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Unit 3 Revision Notes
How firms grow:
Firm – organisation that brings together factors of production in order to produce output
Organic growth – by being successful increase market share, good marketing campaign, reinvesting
profits or borrowing money to invest (by issuing shares)
May be limited by industry i
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saturated or small in size - diversification may remove problem –
success relies on quality of management as unknown market
Other limits include lack of finance, the objectives of ownership and regulation
Mergers and acquisitions – merger is coming together of equals whereas acquisitions may be hostile
Types:
- Horizontal merger – two firms at same stage of production in an industry – increases market
power (affects conc
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- Forward integration – merging towards consumer, down the supply chain
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Product differentiation:
Improve quality of product/ customer service
EV – may lose price sensitive consumers due to higher costs thus prices

Contestability:
Achieved when low barriers to entry and exit
Neo-classical view – behaviour of firm based on competition in market
William Beaumol – behaviour of firm determined by threat of contestability – monopolists may limit
pricing + increases efficiency due to threat of new firms
All markets (except statutory monopolies) are contestable to a degree
Concentration ration – market share held by x firms – must write out calculation as reference
Gov’t Intervention:
Regulation:
Surrogate for competition
Brief history:
Under conservatives in 80’s/90’s, state monopolies were privatised – raised £90bn
33 firms privatised – cost £500m to do so, generated £8bn each year to treasury
’84-00 telecoms bills fell by 49%
’86-00 gas bills fell by 32%
’98-00 electric bills fell by 20%

Due to increases in productive and allocative efficiency as now profit motivated – decrease costs
Strengths of UK regulation:
 Independent of govt and firms
 Specialist knowledge
 Flexible pricing formula and licensing
 Incentivises efficiency – cost savings greater than X means increased profits
Weaknesses:
 Need stability over flexibility for firms to plan long term – creates short-termism – missing
out on long run efficiency gains
 Decisions made with imperfect information
 Regulatory capture – when regulators work in the interest of firms who they work closely
with, as opposed to the consumer
Forms of regulation:
Price capping:
 RPI-X+Y+Z
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– removes to
fixed element of the general supply
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2bn Channel Tunnel in 2000
£10
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com – collect nights in different cities
Free Wi-Fi in hotels
Ocado regular shopping list
DFDS multi trip ferry tickets – buy if a regular customer
P and O - £47 return to Calais vs 2x£27 singles
Condor ferries £108 loyalty card sign-up fee – high cost to run
EBay bought PayPal – earnings used to invest in PayPal abroad – separated management in 2015 –
PayPal needed to focus on own industry – competition from Apple Pay
£150m a year spent on removing gum from streets
Rev7 – dissolves in 24hrs – eco-friendly label
Ryanair prevented from buying aerlingus – wanted routes to US – anti-competitive
Iberia and BA merged in ’09 – losses after financial crisis forced merger – save £500m over 5 years
due to overlapping routes
Lufthansa acquisitions – small Swiss and Austrian airlines from ’05-09
Amazon:
CEO Jeff Beezos
Forced out incumbents e
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HMV

Diversification e
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Kindle
Poor working conditions + monopsony power keep costs low
1st profit was in 2015 - $92m in 2nd quarter
TR $89bn in 2014 – revenue max
Tesco:
CEO Terry Leahy until recently
£2
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6%) and Lidl (4
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5bn total – Swiss
bank UBS not fined as first to report collusion
OFCOM changes of X:
3 to 4
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25 in ’91, to 7
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2bn Channel Tunnel in 2000
£10

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