concentrated Markets and Government Intervention
12

2. A Level Economics – Year 2 (A2) Revision Workshop
Session 2 Outline
Concentrated Markets: Key Terms
Characteristics of Concentrated Markets
Evaluating Monopoly
Examining Natural Monopoly
Analysing Oligopoly, and Exploring Game Theory
Competition Policy and Regulation
12

3. A Level Economics – Year 2 (A2) Revision Workshop
Key Term Match
12
Match the Concentrated Markets Key Terms to their correct definitions

4. A Level Economics – Year 2 (A2) Revision Workshop
Concentration Ratios
13
64.8 74 61.4

5. A Level Economics – Year 2 (A2) Revision Workshop
Characteristics of Concentrated Markets
13
One dominant firm
High barriers to entry (and exit)
Price-making power
Aim to profit-maximise

6. A Level Economics – Year 2 (A2) Revision Workshop
Characteristics of Concentrated Markets
13
A small number of dominant firms
Interdependence
High barriers to entry (and exit)
Collusion or price competition;
differentiated or homogeneous goods

7. A Level Economics – Year 2 (A2) Revision Workshop
Monopoly examples
13
Local train services (regional monopoly)
Google Chrome (working monopoly)
London Underground (pure monopoly)
Rural pubs (local monopoly)

8. A Level Economics – Year 2 (A2) Revision Workshop
Analysing Monopoly
14
Q
P

9. A Level Economics – Year 2 (A2) Revision Workshop
Evaluating Monopoly: Productive Efficiency
14
No – not producing at lowest average cost
Possibly – average costs may be LOWER than in a
competitive market due to ECONOMIES OF SCALE
Monopoly AC
Competitive AC
Qm
Cm
Qc
Cc

10. A Level Economics – Year 2 (A2) Revision Workshop
Evaluating Monopoly: Allocative Efficiency
14
No – not producing where AR = MC
Possibly – there may be legal barriers to entry (eg
safety regulations) which protect the consumer; may
be complete market failure without the monopoly

11. A Level Economics – Year 2 (A2) Revision Workshop
Evaluating Monopoly: Dynamic Efficiency
14
Possibly – supernormal profits can be used to
fund R&D, and innovation to lower costs
Possibly not – many monopolies have not managed
to innovate, and some had to leave the market

12. A Level Economics – Year 2 (A2) Revision Workshop
Evaluating Monopoly: X-Efficiency
14
No – lack of competitive pressure means no
incentive to lower costs
AC1
Possibly – tight profit margins in recession drive
efficiency; shareholders reduce complacency etc

13. A Level Economics – Year 2 (A2) Revision Workshop
What is a Natural Monopoly?
14
Only one firm
Large sunk costs
/ large networks
Difficult to
achieve
economies of
scale

14. A Level Economics – Year 2 (A2) Revision Workshop
Analysing Natural Monopoly
14
Average Costs always falling
P
Q
Profit Max: MC = MR
Tiny supernormal profit
Highly inefficient – long way
from productive efficiency
and barely any market
demand met

15. A Level Economics – Year 2 (A2) Revision Workshop
Analysing Natural Monopoly
14
OPTIONS
P
Q
Provide a subsidy to
operate at allocative
efficiency
Nationalise and operate as
not-for-profit
Q1
P1

16. A Level Economics – Year 2 (A2) Revision Workshop
15
Read the Royal Mail
case study and identify
evidence that supports
the view that the Royal
Mail is a natural
monopoly

17. A Level Economics – Year 2 (A2) Revision Workshop
Examples of Oligopoly
15
Can you think of 3 more
examples of your own?

18. A Level Economics – Year 2 (A2) Revision Workshop
How do firms behave in oligopoly?
15
• Homogeneous goods
• Price wars
• Price leadership
Price Competition
• Homogeneous goods
• Illegal, if not tacit collusion
• Maximise joint profits
Collusion
• Anything other than price
• Differentiated products
• Brand proliferation
Non-Price
Competition

19. A Level Economics – Year 2 (A2) Revision Workshop
Stable Prices in Oligopoly
15
Kinked Demand Curve
• Price elastic demand if the price is raised –
competitors do not copy
• Price inelastic demand if the price is lowered – all
competitors copy
• Implies a discontinuous MR curve
Stable price
• Costs can change but the profit-maximising point
does not change
P

20. A Level Economics – Year 2 (A2) Revision Workshop
Stable Prices in Oligopoly
15
Kinked Demand Curve
• Price elastic demand if the price is raised –
competitors do not copy
• Price inelastic demand if the price is lowered – all
competitors copy
• Implies a discontinuous MR curve
Stable price
• Costs can change but the profit-maximising point
does not change
MC
AC
MC1
AC1P

21. A Level Economics – Year 2 (A2) Revision Workshop
Evaluating the kinked demand curve model
15
It
ignores
…
Product
differentiation
Collusion
(tacit or real)
Dynamics of
reaching the
stable price

