Limit Pricing

Here is a picture to show how an incumbent firm can take advantage of economies of scale in order to drive out competition. If it sets a price below CNE (the cost to new entrants) and above CI (the cost to the incumbent) then it can continue to make a supernormal profit whilst the new entrant will make a loss. In the short run it may make lower supernormal profits but in the long run it is likely to benefit from a more inelastic demand curve (as there is less competition, since they have been driven out by limit pricing) and can make a larger supernormal profit. [...]

Quiz Answers

1. PED = %Change in QD / %Change in Price

2. The price elasticity of demand is the responsiveness (how they change their demand) of consumers to a change in the price of a good.

3. The good is inelastic

4. Perfectly Elastic = -Infinite; Perfectly Inelastic = 0; Unit Elastic = 1; A value between 0 and -1 is inelastic; A value between -1 and -Infinite is elastic.

5. If there is derived demand for a good then it means that the good is demanded for what it produces. For example labour isn’t demanded for labour but for what it produces. [...]

Unit 1 Quiz: Microeconomics (Basics)

I have created a quiz for the Edexcel Unit 1 Exam; you won’t be asked these questions in the exam, but you need to know the answers. The answers are in a separate blog post (see here).

1. How do you calculate PED?

2. Define PED

3. If the value produced by a PED calculation was -0.6 what would it mean?

4. What values would be needed from the PED calculation to say a good is a.) elastic b.) inelastic c.) unit elastic

5. What does derived demand mean?

6. If I have a vertical demand curve what price elasticity does it have? [...]

Methods to spot Collusion

The article above shows some different methods that anti-trust economists are now adopting in order to identify cartels. The main bulk of the article is based on the Benford Law which states that in a large number of populations the leading number is not uniformly correlated as one may expect. Instead the number 1 is much more likely to be a leading number than the number 9. This can be seen from the graph below which shows the probability that the leading number will be the given constant.









Anti-trust agencies can use this law to spot whether a firm is creating dubious numbers. [...]

Television Collusion

6 television firms were recently fined £1.2 Billion for colluding to fix prices of cathode rays in televisions. The result of this collusion was higher prices for consumers and thus larger profits for the television firms.

The article can be read here.

This shows the EU Competition Commission using its powers to prevent consumers losing out. It is also worth noting that the television firms undertook this price fixing by increasing the price of cathode rays, as oppose to the price of TVs themselves. Perhaps one reason behind this decision was because it is easier to monitor the price of cathode rays and hence this prevents cheating by any one member of the cartel. [...]