Term
| Oligopoly market structures |
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Definition
are characterized by only a few firms, each of which is large relative to the total industry.
Typical number of firms is between 2 and 10.
Products can be identical or differentiated. |
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Term
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Definition
| An oligopoly market composed of two firms is |
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Term
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Definition
There are few firms in the market serving many consumers.
The firms produce differentiated products.
Each firm believes its rivals will cut their prices in response to a price reduction but will not raise their prices in response to a price increase.
Barriers to entry exist. |
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Term
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Definition
There are few firms in the market serving many consumers.
The firms produce either differentiated or homogeneous products.
Each firm believes rivals will hold their output constant if it changes its output.
Barriers to entry exist. |
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Term
| Cournot Oligpoly Reaction Function |
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Definition
Consider a Cournot duopoly. Each firm makes an output decision under the belief that is rival will hold its output constant when the other changes its output level.
Implication: Each firm’s marginal revenue is impacted by the other firms output decision.
The relationship between each firm’s profit-maximizing output level is called a best-response or reaction function. |
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Term
| Cournot Oligopoly Reaction Functions Formula |
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Definition
| Given a linear (inverse) demand function |
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Term
| Cournot Oligopoly Equilibrium |
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Definition
| A situation in which neither firm has an incentive to change its output given the other firm’s output |
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Term
| Cournot Oligopoly Collusion |
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Definition
Markets with only a few dominant firms can coordinate to restrict output to their benefit at the expense of consumers.
Restricted output leads to higher market prices.
Such acts by firms is known as collusion.
Collusion, however, is prone to cheating behavior.
Since both parties are aware of these incentives, reaching collusive agreements is often very difficult. |
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Term
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Definition
| A strategy that results in the highest payoff to a player regardless of the opponent’s action. |
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Term
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Definition
| A strategy that guarantees the highest payoff given the worst possible scenario. |
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Term
| Nash Equilibrium Strategy |
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Definition
| A condition describing a set of strategies in which no player can improve her payoff by unilaterally changing her own strategy, given the other players’ strategies. |
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Term
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Definition
There are few firms serving many consumers.
Firms produce either differentiated or homogeneous products.
A single firm (the leader) chooses an output before all other firms choose their outputs.
All other firms (the followers) take as given the output of the leader and choose outputs that maximize profits given the leader’s output.
Barriers to entry exist. |
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Term
| Stackberg Oligopoly Equilibrium Output Formula |
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Definition
| Given a linear (inverse) demand function |
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Term
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Definition
There are few firms in the market serving many consumers.
Firms produce identical products at a constant marginal cost.
Firms engage in price competition and react optimally to prices charged by competitors.
Consumers have perfect information and there are no transaction costs.
Barriers to entry exist |
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Term
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Definition
The conditions for a Bertrand oligopoly imply that firms in this market will undercut one another to capture the entire market leaving the rivals with no profit. All consumers will purchase at the low-price firm.
This “price war” would come to an end when the price each firm charged equaled marginal cost.
In equilibrium, |
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Term
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Definition
Firms with market power face a downward-sloping demand.
Implication: there is a trade-off between selling many units at a low price and selling a few units at a high price.
Managers of firms with market power balance these competing forces by selecting the quantity that equates marginal revenue ( |
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Term
| Simple Pricing Rule: Monopoly & Monoopolistic Competition |
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Definition
Managers have a “crude” estimate of
marginal cost; the price paid to a supplier.
the price elasticity of demand, since it is typically available for a representative firm in an industry.
With this information, the monopoly and monopolistically competitive firm’s profit-maximizing price (markup) is computed from: |
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Term
| Simple pricing Rule : Cournot Oligpoly |
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Definition
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Term
| Single-Price-Per-Unit Model |
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Definition
In some markets, managers can enhance profits beyond those resulting from charging all consumers a single, per-unit price.
Models that yield greater profits fall into three categories:
Pricing strategies:
that extract surplus from consumers.
for special cost and demand structures.
in markets with intense price competition. |
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Term
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Definition
| Price discrimination is the practice of charging different prices to consumers for the same good or service |
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Term
| First Degree Price Discrimination |
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Definition
First-degree price discrimination is the practice of charging each consumer the maximum price he or she would be willing to pay for each unit of the good purchased.
Implication: the firm extracts all surplus from consumers and earns the highest possible profit. |
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Term
| Second Degree Price Discrimination |
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Definition
Second-degree price discrimination is the practice of posting a discrete schedule of declining prices for different ranges of quantity.