22. A Level Economics – Year 2 (A2) Revision Workshop
Oligopoly Behaviour
16
San Francisco – Hawaii flights (Nov 2015)
Supermarket Petrol Prices (Jan 2016)
Pizza Chain voucher codes (Feb 2016)

23. A Level Economics – Year 2 (A2) Revision Workshop
Oligopoly Behaviour
16
LIBOR rate fixing (banking, up to 2012)
Modelling agencies & model fees (Aug 2015)
Air Cargo price fixing (2000 to 2006)

24. A Level Economics – Year 2 (A2) Revision Workshop
Explaining Collusion
16
Why?
• Maximise joint profits
How?
• Restrict output / set prices high
Conditions
• Homogeneous goods
• Easy to detect if a firm breaks the agreement (small number of firms, high trust)
• Firms must have price-making power

25. A Level Economics – Year 2 (A2) Revision Workshop
Game Theory and Collusion
16
Papa Joe’s Pizza
High Price Low Price
Dynamo’s Pizza High Price (10 , 10) (3 , 12)
Low Price (12 , 3) (6 , 6)
Work out Dynamo’s Dominant Strategy
Work out Papa Joe’s Dominant Strategy
Work out the Nash Equilibrium

26. A Level Economics – Year 2 (A2) Revision Workshop
Game Theory and Collusion
17
Papa Joe’s Pizza
High Price Low Price
Dynamo’s Pizza High Price (10 , 10) (3 , 12)
Low Price (12 , 3) (6 , 6)
Is there a “better” option for each firm,
other than the Nash equilibrium?
YES!
Each firm charges a HIGH PRICE in order to
maximise joint profits
REQUIRES COLLUSION!

27. A Level Economics – Year 2 (A2) Revision Workshop
Game Theory and Collusion
17
Papa Joe’s Pizza
High Price Low Price
Dynamo’s Pizza High Price (10 , 10) (3 , 12)
Low Price (12 , 3) (6 , 6)
Why is this option “unstable”?
Because each firm could individually earn
12 by “defecting” and charging a low
price, compared to 10 by colluding and
charging a high price

28. A Level Economics – Year 2 (A2) Revision Workshop
Game Theory and Collusion
17
Papa Joe’s Pizza
High Price Low Price
Dynamo’s Pizza High Price (10 , 10) (3 , 12)
Low Price (12 , 3) (6 , 6)
How can competition authorities take
advantage of this instability to help tackle
collusion?
Encourage firms to defect by
whistleblowing so avoiding fines

29. A Level Economics – Year 2 (A2) Revision Workshop
Non-Price Competition
17
Legroom, flight times,
entertainment, food
Quality of ingredients,
ambience, seasonality
Location, range of
products, other services
in store
Durability, battery life,
weight, style
Quality of ingredients,
branding, availability

30. A Level Economics – Year 2 (A2) Revision Workshop
Anti-competitive practices
18
Types
Collusion
Bid-
Rigging
Full Line
Forcing
Refusal to
Supply
Predatory
Pricing

31. A Level Economics – Year 2 (A2) Revision Workshop
Tools of competition policy
18
Price Controls (RPI – X, RIIO, RPI – X + Y)
Reducing or eliminating barriers to entry (deregulation)
Monopoly break-up / prevent mergers
Taxation / windfall taxes / fines
Changing ownership (nationalisation / privatisation)

32. A Level Economics – Year 2 (A2) Revision Workshop
Regulators
19
Services that care for, and
provide education for,
children & young people
• School inspections – sets and monitors
standards
• Funding removal for inadequate pre-
school care
Firms that provide financial
services to consumers
(banks, mutual societies and
financial advisors)
• Ban financial institutions from operating
• Fine firms/individuals that break the rules
(e.g. Millburn Insurance, the boss of the
London Whale)
Creating better places for
people and wildlife, and
supporting sustainable
development
• Fines and imprisonment (e.g. Melksham
Metals)
• Advice and guidance on how to meet
standards
The UK’s water supply and
sewerage services
• Price-capping (RPI – X + K)
• Fines (e.g. Thames Water and false
flooding risk reports)
• Force investment (e.g. anti-leakage)

33. A Level Economics – Year 2 (A2) Revision Workshop
Reasons for regulatory failure
20
Reasons
Regulatory
Capture
Non-experts
Lack of
Funding
Bureaucracy
burdens /
costly
Too close to
politicians

34. A Level Economics – Year 2 (A2) Revision Workshop
20
Regulatory
Capture?

35. A Level Economics – Year 2 (A2) Revision Workshop
Additional Activities
21
Game theory analysis
Analysis of types of monopoly, with examples
Are concentrated markets always bad? Essay practice
Evaluating the impact of freezing energy prices – essay planning
Rail fare regulation – data response