4.2.1 Market failure

What is market power

Ability to influence price output or wages

What is collusion

Firms agree to reduce competition

What is the aim of collusion

Increase profits

What happens to prices under collusion

Prices rise

What happens to consumer surplus under collusion

It falls

Why do oligopolies collude

To act like a monopoly

When is collusion more likely

Few firms similar costs high barriers weak regulation

Why does collusion deter entry

Higher prices attract control

What is non collusive behaviour

Firms compete with each other

When is non collusion more likely

Many firms cost differences homogeneous products

What is overt collusion

Formal agreement between firms

Is overt collusion legal

No

Give an example of overt collusion

Price fixing

What is tacit collusion

Implied coordination without agreement

Why does tacit collusion cause price stability

Firms follow each other

What is a cartel

Firms controlling price or output

Give an example of a cartel

OPEC

What is an effect of cartels

Higher prices lower output

What is price leadership

One firm sets price others follow

Why does price leadership occur

To avoid losing market share

What is a price war

Firms repeatedly cutting prices

What is one effect of price wars

Lower profits

What is non price competition

Competing without changing price

Why do firms use non price competition

Increase brand loyalty

How does brand loyalty affect demand

Makes demand more inelastic

What are barriers to entry

Obstacles preventing new firms entering

Why do firms create barriers to entry

Protect market power

What is monopsony power

Single buyer in a market

Give an example of monopsony power

NHS buying drugs

How does monopsony power affect suppliers

Lower prices received

How does monopsony power affect workers

Lower wages

Why can monopsony be beneficial

Lower costs for consumers

What is a natural monopoly

One firm most efficient provider

Why are natural monopolies efficient

Avoid duplicate infrastructure

What is trade union power

Worker collective bargaining strength

How do trade unions affect wages

Push wages higher

How do trade unions affect monopsony power

Reduce exploitation

What is the risk of strong trade unions

Higher unemployment

What is the competitive wage level called

W1

What wage does a monopsonist pay

W2

What wage do unions aim for

W3