Implication: firm extracts some surplus from consumers without needing to know the identity of various consumers’ demand. |
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Term
| Third degree price discrimination |
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Definition
Third-degree price discrimination is the practice of charging different prices based on systematic differences in demand across demographic consumer groups.
Implication: marginal revenue will be different for each group. That is, if there are two groups, 〖 |
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Term
| 3rd degree price discrimination rule |
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Definition
| To maximize profits, a firm with market power produces the output at which the marginal revenue (left-hand side of the following equations) to each group equals marginal cost. |
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Term
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Definition
| Two-part pricing is a pricing strategy whereby a firm with market power charges a fixed fee for the right to purchase its goods, plus a per-unit charge for each unit purchased. |
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Term
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Definition
Block pricing is a pricing strategy in which identical products are packaged together in order to enhance profits by forcing customers to make an all-or-none decision to purchase.
The profit-maximizing price on a package is the total value the consumer receives for the package. |
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Term
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Definition
Commodity bundling is the practice of bundling several different products together and selling them at a single “bundle price.”
Key assumption: Consumers differ with respect to the amounts they are willing to pay for multiple products sold by a firm.
Managers cannot observe different consumers’ valuations. |
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Term
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Definition
| Peak-load pricing is a pricing strategy in which higher prices are charged during peak hours than during off-peak hours. |
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Term
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Definition
Cross-subsidy is a pricing strategy in which profits gained from the sale of one product are used to subsidize sales of a related product.
Principle:
Whenever the demands for two products produced by a firm are interrelated through costs or demand, the firm may enhance profits by cross-subsidization: selling one product at or below cost and the other product above cost. |
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Term
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Definition
Transfer pricing is a pricing strategy in which a firm optimally sets the internal price at which an upstream division sells an input to a downstream division.
Important since most division managers are provided an incentive to maximize their own division’s profits.
Transfer pricing aligns division manager’s incentives with that of the overall firm, and increases overall firm’s profit. |
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Term
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Definition
Transfer pricing is used to overcome double marginalization.
A transfer pricing rule sets the internal price at which an upstream division sells inputs to a downstream division in order to maximize the overall firm profits.
Require the upstream division to produce such that its marginal cost, 〖 |
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Term
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Definition
Price matching is a strategy in which a firm advertises a price and a promise to match any lower price offered by a competitor.
Used to mitigate the stark outcome associated with firms competing in a homogeneous-product, Bertrand oligopoly.
Outcome: If all firms in the market adopt a price matching policy, all firms can set the monopoly price and earn monopoly profits; instead of the zero profits it would earn in the usual one-shot Bertrand oligopoly.
Potential issues:
Dealing with false consumer claims of low prices.
Competitor’s with lower cost structures. |
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Term
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Definition
Brand loyal customers continue to buy a firm’s product even if another firm offers a (slightly) better price.
Strategy used to mitigate the tension of Bertrand competition.
Methods for inducing brand loyalty.
Advertising campaigns.
“Frequent-buyer” programs. |
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Term
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Definition
Randomized pricing is a strategy in which a firm intentionally varies its price in an attempt to “hide” price information from consumers and rivals.
Benefits of randomized pricing to firms:
Consumers cannot learn from experience which firm charges the lowest price in the market.
Reduces the ability of rival firms to undercut a firm’s price.
Not always profitable. |
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Term
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Definition
The socially efficient quantity in a market occurs where price equals marginal cost. This quantity maximizes the sum of consumer and producer surplus.
This socially efficient price and quantity arise naturally in a perfectly competitive market.
When a firm in a market produces an output that is less than the socially efficient level because it charges a price that exceeds marginal cost, the firm has market power. |
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Term
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Definition
| The purpose of Antitrust policy is to eliminate the deadweight loss of monopoly by making it illegal for manager to engage in activities that foster monopoly power. |
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Term
| Antitrust policy Sherman act section 1 |
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Definition
The cornerstone of U.S. antitrust policy are Sections 1 and 2 of the Sherman Antitrust Act of 1890:
Section 1: Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several states, or with foreign nations, is hereby declared to be illegal. Every person who shall make any such contract or engage in any such combination or conspiracy shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding five thousand dollars (one million dollars if a corporation, or, if an other person, one hundred thousand dollars) or by imprisonment not exceeding one (three) years, or by both said punishments, in the discretion of the court. |
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Term
| Antitrust policy Sherman act section 2 |
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Definition
| Section 2: Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine not exceeding five thousand dollars (one million dollars if a corporation, or, if any other person, one hundred thousand dollars) or by imprisonment not exceeding one (three) years, or both said punishments, in the discretion of the court. |
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Term
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Definition
Interpretation of antitrust policy is shaped by the courts, which rule on ambiguities in the law and previous cases.
