tutor2u- A LEVEL ECONOMICS EXAMPLE ESSAYS Microeconomics: Theory of the Firm with Examiner Commentary Written by experienced teachers and senior examiners Commentary by principal examiners Suitable for all exam boards Learn how to structure an essay, integrate Tien develop chains of analysis, and build Rigel reece}Suggest Essay Structure for A Level Economics Following the tutor2u suggested essay structure and technique can help you to write economics essays that are capable of achieving a top band mark. The key to any successful essay is PLANNING! Identify the 3 or 4 key points that you will be writing about in your essay INTRODUCTION Write one sentence to summarise your conclusion - use the words from the question to indicate to the examiner that you are FOCUSED on the precise question Use the PECAN PIE and go APE approach (see below!) FOR EACH POINT... The final sentence for each point should directly answer the question It is VITAL that you reach a judgment to score top marks CONCLUSION Don’t introduce anything new - base your judgment on the arguments you have already made PECAN PiE — How to Structure a Point An essay needs at least 3 slices of PECAN PIE! P— clearly state your point in one sentence E—then explain your point very briefly CAN — provide contextualised analysis by writing a step-by-step chain of argument and integrating examples PIE — now consider your original point but in evaluation - don’t just focus on disadvantages __or generic evaluation, but instead really think about why your point.may_not be valid — use the go APE strategy. Go APE - How to Evaluate Your Point Assumptions — consider why the assumptions that underpin the theory you have used to make your analytical point may not be valid Perspectives — consider your point from different perspectives For micro, you could use the mnemonic PLASTIC to help you (producers, location, age, skill, time, income level, consumers) For macro, you could use the mnemonic TINKER to help you (trade offs, immediacy, Neoclassical, Keynesian, equity, region) Evidence ~ consider you point in light of evidence, either in favour or againstLevel Economies Example Essays - Theory of the Firm cas In January 2016, the makers of Ray-Ban sunglasses, Luxottica, agreed a merger with a rival eye-wear firm, Essilor, worth €46bn. Evaluate the likely advantages and disadvantages for businesses growing in this way. Firms may grow in a number of ways - internally (organically) or externally The student shows that by merging or taking over another firm. The Luxattica/ Essilor merger is an they have understood the example of external growth, The key advantage of growth by acquisition is that ___main topicin the question, the firms are likely to achieve cost savings, more quickly than using internal and used the context. growth. However, external growth is more likely to attract the attention of the The key arguments are competition authorities, and in the long run, may also fail to deliver many of the outlined. expected advantages, perhaps resulting in a demerger. One key advantage of a merger is that it can allow the firms in question to achieve the economic benefits of operating on a large scale more quickly, and with more The first point builds on the certainty than via internal growth. A merger takes place when two firms agree to Key advantage outlined in combine their operations in the hope of achieving synergies. One such advantage the introduction ~ this is is internal economies of scale. These occur when long run average total costs good structure. fall as the scale of output rises. Depending on whether the merger is horizontal or vertical, cost savings could come from a number of sources. Luxottica and Essilor are suppliers of broadly similar products so this would be an example of a horizontal merger, allowing greater specialisation and purchasing economies here with specific reference (e.g. UVB reflective film for sunglass lenses). There might arguably be advantages __to the companies, AND an from vertical integration by being able to access each other’s supply chains (e.g, attempt to use examples suppliers of glasses cases). Another possibility includes technical economies from the eyewear industry. if the merger allows use of specialised pieces of plant and machinery, volume economies or economies of massed resources. used well The impact of economies of scale for the firms is shown on the diagram. . The green shaded box shows vo the total supernormal profit that = individual firms can achieve with cost Thisis an example Merant ——_of a diagram that allows AOS marks (analysis) structure ACL. Economies of scale a - rather than achieved as the result of the merger / Just AOI marks allow the cost structure AC2 to be (knowledge) reached and profit is considerably because the larger (as shown by the peach- diagram is coloured box). This isa significant adapted and advantage to the merged business = ~carefully arising from gains in productive is integrated into efficiency, The same results might ‘the written have been achievable with internal growth, but more slowly. analysis. However, the analysis diagram assumes an unchanged demand schedule in the face of the merger, and this may not be so. It is possible that customers for products such as high end sunglasses value the exclusivity of the brand and would be less likely to purchase from a business that accounts for a large proportion of the market, and so AR would shift inwards. It is possible too that removal of a rival firm means that there is less incentive to be productively efficient so xinefficiency may result. While the average total cost curve has fallen, the newly merged business may be incurring costs way above it. That said mergers in many industries are expected to achieve more rapid cost savings and profit increases This is an excellent example of evaluating by questioning assumptions. Copyright Tutor2u Limited: All Rights Reserved. NOT TO BE PHOTOCOPIED tutor2uPUTA Se eh 2 cu eee eatery g aC) anon aC than other forms of growth, This is a key advantage of merger. The use of the word ‘significant’ here is an easy way for students to express A significant cisadvantage of a business growing by merger is that it may attract the attention of the competition authorities, in a way that internal growth might not. By merging with a rival firm, the market for eyewear has become more concentrated, and contestability has lessened. Given the size of the deal (€46bn), a degree of judgernent, itis likely that the resulting business now has significant monopoly power. This which is essential in means that the profit maximising firm could restrict output and raise price to achieving top band achieve higher supernormal profits. It might aiso be able to price discriminate responses. to raise revenue and profits even further. This is likely to attract the attention of, the UK Competition and Markets Authority (CMA) who have a remit to investigate This is an excellent example actions which restrict or distort competition. While the business itself may have of a developed chain of a lot to gain from increased monopoly power, it is likely to want to avoid an analysis being used in investigation. Investigations takes time and causes delay, incurs costs and risks evaluatic adverse media comment, all of which can negatively impact on profit. If the merger is disallowed, the firms in question may now become the target of a fresh Aneat end to the hostile takeover, However, the likelihood of an investigation depends on the size paragraph, using “depends of the market, and the contestability. No information is provided on this, but the on” phrases that are risk is higher than with internal growth, so the desirability of growth via merger carefully chosen and not depends on the degree of risk-aversion of the firm and its owners “run of the mail” A further disadvantage of growth by merger is that many of the hoped for benefits fall to materialise. Itis said that the majority of mergers fall into this category. In behavioural economics terms, it seems that perhaps there is bounded rationality in considering the vast amounts of information available, and some sort of optimism bias at work. There are a number of reasons why this may be so. One is the cost of the merger itself. If itis debt financed for example, then the need to repay and finance the loan may present a significant. burden. It may also be that if other parties were interested in the deal the price eventually negotiated was too high - the so-called winner's curse. €46bn is a large deal so this is an important consideration. It is possible too that rather than, bringing the combined business closer to minimum efficient scale, it actually takes it to the point where diseconomies of scale start to operate. For many businesses, post-merger, integrating systems such as IT proves to be a problem. Also cultural incompatibility can be a major cause, due to clashing priorities and perhaps personalities of senior managers. Sometimes human capital is lost, if the ‘most skilled labour prefers to work for smaller businesses where there is more autonomy. There are exceptions of course but in the case of the Luxottica/ Essilor Data helps to raise the merger, these seem valid concerns. Research by Harvard Business School suggests Quality of the evaluation. that between 70% and 90% of mergers fail. This is excellent synoptic analysis, demonstrating holistic economic thinking. Good use of the context here. In conclusion, there