CAIE A-Level Economics A2 7.8 Differing Objectives and Policies of Firms Questions

In the diagram
M C= marginal cost; A C= average cost; M R= marginal revenue; A R= average revenue.

What will be the output of a profit-maximising firm whose cost and revenue functions are shown above?

A firm is operating at a level of output which corresponds to the point where MR=0.
What objective is the firm achieving?

A bus company has a monopoly and specialises in long-distance travel. It initially sells its tickets to customers one month in advance of the journey. As the departure date approaches, the price of a ticket increases.

Which kind of pricing policy does the bus company operate?

The threat from large firms

In 2021, one of the largest United States (US) technology companies averaged sales of US$1.2 billion a day. It took less than four seconds to earn US$52000, the average American yearly salary. Three of the largest technology companies reported record breaking sales and profits. Five of the largest companies made combined profits of over US$68 billion.

They were helped by the Covid-19 pandemic that caused a huge increase in online working and shopping. The ability to work and shop online was greatly welcomed by many who were forced to stay at home.

Critics, however, worry that if this trend to large firms continues the future will be controlled by a handful of super-rich, super-powerful companies. They will dominate economic activity. This is not just bad for the economy; it is bad for consumers and bad for competition. Also, economic concentration causes unacceptable inequality. One powerful firm tried to prevent workers joining a trade union.

Their huge cash reserves mean that they could undercut possible new entrants and prevent competition. Investors will be wary of investing in possible competitors and new owners would be prepared to sell out to the dominant firms rather than try and compete.

The size of the firm gives it political power to fight any official or government intervention. Governments are beginning to be aware of this. The chair of the US body that deals with competition law said there was a range of potential risks created by the large companies. The government is aware of their ability to avoid paying taxes and their ability to dominate allows them to expand into markets for similar products.

Ten years ago, a co-founder of one of the large firms said 'Joseph Schumpeter, the economist who used the term creative destruction would be proud'. But now that co-founder is not so sure. 'We went from being pirates to being the navy. People may love pirates when they are young and small, but nobody likes a navy that acts like a pirate. Today's technology giants are just like that'.

Source: The Guardian, 31 July 2021

Loyalty and consumer behaviour

Consumer loyalty can be shown in different ways. It may be through:
- customer reward schemes (e.g. loyalty cards) that offer discounts based on the amount spent with a specific retailer
- emotional loyalty where customers prefer a particular brand that they always buy
- monopoly loyalty where there is no alternative to the retailer or brand.

Supermarkets try to attract customers by using loyalty cards that give promotions and price reductions to those who have a card. The cards also help the supermarket build barriers between retailers to gain a marketing advantage.

When consumers are collecting points towards a particular goal, the loyalty card may hinder free competition and prevent switching between brands. However, sometimes the discounts used by the scheme may be confusing and make it difficult for the consumer to compare prices.

There are risks for the retailers too. The loyalty cards require substantial investment to run - one supermarket put the cost at US $\$ 60 \mathrm{~m}$ a year. These costs could well result in higher prices for the consumer.

But how do loyalty card schemes fit into the context of the way in which consumers make choices? A research report found that in one country where $70 \%$ of consumers had a loyalty card, only about 10% were loyal to one particular card.

It has been found that when choosing to buy groceries consumers look for one-stop shopping $(43 \%)$, good service ( $22 \%$ ), price ( $18 \%$ ), the availability of a coffee shop ( $12 \%$ ) and help with packing (6%). Loyalty cards come below these.

Companies use loyalty cards to gather data on customers and their buying preferences. They then direct future offers to consumer wishes in specific promotions both online and in the mail. Loyalty schemes are thus sometimes less about loyalty and more about understanding customers' wants.

The economic model of consumer behaviour using indifference curves assumes that consumers conduct research and buy products and services in a rational way. Many purchases, however, are based on habit and consumer research is imprecise. When the consumer has a low involvement in research or a low emotional attachment to the product, there will be little loyalty.

Source: RSA Journal

Explain why a profit-maximising retailer may be interested in the link between consumers' loyalty and price elasticity of demand.