In the Supreme Court’s ruling on Standard Oil Trust, the Court defined a new rule of reason, which effectively stipulates
that not all trade restraints are illegal; rather, only those that are “unreasonable” are prohibited.
Problems with the rule of reason:
It is difficult for managers to know in advance whether particular pricing strategies or other actions used to enhance profits are in fact violations of the law. |
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Term
| Clayton & Robinson Patman Acts |
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Definition
To make more precise what actions are deemed illegal in antitrust law the U.S. Congress passed the Clayton Act (1914) and Robinson-Patman Act (1936).
These acts make price discrimination – aimed to substantially lessen competition or tend to create a monopoly in the line of commerce, or injure, destroy, or prevent competition – illegal.
Price discrimination is permitted under these acts when
it arises because of cost or quality differences.
it is necessary to meet a competitor’s price in a market. |
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Term
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Definition
Illegal actions for firms under the Clayton Act:
Hide kickbacks as commissions or brokerage fees.
Use rebates unless they are made available to all customers.
Engage in exclusive dealings with a supplier unless the supplier adds to the furnishing of the buyer and/or offers to make like terms to all other potential suppliers.
Fix prices or engage in exclusive contracts if such a practice will lead to lessening of competition or monopoly.
Acquire one or more other firms if such an acquisition will lead to a lessening of competition |
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Term
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Definition
The Celler-Kefavuer Act (1950) strengthened the Clayton Act by making it more difficult for firms to engage in mergers and acquisitions without violating the law.
Merger policy was furthered changed when new horizontal merger guidelines were written in 1982; amended in 1984, and revised in 1992, 1997, and 2010.
Guidelines based on the Herfindahl-Hirschman index (HHI): |
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Term
| Antitrust policy Horizontal Merger Guidelines |
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Definition
Horizontal Merger Guidelines
Merger that increases HHI by less than 100 or leads to an unconcentrated market (post-merger |
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Term
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Definition
| The Hart-Scott-Rodino Act (1976) requires that the parties to an acquisition notify both the Department of Justice (DOJ) and Federal Trade Commission (FTC) of their intent to merge, provided that the dollar value of the transaction exceeds a certain threshold (currently about $70 million). |
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Term
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Definition
The presence of large scale economies may make it desirable for a single firm to service an entire market.
In these instances, government may permit a monopoly to exist, but regulate its price in effort to reduce the deadweight loss. |
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Term
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Definition
Negative externalities exist when costs are borne by parties who are not involved in the production or consumption of a good or service.
The reason externalities cause a “market failure” is the absence of well-defined property rights.
The failure is often resolved when a government defines itself to be the owner of the environment, and uses its power to induce the socially efficient levels of output and pollution |
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Term
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Definition
| Causes firms to internalize the cost of emitting pollutants since the permits are costly to acquire |
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Term
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Definition
leads to a market failure.
nonrivalous and nonexclusionary in consumption and therefore benefit persons other than those who buy the goods. |
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Term
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Definition
| consumption of the good by 1 person does not preclude other ppl from also consuming the good |
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Term
| nonexclusionary consumption |
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Definition
| once provided no one can be excluded from consuming the good |
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Term
| Public goods & inefficiencies |
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Definition
| market to provide inefficient quantities since everyone gets to consume public good once it is avail. but individuals have little incentive to purchase the good they prefer other to pay for it. free rider provlem |
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Term
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Definition
Efficiently functioning markets require participants to have reasonably good information about prices, quality, available technologies, and the risks associated with working particular jobs or consuming particular products.
Market inefficiencies result when participants have incomplete information.
One severe source of market failure is asymmetric information, where some market participants have better information than others.
Implication: buyers may refuse to purchase from sellers. |
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Term
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Definition
| selfishly motivated efforts to influence another party's decision |
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Term
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Definition
A quota is a government restriction that limits the quantity of imported goods that can legally enter the country.
Implications:
Reduces competition in domestic market
Higher domestic prices
Higher profits for domestic firms
Lower consumer surplus for domestic consumers
Conclusion: Domestic producers benefit at the expense of domestic consumers and foreign producers |
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Term
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Definition
| A tariff is designed to limit foreign competition in the domestic market to benefit domestic producers, which accrue at the expense of domestic consumers and foreign producers. |
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Term
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Definition
| Lump-sum tariff: fixed fee that foreign firms must pay the domestic government to be able to sell in the domestic market. |
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Term
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Definition
| Excise (per-unit) tariff: the fee an importing firm must pay to the domestic government on each unit it brings into the country. |
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