are a number of possible advantages to businesses from growing from mergers, as indeed there must be, given the amount of such activity. However, there are disadvantages too and the claim that most merger deals fail to achieve the hoped for benefits is persuasive. There is nothing obvious about the Luxottica/ Essilor merger which suggests they would be immune from the risk of failure. Therefore, itis reasonable to think that the disadvantages of a business growing by merger, most probably outweighs the advantages. A clear judgements reached, allowing this essay to be awarded a top band mark 3 ig Copyright Tutor2u Limited: All Rights Reserved. NOT TO BE PHOTOCOPIED tutor2u‘A Level Economics Example Essays - Theory of the Firm Shares in Premier Foods, the company behind famous brands such as Mr Kipling cakes and Bisto gravy, plummeted following a January 2017 profit warning issued by the firm, in which rising production costs were blamed. Evaluate the view that all businesses should aim to maximise their profits. Profit is the difference between total revenue and total cost. In traditional This is a super opening economic theory, firms are assumed to maximise profits, but itis arguable in paragraph, which carefully today’s complex and globalised world whether this is the case. This essay will _sets out the structure of the consider three key arguments. First, that profit is the reward for risk taking and argument and hints at the is essential to business success. Second, that profit satisficing might be more conclusion. appropriate as an aim, and finally that perhaps profit maximisation should indeed be the aim, but only in the long run rather than the short run. Profit is the reward for risk taking and most commercial private sector businesses The purpose of the diagram exist to make profit. Traditional theory assumes that firms will aim to maximise is introduced, and then profit. On the diagram below, representing a firm in imperfect competition, a careful explanation is profit maximisation is achieved where MR=MC. Output will be Q1 and at this given of its relevance ~it level of output the maximum is vital that price that can be charged is P1 as diagrams are AAR lies significantly above AC at oe Ta well integrated Q1 indicating large supernormal “ into the written profits are being earned. 0 \ onalysis inthis Maximising profits achieves a AY fe way. high reward for entrepreneurs 7 and shareholders. in the case of - ‘, listed companies such as Premier ao ? Foods the likely softening of their share price from poor profit - results could lead to shareholder discontent and perhaps risk a Prac an MC=4AR ore. hostile takeover. Furthermore, maximising profits can provide an important source of finance for further investment by a firm, perhaps crucial in the case of a new small firm without an established track record to obtain a bank loan. Profit is therefore essential to the survival of firms. However, achieving profit maximisation-is not easy. It may be that lack of accurate and timely information on revenue and costs may hamper decision- making; indeed, accountants do not monitor marginal costs and revenues. Even ‘This evaluative paragraph if information is available, firms will experience bounded rationality ~ an inability demonstrates excellent to handle such large amounts of data and take rational decisions. Firms may synoptic thinking, as well as adopt instead simpler rules of thumb (known as heuristics) such as cost plus ‘examining the practicality pricing in response. While itis lack of profit that has caused difficulty for Premier of the theory previously Foods, its immediate objective is survival, and it may not be possible to focus on mentioned. short run profit maximisation, however important to business success. More generally, the aim of true profit maximisation may be difficult if not impossible to achieve for many firms. ‘Secondly for many companies with significant numbers of stakeholders, and a divorce of ownership from control, profit satisficing might be a better aim, and more practical. A stakeholder is anyone with an interest or concern in ‘a. company, This would include shareholders, managers, employees and ic e Copyright Tutor2u Limited: A Rghts Reserved NOT TO BE PHOTOCOPIED tutor2uA Level Economics Example Essays - Theory of the Firm customers. For large companies such as Premier Foods with perhaps thousands _The essay is following the + of shareholders, a Board of Directors is appointed to represent their interests, same structure as outlined ” and a team of managers undertakes the day to day running of the business. in the introduction. There is likely to be asymmetrical information with managers possessing a monopoly of the technical knowledge about the business (the so-called principal- The technical economics agent problem) and additional problems resulting from moral hazard if managers used in this analysis is enjoy the reward when risk pays off but do not suffer the costs when they do excellent, and draws on not. In this situation, managers have different incentives and hence objectives topics from across the to shareholders and other stakeholders. While various methods can be used ‘course content. to re-align objectives such as profit related pay, there is persuasive evidence of industries where revenue maximisation appears to be the dominant strategy — for example streamed TV and films (which occurs when MR = zero). The situation becomes more complicated when stakeholders such as employees and customers are taken into account. True profit maximisation would mean paying employees Again, the practicality the lowest possible wage, and charging customers an ever-varying price. This is of profit maximising is not achievable nor desirable. Political and social objectives may come into play addressed, which shows for a company such as Premier Foods with growing social concerns over obesity _ ea engagement with the and sugar content, The outcome is likely to be that firms profit satisfice ~ that is subject. aim to achieve a level of profit that is likely to be satisfactory to stakeholders. On the diagram, this could lie anywhere between profit maximisation and normal profit (where AR = AC). For many firms, for the reasons given, satisficing is likely to be a better objective than profit maximising, Good use of context The preceding argument has focused on the short run. In the long run, there may be stronger arguments for firms focusing more on profit maximisation than other objectives. Firms are likely to be able to earn abnormal profits onan on- Good technical knowledge going basis where barriers to entry are high and contestability is low. If this is not the case, high profits send a signal to firms currently outside the market to enter, and compete away profits that are in excess of normal. There are many factors Again, the argument looks influencing the ease with which firms can enter a market, but if incumbent firms organised because the key experience significant economies of scale or brand loyalty for instance, new entry point of the paragraph was will be more difficult. Businesses aiming to maximise long run profits may well referenced in the opening adopt short run strategies such as revenue, sales or growth maximisation to build paragraph. market share. On the diagram revenue maximisation occurs where MR= and sales maximisation where normal profit is earned. All of these strategies sacrifice There are strong chains of short run profit maximisation in the interests of longer run gains. Examples of analysis demonstrated in this sort of behaviour can be seen in the coffee market with Costa Coffee rapidly this paragraph, explaining expanding its number of outlets, undoubtedly at high cost, and Amazon, Spotify the dynamism of market -—and-Net#Hic butiding-(exponentially} the number-of active-eustomer-accounts. Ifa structures. market is more contestable however, as it may well be for Premier Foods, then a strategy of aiming for profits closer to normal may be more sensible to avoid the The examples and use of entry of new rival firms and make it easier to maximise longer-term profits. the Premier Foods context «are helpful in enhancing the In conclusion, while profit matters and no business could afford to ignore it quality of the argument. completely (even publically-owned businesses or social enterprises), the view that all businesses should aim to maximise their profits is difficult to sustain. For the reasons given, it may not be possible for them to do so (in the strictest An excellent conclusion — economic sense of the term), although many firms do seem to employ strategies nothing new is introduced, more consistent with long term profit goals. It seems unlikely, though, that these but overarching statements are maximising goals. Most firms will, and should be profit seeking, but it seems are made that allow a most probable that the majority of businesses should be aiming to profit satisfice judgement to be reached and not profit maximise. Copyright Tutor2u Limited: All Rights Reserved. NOT TO BE PHOTOCOPIEDThe company British American Tobacco agreed a takeover deal of January 2017. This will result in the world’s largest tobacco company. One of the reasons cited for the deal was to benefit from increased economies of scale. Evaluate the view that having a business objective of increased economies of scale is always desirable. Economies of scale arise when long run average costs fall when firms increase the