Term
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Definition
| when firms are able to restrict compteition to sustain prices above marginal cost. |
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Term
| How much power does a monopoly have? |
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Definition
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Term
| Can Market Power exist with with Multiple rival firms? |
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Definition
| Yes, multiple rival firms can exist when the products are differentiated and/or are segmented (firms have loyal customers. |
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Term
| How do managers gain market power? |
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Definition
| Managers attempt to sustain any factors which limit competition |
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Term
| Is competition bad for firms? |
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Definition
| Yes competition is bad for firms and leads to 0 economic profit in the Long Run. |
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Term
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Definition
| Yes, collusion is illegal because numerous companies act as one to set a price of a good within an industry. |
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Term
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Definition
| A cartel is a group of businesses form an alliance and act as a monopoly. |
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Term
| What are the strategies in the Market? |
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Definition
| -Guarding Trade Secrets -Control of an essential resource -Exclusive contracts and customer lock-in -coke on campus -extended cell phone contracts -Collusion (form a cartel and act as monopoly. |
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Term
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Definition
-Patent or copyright protection
-Trade regulations
-Licencing or certification requirements
-parable of parking lots |
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Term
| When does the profit maximizing occur? |
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Definition
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Term
| Where can the firm make a profit by selling one more unit? |
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Definition
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Term
| How would the firm lose money on selling one more unit? |
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Definition
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Term
| Given the optimal sales target, price is found as a markup over cost, where the markup factor depends on the demand for the product. |
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Definition
| More inelastic demand, more markup over costs. |
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Term
| How does a firm with market power set its prices? |
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Definition
| it is set higher than the efficient quantity. |
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Term
| Compared to demand how fast does MR Fall? |
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Definition
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Term
| What happens when a firm with market power sets prices too high, and output too low? |
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Definition
| Viewpoint of economic effeciency too few units are produced and sold. |
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Term
| What is perfect price discrimination? |
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Definition
| Each consumer is charged a price at their willingness to pay. |
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Term
| Is there a market ineffiency with perfect price discrimintation? |
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Definition
| No but all the surplus goes to the producer. CS=0 |
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Term
| What is imperfect price discrimination? |
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Definition
| Groups of consumers are charged at different prices (Victoria Secret). |
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Term
| With imperfect price discrimination, are the segments clear? |
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Definition
| No, the segments are not always clear. |
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Term
| What are the results of Imperfect Price discrimination? |
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Definition
-The firm's profits are increased.
-Consumer surplus is decreased, but not equal to 0 |
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Term
| What are the Three Main parts to Game Theory? |
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Definition
| Players, Strategies, and Payoffs |
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Term
| What are the PLAYERS in Game Theory? |
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Definition
-decision makers in the game
-usually within firms, governments, or interest groups |
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Term
| What are the STRATEGIES in Game Theory? |
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Definition
-The decisions firms make
-eg. price product, promotion, advertising, Campaigning, Regulation, etc. |
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Term
| What are PAYOFFS in game theory? |
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Definition
-The outcomes of decision choices
-usually in terms of profits and losses |
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Term
| Which players select a strategy in a strategy set within game theory? |
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Definition
-Both players select a strategy.
-Each Player optimizes strategy to maximize payoffs |
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Term
| What does the OBJECTIVE FUNCTION do in Game Theory? |
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Definition
| the OBJECTIVE FUNCTION is to maximize payoffs |
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Term
| What are the Four Main Strategies in Game Theory? |
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Definition
-Dominant Strategy
-Secure Strategy
-Think Like Your Rival
-Nash Equilibrium |
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Term
| What is a DOMINANT STRATEGY in Game Theory? |
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Definition
-A strategy that results in the highest payoff no matter what your rival chooses
-Look for the exisitance of a Dominant Strategy if you always choose the same strategy. |
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Term
| What is a SECURE STRATEGY in Game Theory? |
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Definition
-In the absence of a dominant strategy, choose the strategy that gaurntees the highest payoff given the worst payoff
-Strategy where you avoid the worst possible outcome |
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Term
| What is the THINK LIKE YOUR RIVALS STRATEGY in Game Theory? |
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Definition
-In the absence of a dominant strategy, look at the game from your rivals perspective
-use knowledge in advance, think how your rivals play and optimize. |
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Term
| What is a NASH EQUILIBRIUM in Game Theory? |
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Definition
-a set of strategies where no player can improve his or her payoff by unilaterally changing their strategy, given their rivals strategy.
-Everyone is satisfied (each player does not have regrets) |
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Term
| What is a NORMAL FORM GAME in Game Theory? |
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Definition
-a representation of a game that reveals the players, their possible
strategies, and the resulting payoffs
-simultaneous move, (one-shot game)
-There is no time element
-cannot see what rival is doing
Low price is pricing just higher than marginal cost
-pricing above marginal cost
-Payoffs to Player 1 is listed first then Payoffs to Player 2 is listed second |
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Term
| What Acts did the US pass to make it illegal to try to monopolize a market? |
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Definition
Sherman Act (1890)
Clayton Act (1914) |
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Term
| What did the Sherman Act (1890) do? |
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Definition
| -makes monopolizing a market, cartels, and other collusive arrangements illegal |
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Term
| What does the Clayton Act(1914) do? |
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Definition
-It makes price discrimination illegal, and also targets M&A activity that lessens competition
-Victoria Secret was brought to court and the court ruled that he was Acting in good faith, they said it was adding a coupon, they said they were reaching out to the demographic |
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Term
| Who looks at the Mergers and Aquisitions (M&A) activity? |
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Definition
-Department of Justice
-They look at teh M&A activity based on its potential effect on industry competition |
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Term
| What 2 thisng does the Department of Justice use to see the sales level concentrationas an indication of the level of competition? |
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Definition
-The 4 Firm Concentration Ratio(C4)
-The Herfindahl-Hirshman Index(HHI) |
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Term
| How does the Herfindahl-Hirshman Index (HHI) work? |
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Definition
-The sum of squared market shares of firms in an industry multiplied by 10000
-If the HHI is above 1800, it is bad, it signals an uncompetitive industry |
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Term
| How does the 4-Firm Concentration Ratio(C4) work? |
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Definition
It is the fraction of industry sales that goes to the four largest firms in the industry.
-If the C4 is close to 1, the market is not competitive |
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Term
| What does competition do for a firm? |
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Definition
| It leads to 0 long run economic profit |
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