scale of their production. In reaching a view on whether economies of scale are always desirable, this essay will consider the issue from the perspective of a business itself, but in reality there will be impacts on consumers, competitors, government and society as a whole. This essay will consider first the impact of such an objective on business costs, efficiency and profits, second the risk that pursuing this objective will increase the likelihood instead of experiencing diseconomies of scale and finally the possibility that pursuing this objective might attract unwanted responses from other market participants or competition authorities. The first reason why such a business objective might be desirable is that the lower cost structure means that total profits rise. On the diagram, at scale of output Q1, a profit maximising firm (equating MR with MC) would earn the profit shown by the green box. However, at a larger scale of output, Q2, costs savings might be possible perhaps due ie to technical economies wee such as indivisibilities or = volume, or economies of A" marketing or research and development. The latter r is likely to be especially important for an industry such as tobacco as next- a generation products, such as e-cigarettes, are developed. At scale of output Q2, average = = von costs are lower, and although the price paid by consumers has fallen to P2, and hence consumer surplus increased (generally an advantage, but perhaps not so in this case with cigarettes being a demerit 00d), profits have risen significantly as shown by the grey box. Supernormal profits allow greater rewards to be paid to shareholders and can provide an additional source of finance for capital investment in an industry that might find more conventional bank borrowing problematic and expensive. However, profits will only increase to the extent indicated if the firm in question is xefficient. X-inefficiency occurs when there is organisational slack (perhaps due to lack of real competition) and higher wages than necessary are paid, or perhaps there is over-staffing, or simply wasteful production. On the diagram, the firm would operate above its average cost curve, rather than on it. This is possible in an industry such as tobacco, which is concentrated, or where firms might choose to pay higher wages to avoid further public criticism. More generally, although there are significant economies of scale to Copyright Tutor2u Limited: All Rights Reserved. NOT TO BE PHOTOCOPIED ts US rival Reynolds in This is a smart opening paragraph ~ the student recognises that they cannot cover everything in the available time, and therefore note that they will focus purely on the arguments from the business itself. This is an excellent example of a diagram that is being used to develop and support the analysis - the relevance of Moxrofet the diagram output 2 is carefully written about. Excellent use oa of context, demonstrating the importance of knowing about the wider world and being observant The key point of the paragraph ~ rising profit is referred to again, demonstrating a strong paragraph structure, A succinct way of introducing technical evaluation. tutor2u °be gained in many industries such as car manufacturing and pharmaceuticals, is is not always the case. In some of the service sectors, for example, the minimum efficient scale (MES) could be low especially if little specialist The final sentence of this capital is required. In the UK, the service sector accounts for around 75% of paragraph links explicitly GDP, suggesting that achieving economies of scale may not be essential. So, back to the question, although lower costs and improved profitability is one reason why an objective which helps to build a solid of increased economies of scale might be desirable for many firms, itis structure. doubtful if this is always the case. ‘A second factor with a bearing on whether an objective of increased The point of the paragraph economies of scale is always desirable is the risk that such a strategy would is made clear immediately. instead lead to diseconomies of scale. Diseconomies of scale occur when long run average costs rise as the scale of output increases. While technical Excellent definition. economies and so on may still be operating, these are now more than offset by difficulties with administration, communication, coordination and motivation. This may be especially so where the scale of output has increased because firms have merged (amicably) or where there has been a takeover as for British American Tobacco and Reynolds. In this case, different corporate _ Excellent use of behavioural cultures can increase the probability of diseconomies of scale arising. Firms economics, which may overestimate the likelihood of experiencing economies of scale and demonstrates sound underestimate the risk of diseconomies of scale - an example of optimism synoptic knowledge. bias. In industries where there are constant returns to scale over large output ranges, the risk will be less, but this is a reason why itis doubtful that having an objective of economies of scale is always desirable. A final factor to be considered is the likely response of other market participants and the competition authorities. Unless total market size is More evidence of excellent growing (which it isn’t for tobacco), such a strategy would mean the firm in use of the context. question obtained a larger market share. This is not the only factor to be considered by the competition authorities, but it increases the chances of their attention and the costs and time associated with an investigation, even if there is no further action. Itis also likely that other market participants would respond, perhaps aggressively, which could damage market share and profit. IF economies of scale are significant, the market is likely to be concentrated, Good use of technical and the decisions of the firms concerned will be interconnected. While economic theory, backed game theory throws light on the possible consequences, uncertainty would up with appropriate be significant:-While there is evidence of some large businesses pursuing terminology. jum growth strategy - such as Amazon and Costa Coffee, it is not sufficiently widespread to provide compelling evidence that having a business objective of increased economies of scale is always desirable. To claim that having a business objective of increased economies of scal always desirable would require both robust theoretical evidence in support, together with numerous and credible real world examples of success. While there are some, there are equally compelling arguments against. The number Steer that the judgement of mergers or takeovers which fail to produce the expected results is a isn'ton one side or the compelling argument against. For many firms a business objective of increased ‘other economies of scale may well be desirable, but it not possible to conclude on the basis of the arguments provided that it is always so. A judgement is reached on whether economies of scale are desirable ~it doesn’t Copyright Tutor2u Limited: tutor2u ® Alll Rights Reserved. NOT TO BE PHOTOCOPIEDPAGE 12 AS] SCN eel sem Hp AUS) The telecoms provider EE was fined £2.7m by the industry regulator Gicora in early 2017 for overcharging thousands of customers who had used their mobile phones when abroad. EE has significant market power. Evaluate the extent to which the existence of monopolies is always bad for consumers. Economic theory suggests that monopolies are bad for consumers, but in practice this is not necessarily the case. This essay will evaluate the arguments and welfare loss in monopoly, which provides evidence that they are. Second, a possible counter argument is provided by considering economies of scale and dynamic efficiencies. Finally, the importance of potential competition and contestability is explored. It will be shown that whilst some monopolies may be bad for consumers, that is not by first considering the static efficien always the case. An argument in support of the claim that monopolies are always bad for The key arguments ‘as well as the overall judgement are outlined in the introduction, which strengthens the structure and indicates to the examiner that this is likely to be a top band answer consumers comes from considering static efficiencies and welfare loss. In theory, oq marks are picked up a pure monopoly exists when one firm supplies the entire output of an industry. here, with o definition of Itis at the opposite end of the competitive spectrum from perfect competition ‘monojioly - a theoretical market which acts as a benchmark against which other market structures may be This is 0 useful judged, as per the diagram diagram to the right. Sap iopetecs competition) that simply The competitive market / Wie {in monepoty} and quickly equilibrium will be at indicates the Ppc and Qpe, where the static problems price mechanism has . with monopoly, brought about market ° as well as clearing. Each of the being carefully many individual firms ' Demand inseriect integrated into will be earning normal \! competion) the written profit in the long run ‘ 8 a monopoly analysis and and will be productively efficient and allocatively ‘men OP Output efficient (assuming the absence of externalities Outlining and economies of scale and that all parallel markets are also achieving allocative assumptions is a neat way efficiency) and consumer and producer welfare are maximised. In contrast, of demonstrating strong ‘a pure monopoly will restrict output to maximise profit. Profit maximisation understanding of market occurs where MC=MR at level of output Qmon and price Pmon, well above structures, and can allow the perfectly competitive market price of PPC. There is a welfare loss and in _ evaluation to be developed static efficiency terms, the outcome is productively and allocatively inefficient. not just ‘used as a picture’ From a static efficiency and welfare point of view, monopoly seems worse and The point is explicitly specifically with regard to consumers, consumer surplus is less. linked to the question However, there are a number of other factors to consider, which may mean about the imp nen monopoly power is desirable for consumers, For example, the conditions for portant allocative efficiency to be achieved in perfect competition are unlikely to be ‘met; in the case of telecoms there are significant economies of scale, and this would be true of similar industries such as energy. Allocative efficiency (or the lack of it) is important for consumers because it is concerned with whether firms produce the goods consumers most want ~ monopolies may have become dominant because they supply the goods that consumers desire most! Also, firms in monopoly may not in practice be profit maximising in the short run. They will, This is a good example of how to evaluate by addressing the underlying assumptions, as well tutor2u" Copyright Tutor2u Limited: All Rights Reserved. NOT TO BE PHOTOCOPIEDprobably be profit seeking, but the need to consider various stakeholders and as using the context / indeed the need to be wary of the attentions of the competition authorities ‘examples as evidence may lead to other objectives being pursued. In the example of telecoms, market share may be a significant consideration, Any objective other than profit maximisation will result in a higher level of output being produced than QM, and hence a lower price. However, the fact that EE was fined £2.7mfor Another excellent use of the overcharging consumers lends considerable evidence to the claim that this firm given context with monopoly power acted against the interests of consumers. Similar claims have been made against the energy industry for example. There is compelling This is a strong ‘mini evidence for monopolies being bad for consumers, particularly if they supply conclusion’ for the point on goods/services for which demand is relatively price inelastic due to the product efficiencies, as a judgement being a necessity. Businesses can therefore raise price and increase their total ‘has been reached revenues. ‘That said, we should also examine dynamic efficiencies. The diagram above, crucially, assumes that monopolies and firms in perfect competition face Evidence of sound the same cost structure but is unlikely. Indeed, one key reason why British understanding of cost Telecom was previously nationalised is that it was seen as a natural monopoly, theory, with careful chains benefitting from significant economies of scale. Even if the monopoly in of analysis being developed question is being productively inefficient and perhaps even x-inefficient, the cost difference may be such that the profit maximising price charged to consumers is less than it would be under perfect competition. Consumer Good link to consumers surplus will therefore rise. Furthermore, if the monopoly is earning abnormal profit, this may be used to gain dynamic efficiencies. Dynamic efficiency occurs when static efficiencies improve over time. In.an industry such as telecoms More excellent use of where technological progress is occurring at a fast rate, this seems a powerful the context to build an argument e.g. if profits are used to develop faster broadband or more reliable ‘argument coverage, again this seems likely to provide a benefit to consumers. The contestability of the market is one further factor to consider in evaluating if monopoly is always bad for consumers. In conventional economics, monopolies. exist and persist because of the existence of high barriers to entry that prevent new entrants from joining a market and competing away abnormal profit, allowing consumers to be exploited. However, it may be that there is a single firm in a market simply because only normal profits are being earned. Where markets are contestable with low barriers to entry and exit, incumbent firms have a clear incentive to moderate profit, so as not to provoke hit and run entry from potential competitors. In this case, consumers benefit from lower prices __ associated with normal profit rather than abnormal profit, but also gain from a cost structure likely to be associated with widespread economies of scale. While a perfectly contestable market is as unlikely as a perfectly competitive one, technological progress e.g. price comparison websites, is making industries Again, the paragraph starts by focusing firmly on the question Excellent analytical chains, using accurate theory and making connections between different topics Good ‘mini conclusion’ to. such as telecoms more contestable. Over time, this may mean that monopolies the paragraph are less costly for consumers than perhaps they are now. In conclusion, the existence of the fines against EE provides strong evidence that firms with monopoly power can be bad for consumers. However, theory A well-expressed and indeed real world evidence provides a compelling counter-argument, conclusion, with a good especially when wider issues than just consumer surplus are considered. It understanding of the seems likely that technological progress will continue to increase contestability dynamic forces at play in of a number of key industries and that this will provide some moderation of markets firms acting against consumer interests. All in all, while some monopolies at present might be bad for consumers, it is not possible to conclude that all are bad for consumers. <2 Copyright Tutor2u Limited: & All Rights Reserved. NOT TO BE PHOTOCOPIED tutor2uOrel aitey scissile au The UK's Post Office continues to be strongly affected by increasing competition from courier services such as UPS in the parcel sector, and by the increasing popularity of online communications. For example, in December 2016, more people sent electronic Christmas cards rather than traditional cards through the post. Consequently, the volume of letters sent via Royal Mail was down 9% in 2016. Evaluate the view that increasing contestability in markets is always good for the economy. A contestable market is one in which the potential for competition leads firms to act in similar ways to if they were in perfect competition; traditional theory seems to suggest that Increasing contestability is always good. There can be considerable static efficiency benefits from greater contestability, as well as dynamic efficiency gains, perhaps through so-called creative destruction. It will be argued that increasing contestability is generally good, but ‘that some mitigating policies might need to be introduced to protect the possible losers. It can be argued that the static efficiency benefits (allocative and productive efficiency) in a perfectly contestable market are closer to perfect competition, and this provides support for the view that increasing contestabilty is good for the economy. Contestable market theory was developed by Baumol and has become the driving force behind this area of ‘government competition policy. Ina contestable market, the actual structure of the industry in question (in terms of concentration ratios / number of firms) is irrelevant in determining the conduct of firms in that market. Instead, the behaviour of firms is determined by the threat of competition from new entrants. Assumptions such as low barriers to entry and exit, 2 pool of firms willing and able to enter the market in response to abnormal profit signals, equal access to available technology and high rates of customer churn characterise a contestable market. Although as unlikely as perfect competition, a perfectly contestable market can be closer ta achieving allocative efficiency and productive efficiency than an un= contestable market. Productive efficiency occurs when firms operate at the lowest point of their LRAC curves, and indicates that scarce resources are being used to produce maximum, ‘output at lowest cost. Allocative efficiency occurs where P(AR) = MC and indicates that firms are producing the goods and services which consumers most want. Both of these characteristics suggest contestability is beneficial. In reality, while all markets are contestable to a degree, the degree of contestability will vary. Even so, the gains in terms Of static efficiency are likely to be present. In the case of the Post Office for example, its traditional markets are subject to a high degree of competition, both real and potential (e.g. parcel couriers such as Yodel and DPD}. On the diagram, a profit maximising ficm protected by barriers to entry will produce at Qmon and Pmon (where IMC=MR): Ira contestabtemarket, the firm will produce at Qcon and Peon, where AR=AC and profits are normal, Earning profits above normal would Incentivise hit and run entry from firms outside of the market. The firm In question is closer to allocative and productive efficiency, suggesting that increasing contestability is desirable. That said, such outcomes are not always maintained. While the low cost airline industry continues to demonstrate benefits from contestability with growing customer choice and lower fares, the same is not true of regional buses, which despite being one of the first industries to experience deregulation and increased contestability, has resulted in regional monopolies. Incumbent firms have been successful in replacing legal barriers to entry with strategic barriers, created for example by their ability to integrate the bus and Copyright Tutor2u Limited: All Rights Reserved. NOT TO BE PHOTOCOPIED Accurate and succinct definition to start with Always useful to see the overall judgement in the introduction, as this gives ag stronger structure to the essay Good development and build-up of the point, demonstrating excellent knowledge of contestability and allowing strong AO2 marks to be accessed Again, excellent technical knowledge is demonstrated Good use of context, supplemented by real world examples (Yodel and DPD) - wider reading and awareness of real world business is vital The diagram is accurate and carefully integrated into the written analysis ~ itis also ‘comparative’ which allows a judgement to be reached on the desirability of contestability. Good use of evidence to act as evaluation tutor2u"vel Economics Example Essays - Theary of the Firm rl sides of their business. There have been several investigations from the competition authorities of anti-competitive behaviour. Generally, the static efficiency benefits do seem. significant and provide support for the view that increasing contestability is generally good for an economy. {further argument in support of the benefits for an economy from increasing contestability comes from dynamic efficiencies. Dynamic efficiency refers to the process of improvements in static efficiency over time, While dynamic efficiency is often associated with firms earning abnormal profit, contestable markets are also likely to exhibit high dynamic efficiency because improving dynamic efficiency allows firms to maintain their incumbent market position and appeal to consumers e.g. courier pick-up points, flexible delivery times, parcel tracking etc. While the drive to achieve dynamic efficiency brings with it considerable benefits, itis not without costs. Productive efficiency requires firms to pay the lowest possible price for its factors of production. In the case of the Post Office, much ofits activity isabour intensive, and trade union density is relatively high. This sector saw strikes over Christmas 2016 in response to attempts to reform the pension scheme, and previous industrial action in relation to automated sorting, More generally, the ability of the Post Office to improve dynamic efficiency is limited by its ability to utilise economies of scope. Economies of scope arise when itis cheaper to produce a range of distinct products. While some are clearly present, other firms such as, ‘Amazon, currently expanding its delivery options, arguably have more to gain. There are other examples too where the drive for dynamic efficiency in contestable markets has led to difficulties. in the case of a number of delivery firms and Uber taxi drivers, questions have been raised about employment contracts, employment status and payment rates, Uber is '@ monopsony employer and has considerable bargaining power to drive wage rates down. to increase dynamic efficiency. For the individuals concerned, the associated uncertainty and low rates of pay raise questions of equity. Allin all, while the existence of dynamic efficiencies generally provide support for the view that increasing contestability is good for an economy, there are some important issues in relation to employment and job security. Finally, an economy which is becoming increasingly contestable will be constantly changing. Its important to question whether this creative destruction is good for an economy. The term creative destruction was coined by Joseph Schumpeter and refers to the process by wich technological change and innovation leads to economic growth as new innovations create more economic value than the businesses being affected. Industries which are increasing in contestability are full of examples of this type of behaviour occurring. For example, both Porsche and Ford are developing electric cars, Aldi and Lidl have established themselves in the supermarket industry, Apple is developing peer to peer lending and Metro Bank's a new entrant to the banking sector. The result i challenges to existing firms, asis likely with the growth of Uber and the existing London black cab business, or as happened vith Kodak following the introduction of digital cameras rendering traditional film obsolete. Inthe case of the Post Office many oftheir traitionat services-such-a5lotter deliveryare becoming redundant as email volumes increase. Schumpeter predicted that the overall benefits to consumers will be postive, but this depends on the flexibility and adaptability of factor markets. The result could well be unused resources due to structural unemployment, and resulting increases in relative poverty in certain groups, particulary lower-skill workers. ‘This seems reasonably likely in the case of the labour-intensive Post Office, and perhaps other sectors. It highlights the need for increasing contestabilty to be accompanied by other measures such as increased investment in employment training to improve supply side response to such a shock Jn conclusfon, the Post office provides a good example of one of the many industries experiencing increasing contestability, While there are strong theoretical arguments suggesting benefits to the economy from such a trend, via efficiency Improvements, and real world examples to back up this claim, there are some reasons to exercise caution. The case against is less strong, and perhaps could be mitigated with appropriate policies, but it is there. It cannot therefore be concluded that increasing contestability in markets is always good for the economy. Copyright Tutor2u Limited: All Rights Reserved. NOT TO BE PHOTOCOPIED A good fink back to the question, ensuring that focus is maintained and the specific question is answered Good use of context, using some common sense and real-life examples Excellent knowledge of the postal sector Fantastic synoptic thinking, demonstrating knowledge of labour markets and inequality, as well as allowing evaluation by considering different perspectives Itis always good to see students using concepts that are more challenging Brilliant examples, followed by another good link to the Post Office context A clear judgement on the answer to the question is reached, and is backed up throughout the essay tutor2u°Following the UK's vote to leave the European Union and the Single Market, Prime Minister Theresa May has noted that UK businesses will need to be more competitive and efficient to compete internationally. Evaluate the effectiveness of government policies to improve competition and efficiency in the economy. Competition policy is that part of government policy which seeks to promote ‘competition and efficiency in different markets and industries, and prevent exploitation of consumers. This essay will first evaluate the effectiveness of policies to prevent abuse of monopoly power. Next, it will assess policies to liberalise markets and increase contestability. Finally, it will discuss other policies, outside the sphere of competition policy, which have a bearing on improving competition and efficiency. Overall, the effectiveness of policy appears to depend on the power of the regulators and their willingness to take action when the evidence supports it. One key way in which governments aim to improve competition and efficiency is by preventing the abuse of monopaly power, and aiming to promote competitive markets, in which market forces reach an efficient equilibrium. However, not all markets are competitive, or can easily be made more competitive. In the case of natural monopolies for instance (where long-run economies of scale are experiencéd over all levels of output), it would be inefficient to have a large number of firms. Privatised industries such as energy, telecoms and water & sewerage are such examples, as well as other concentrated industries such as pharmaceuticals. In these cases, established firms have monopoly power and may seek to restrict output and raise price to profit maximise at the level where MMC=MR. There are costs from such actions in terms of static efficiency and consumer surplus, but there could be gains as economies of scale are exploited and dynamic efficiencies as abnormal profits are used to fund research and development, Competition authorities must be careful to promote the gains that they desire i.e. lower prices, but not reduce the existing benefits i. innovation. ‘One way to improve competition and efficiency against such a background is by legal restrictions on anti-competitive behaviour backed by fines. These are both preventative (if fines are high relative to possible gains) and punitive, Another way in which abuse of monopoly power is prevented is by an active and pre- ‘emptive consideration of mergers and take-overs. In both cases, the competition authorities take a case by case view to assess the balance of argument. This suggests that policy needs to be specific to the industry in question to be effective. However, industry-specific policy takes time and is probably costly; fines may be appealed, and few mergers have been denied. Furthermore, there is a risk of government failure. In the recent past, investigation caused a significant delay in the merger of Poundland and 99p stores and was blamed for the resulting diseconomies of scale when the merger eventually went ahead. In the case of privatised industries, itis the industry regulator which attempts to promote competition and efficiency by (depending on the industry in question) regulating prices, monitoring levels of customer service and acting as a surrogate competitor. This is an area where concerns have been raised about the effectiveness of policy. A recent parliamentary report claimed that rail passengers have been let down by regulatory failure. There have been criticisms of the profits earned by the energy industries and the standards of service in the telecoms sector. One possible explanation is regulators limiting innovation in fast-growing markets or implementing price caps which remove the incentive for new firms to enter a market. All in all, while some sort of government intervention to improve Copyright Tutor2u Limited: All Rights Reserved. NOT TO BE PHOTOCOPIED A good definition. This is obviously a well- planned essay, because the key points are outlined in the introduction, with a hint at the overall conclusion. A huge amount of economic knowledge Is demonstrated in this paragraph, with connections made from across the microeconomics syllabus This is a good way of assessing whether policy is effective. The student has linked explicitly back to the question. The specific point is now being directly evaluated ~ this is more effective than using generic evaluation Good use of examples to support the argument tutor2ucompetition and efficiency is necessary, there does seem to have been some shortcomings in the current policies in terms of preventing abuse of monopoly power. Alternatively, governments could liberalise markets and encourage contestability, by deregulating and lowering structural/legal barriers to entry, A contestable market is one in which potential rather than actual competition leads to incumbent firms moderating the profit they earn to avoid hit and run entry. Technological advances have increased contestability even further, improving both static and dynamic efficiency. Examples of dynamic efficiency in contestable markets include Porsche and Ford developing electric cars, Aldi and Lidl establishing themselves in the supermarket industry, Apple developing “peer to peer” lending and Metro Bank entering the banking sector. However, while the low cost airline industry continues to demonstrate benefits from contestability, the same has not always been true of regional buses. The regional bus industry was one of the first to experience deregulation, leading to increased contestability. However, incumbent firms have been successful in replacing legal barriers to entry with strategic barriers, created for example by their ability to integrate the bus and rail sides of their business. There have been several investigations from the competition authorities of anti-competitive behaviour. Generally, policies to promote competition and efficiency by liberalising markets and contestability do seem to have been effective, across a wide range of industries, There are examples where this has not been the case, but robust use of competition authority powers should mitigate this. In other words, a multi-pronged approach to competition policy is needed to counteract the disadvantages of each, Finally, another important factor to consider is that competition involves a process of constant change and is likely to lead to a process of “creative destruction”. Indeed, such a process may be essential if static and dynamic efficiency gains are to be maximised. However, crucial to the evaluation of whether policies to promote this are effective is a consideration of the impact on now-redundant resources, for example, whether London black-cab drivers become Uber drivers, or whether they look for employment in other industries. In other words, competition policies are more effective if labour and other product markets are flexible enough to allocate these resources quickly and at low cost to other uses to prevent structural unemployment. This is likely to be especially important after the UK leaves the European Union where competition will come from new trading partners, involved in all sorts of industries perhaps previously protected by EU external tariffs. The government policies relevant here are wider than just competition policy, and link to the economy's supply side. Macroeconomic policies which ensure sustainable growth and stability, a structure of taxation which provides appropriate incentives, and policies aimed at ensuring the integrity of the financial system are likely to be important in encouraging enterprise, innovation and risk taking in the post-Brexit world i.e. competition policy alone will not be enough, In conclusion, government policies aimed at improving competition and efficiency in the economy have been reasonably effective, but more so in some areas than others. Many privatised utilities, or large firms providing essential services for Which the coefficient of PED is relatively inelastic, remain reasonably uncompetitive and arguably inefficient. That said, each year, the UK scores relatively well on the competitiveness index, indicating success of most government policies in respect of competition and efficiency and in terms of how competition and efficiency are likely to impact performance beyond 2019 when the UK is outside of the EU. However, questions remain especially in some areas of the actions of the CMA and especially with regard to the post-privatisation regulators. Copyright Tutor2u Limited: All Rights Reserved. NOT TO BE PHOTOCOPIED A good choice of contrasting policy — it’s always useful to contrast hefty government intervention with free market approaches Excellent examples The paragraph draws toa close by linking explicitly back to the question and reaching a judgement The point is made specific to the question about the effectiveness of competition policy Important to refer to the Brexit context in the question Another careful and specific link to the question to draw the paragraph to a close A thoughtful conclusion, that doesn’t assume all industries are the someAlLevel Economics Example Essays - Theory of the Firm in 2016 and 2017, passengers using the Southern Train network faced significant disruption due to strike action, initiated due to the desire by the train provider to make technological changes on trains so that doors can be shut automatically, rather than by the train conductor. At the same time, technological improvements in driverless car technology look set to make life easier for drivers. Evaluate the technological change on the structure of product markets. Product markets are where all kinds of goods and services are made and traded ‘The market for rail services and cars are examples of product markets. In considering the likely impact on the structure of product markets of technological change, this essay will first consider the effect on production processes, followed by evaluating the impact on product availability and choice, and finally discussing the impact of creative destruction. Technological change is likely to impact the structure of product markets through its effect on methods of production. Market structure refers to the competitive characteristics of a market, such as the number and size of firms, the degree of concentration and the size of barriers to entry. At one extreme is perfect competition and at the other is pure monopoly, where one firm supplies the entire product market, In between are imperfect market structures such as monopolistic competition and oligopoly. Rail and car production are examples of oligopoly markets, where there are a handful of dominant firms. Technological change is a term used to describe the overall effect of invention and innovation and the spread of technology. Invention means making something new that did not exist before. Innovation means turning an invention into a commercially viable product. innovation affects both products and processes. Process innovation affects methods of production. Technological change might mean that existing production methods can be improved or that new methods completely are possible. The characteristics of production methods, and whether they involve significant economies of scale has an enormous impact on barriers to entry. Concentrated markets are likely to be associated with high barriers to entry, whereas generally, lower barriers mean that markets are more competitive as it is easier for new firms to enter. Technological change can impact barriers to entry (and hence product market structure) in either direction. One possibility is that innovation leads to capital indivisibilities. Technical economies of scale mean that firms producing on a larger scale of output will experience cost advantages, and the product market structure s likely to-be more concentrated—there-are-already- someearly market leaders in the driverless car industry e.g. Ford. It is equally possible though that if technological change applies to linked processes within an industry (as it might for example for driverless cars) then firms might choose to vertically dis-integrate, Which could increase competition. The impact of technological change depends on the specific industry and the precise nature of the change. To that end, there are as many examples where technological change has helped. lower barriess to entry and led to more contestable markets. Whether this affects actual market structure depends on the conduct of incumbent firms i.e. whether they have a first-mover advantage, or whether creative destruction takes place. In the case of driverless cars, existing companies such as Ford are making strong, progress, but are being challenged in unexpected ways by Google and Uber who launched their own driverless car service in 2016 - it is too early to tell how the market structure will change overall. Also, just because technological change provides the potential for efficiency gains does not necessarily mean that it will. Copyright Tutor2u Limite All Rights Reserved. NOT TO BE PHOTOCOPIED ely impact of A safe start with a solid definition, followed by an outline of the essay structure, which indicates good planning. A “to-the-point” sentence to open the poragraph that sets the direction for this point Good link to the given context Appropriate and extensive used of terminology demonstrates knowledge Both sides of the argument are considered in the discussion here, helping to build both strong analysis and evaluation Nice connective phrase: "to that end” Excellent reference to the given context of cars and also rail - this gives weight to the arguments and pushes the essay into higher mark bands tutor2uPeel teed t cas als Ao ea TLL) (One reason is that change may be resisted by workers, especially if they are represented by a trade union with high density. Southern Trains and the RMT is Strong link back to the an excellent example of this type of behaviour. Technological change is unlikely to question, ensuring that the impact on the market structure of regional rail services. Allin all, while it seems essay remains focused — likely that technological change will affect the structure of product markets via the this is a great way to enda impact on production processes, the direction (and indeed magnitude) of change paragraph / point will vary from industry to industry. Technological progress will also impact the structure of product markets via product availability and choice. Praduct innovation could mean improving existing goods and services, or developing entirely new ones. Driverless cars are a clear example of product innovation. While it is likely that product innovation will impact market structure, again the direction and size will depend on a number of factors. There are reasons to think that markets could become more concentrated if the development in question is protected by a patent (a legal protection to intellectual capital to reward the risk taking of research and development). This could happen for features of driverless cars, but is a feature of other markets e.8 the pharmaceutical industry. Even in the absence of patents, itis possible that first mover advantage will allow the quickest firm into a market to reap some monopoly power and concentrate the market due to consumer loyalty. However, sometimes the production processes of new products are associated with lower This is effective evaluation, barriers to entry and more competitive market structures emerge. One good ‘making use of ‘evidence’ as example is the development of digital phones and cameras which are significantly ‘the evaluative technique less capitat-intensive than photographic paper and film. The result was the demise and eventual bankruptcy of the previously dominant firm Kodak. Again, while it is certain that there will be an impact on product market structure from product availability and choice, the direction is ambiguous. Considering both process innovation (as in the previous point) and product innovation is a great way of adding depth to the answer Itis more certain, however, that technological change will impact the structure It is always good to see of product markets by making the structure more volatile over time, via creative ‘dynamic’ analysis that destruction (the way in which the opening of new markets and the destruction of considers how the economy old ones drives changes in market structure from within). Technological change or a market will change, ‘means that product market firms need to be constantly aware of the threats and and the nature of that opportunities from product and process innovation, and must react if they are change to survive. In some cases, this has led to firms such as Apple not only innovating on an ongoing basis but also attempting to grow and consolidate their market share to strength brand loyalty. Takeaway food delivery innovator Deliveroo is making the restaurant market more competitive and allowing smaller, non-chain Examples help to lift the eateries to compete, which may reduce the dominance of larger chains. Driverless quality of the answer, and reduce the-need: technology-may-1 for 4orry-drivers-and-consolidate logistics and ass the case here, canbe transport in the hands of just a few dominant firms, rather than the competitive used in both analysis and industry that it currently is. in other areas risk taking which has not paid off, or i evaluation lack of risk taking altogether has led to changes in product market structure. For example, Nokia failed to innovate quickly enough in the smartphone market, allowing Apple to become more dominant. Market structures may change more quickly as a result of increasing technological change. In conclusion, technological change is an increasingly important and constant This is @ good example of a feature of product markets. While itis relatively certain that market structure question for which there is will be affected by technological change, some industries are likely to see more __~0 definitive answer. In this concentrated markets, and some less. The direction and magnitude of change is ¢@5e, the judgement that it likely to change over time. However, some industries may see litle change at all if 15 t00 difficult to predict the powerful trade unions oppose such changes, but it is difficult to predict how this impact on market structure will affect the ongoing survivability of the firm in question, is entirely appropriate Copyright Tutor2u Limited: Ai Mghs Reserved. NOT TO 8 PHOTOCOPIED tutor2uIt was reported in 2016 that women were paying more than men for shaving products such as razor blades and razors. The only difference between the products designed for women and those for men was colour. Evaluate the advantages and disadvantages of price discrimination. Price discrimination involves firms with monopoly power charging different prices to A solid definition different groups of consumers for the same good or service, for reasons unrelated to cost. This essay will evaluate the arguments for the different degrees (third, second Including the final and first) of price discrimination, and conclude that the benefits become increasingly judgement in the weighted in favour of firms rather than consumers as we move from third, to second, to first degree price discrimination. introduction is an excellent way of showing the Third degree price discrimination occurs when firms are able to segment markets into examiner that the essay is different groups according to the coefficient of price elasticity of demand, perhaps worthy of a top-band mark based on income, age, gender and so on, and charge those groups different prices. This is the type of price discrimination relevant to shaving products. The diagram This is an excellent example below shows the market for shaving products on the assumptions that female of a complex diagram being demand is more inelastic than male demand, that razor companies such as Gillette are ysed well in an essay ~it is price-makers, and that the markets can be separated to prevent seepage/arbitrage. labelled according to the Profit maximising output for the combined market occurs where MR given context (razors) and ICon the fstale Ravors Senvaie Razors Combined Razor ket Revenue and Casts Revenue and Cost Revenue and Costs i oe me ™ Pen — 1X i Io | | \ ~ i \ tie aR . am Output ‘Outout: right hand diagram, with quantity of Qcm and price Pcm. However, revenue and its relevance is explained in supernormal profits can be increased even further by re-allocating output between the accompanying written markets so that MR=MC in each individual market. In this case, female customers analysis pay a higher price (Pf) than is paid by males (Pm). The benefit to the firm is clear in terms of producer surplus, and in some cases the boost to cash flow may prove critical in ensuring business survival. For females, consumer surplus has fallen, but for male Good chain of analysis, that ‘consumers in this example, consumer surplus is higher. Indeed, the lower price may bring some male consumers within the market who were previously excluded by the rationing function of prices. Overall, consumer surplus has been replaced by producer surplus. is carefully linked to the precise question ‘The extent to which consumers are disadvantaged, though, depends on whether higher revenues and profit are used for productive purposes, such as research and The evaluative language development and innovation, and whether shareholders (who are also consumers) in this opening sentence is gain higher dividends. tt may also be the case that in some industries, price good, Evaluation is achieved discrimination allows cross subsidy of activities that bring social benefits such as medicines sold for lower prices in low or middle-income countries; this is perhaps less likely to be the case in terms of razors. The hurdle model provides a further reason here by considering different perspectives. This essay moves beyond Copyright Tutor2u Limited: 5 All Rights Reserved. NOT TO BE PHOTOCOPIED tutor2uPVE iecuriescunlel ss Seen for arguing that some consumers gain from price discrimination. Consumers willing the basic ‘textbook’ ~ to overcome some hurdle such as slightly damaged goods, collecting coupans and so ‘approaches to price on are rewarded with a lower price e.g. accessing online news by answering slightly discrimination and inconvenient market research surveys rather than paying, Itis doubtful, however, demonstrates up-to-date that many of these advantages apply to shaving products, although in many industries practicol knowledge the advantages and disadvantages eppear more evenly balanced. The exception is Excellent synoptic where third degree price discrimination is taken to an extreme as in price gouging, ‘An example of this behaviour is the fines levied on Nurofen in Australia for selling exactly the same over-the-counter painkilling product, differently branded, for different prices. Arguably, this is the case in shaving products. Drawing on behavioural economics, the use of framing techniques can mislead customers even further and result in clear producer advantage to the disadvantage of consumers. knowledge, using some behavioural economics to support the argument In second degree price discrimination, price varies according to quantity sold and time of purchase. Clearly firms operating on a large scale gain, and second degree There is plenty of technical price discrimination allows them to benefit from bulk purchasing economies of scale / monopsony power. This may increase productive efficiency ~ which can lead to lower prices - but may also mean that markets become more concentrated, so industry conduct is vital in assessing the advantages and disadvantages, as is the effectiveness of the competition authorities to respond to or deter anti-competitive behaviour such 2s predatory pricing. Second degree price discrimination may also mean that firms ‘can spread cash flow more evenly (by offering discounts for early purchases) and utilise spare capacity more effectively. This represents a more efficient use of scarce A nicely developed example resources, and is economically desirable. There are many examples of this type of to support the analysis behaviour, such as taxi fares, cinemas and train ticket prices. In the latter, the relatively inelastic demand pre-9.30am is associated with higher prices than at non-peak times. The train operating companies benefit from increased revenue and profit, but this can 4 sound ‘mini conclusion” be used to finance improvements to the service which in many cases is overcrowded that neatly summarises the ‘and outdated. While peak time passengers undoubtedly experience lower consumer paragraph surplus, and there has been adverse media comment concerning the real increase in fares, a significant advantage may be reductions in over-crowding on busy trains. ‘Again, the advantages and disadvantages are mixed but seem rather more on the side Of firms in this case. detail in here, using appropriate and extensive terminology — fabulous! Finally, first degree price discrimination provides an example where the advantages fall almost entirely to the firm and the disadvantages to the consumer. In first degree Excellent use of technical price discrimination, firms segment the entire market, charging each individual ‘economic theory and the maximum amount they are willing to pay. All consumer surplus is extracted to analysis to develop the become producer surplus. Most (if not all) consumers will pay a price well above point ‘marginal cost thus increasing allocative inefficiency. While there can still be dynamic gains the disadvantages seem greater. This approach is becoming more widespread —as-technological-progress-allows-firms-withan-online presence to conduct auctions for goods such as aitline upgrades. Without technology, determining the maximum price that a consumer is willing to pay is costly and difficult for firms. That said, some consumers who might not be able to afford the product at a given market price may now find that firms are willing to supply them at lower prices. For the most part, though, first-degree price discrimination is the least good type of price discrimination from the consumers’ perspective. A clear judgement on the ‘answer to the question is reached, and is backed up throughout the essay In conclusion, the advantages and disadvantages of price discrimination are varied « both in terms of their size, their desirability from an economic perspective and the groups affected. In many cases, the overall advantages and disadvantages seem reasonably balanced, especially if ongoing technological progress increases the pressures on firms to utilise higher revenues and profit for innovation, and the competition authorities are vigilant and effective. The concern is first degree price discrimination which is becoming more of a reality. Here there are definite disadvantages and concerns in terms of consumer welfare and efficiency, and first degree price discrimination is clearly more worrying than third degree. ‘al tigts nce Nor To BE pHOTOCOPIED tutor2uLevel Economics Example Essays - Theory of the Firm In 2016, the online estate agent HouseSimple received a £13m injection of capital from a famous entrepreneur to help it compete with Purple Bricks, the dominant online estate agent. It is estimated that using an online estate agent can reduce the fees paid by house-sellers by £6000. Currently around 5% of homes are sold online rather than through traditional estate agents with a high street presence. That figure is estimated to increase to 50% by 2020. Evaluate the impact on markets of increasing competition from online suppliers. Online suppliers, who sell goods and services using an electronic network, such as the internet, are becoming an increasingly common feature of markets, as evidenced by the estate agency sector where the number of houses sold online i likely to rise from 59% now to 50% by 2020. This essay will consider first the possibility that markets will become more efficient and welfare will increase. Next, the possibility that, in contrast, some markets will become more concentrated, and finally the likelihood that markets will become more disrupted. One possible impact on markets of increasing competition from online suppliers is that markets will become more efficient and welfare will increase. In general terms, efficiency refers to how well scarce resources are used to meet infinite ‘wants. Inereasing competition from online suppliers might mean that markets now exhibit more of the characteristics of perfect competition. Perfect competition is a theoretical market structure which is both allocatively and productively efficient in the long run. Firms are productively efficient when they produce at the lowest point on their LRAC curve and are allocatively efficient when they produce the goods people most want (achieved where P{AR) =MC). There are no barriers to entry, there are large numbers of small firms who are price takers, large numbers of buyers and there is perfect information. Most sectors are some way removed from these assumptions, but increased competition from online suppliers could make some of the assumptions more realistic. The most obvious is perfect information. Online suppliers allow consumers access to information on their products and prices with low search costs being incurred. Providing consumers do not exhibit bounded rationality, this should allow more rational decisions to be taken and will create an incentive for other firms to be more x-efficient (i.e. pay the lowest price for their factors of production). An increasing number of online suppliers now exist simply to ease this process e.g. price comparison websites such as Go Compare. Itis possible too that increasing competition from online suppliers such as Amazon or eBay allow new small firms to enter all sorts of markets more easily as barriers to entry are considerably lower. There is no need to buy premises, undertake expensive advertising, and develop a website etc. The diagram allows the impact to Nice use of context, demonstrating that this is not just @ pre-learned rote answer. An excellent opening sentence to the paragraph that sets the scene and tone for the paragraph. This is super analysis, again demonstrating some thinking outside of the box by linking online developments with the characteristics of market structures Excellent examples, demonstrating wider reading and the ability to apply economic theory to practice A well-chosen, be analysed if markets dobecome 3. 3 Supply (in perfect diagram, that closer to perfect competition. The is ~N competition) allows strong competitive (statically efficient) . ow MC (mn emancpolt comparative equilibrium is at Qpc and Ppe. A LS analysis to be ‘monopolist, in contrast would carried out produce at QM and price PM where MR=MC and profits are maximised. Not only is this Inefficient, but there is a welfare <___Damand fin gerost ~ competion loss with lower overall community q Sey surplus. f markets become more Tin monoro) “ competitive, welfare should rise. ae However, concerns have been Copyright Tutor2u Limited: All Rights Reserved. NOT TO BE PHOTOCOPIED tutor2u"