Notes for Final
Oligopoly - small number of firms, usually 2-12. difficult to enter market.
High degree of interdependence among firms, similar or differentiated product.
BARRIERS TO ENTRY
economies of scale
control over key inputs to production
firms base decisions on what other firms are doing.
game must have players, rules, payoffs, strategies
Two players: Firm 1 and 2
Strategies: discount or no discount
Rules: each player chooses strategy simultaneously, without knowledge of the other’s chosen strategy
neither firm discount: splits market
both discount: split market and sells more
1 discount and 2 doesn’t: 1 will sell a ton and 2 won’t sell hardly any If you want to learn more check out What does altruistic behavior mean?
2 discount and 1 doesn’t: same thing
circle and square in the same box. situation where each player chooses best strategy for them. If you want to learn more check out What is the chemical symbol of nitrogen?
It is possible to have two nash equilibrium.
A strategy that firm never plays is called a dominated strategy. A strategy that a firm always plays is called a dominant
One player moves first; this is done with a game tree.
Solution should be written like this:
“When firm 1 moved first, Firm 1 Plays B and firm 2 plays X”
First Mover Advantage: When a firm gets a higher payoff when it moves first.
Limit Pricing -
You own the only coffee shop in town
You hear a new entrant is coming in We also discuss several other topics like The symbol for the element sodium is what?
Do you lower price in advance of new entrant, hoping to keep him out of market?
will the entrant enter anyway?
Bertrand Model: One firm reacts to the price that another firm is charging
Cournot Model: One firm reacts to the quantity of output that another firm si producing
Dominant Firm Model: A single firm sets the price in a market and the competitive fringe must match
Cartel Model: group of firms that acts as a single firm regarding decisions
Price Collusion - Agreement among firms to set the price at a certain level. implicit and explicit
Utility - Satisfaction/Happiness
Utility = putting a number on it… “A filet from Ruth’s steakhouse: 100”
Diminishing Marginal Utility - as you consume more units of a thing.. the amount if utility decreases per unit.
1. buy the thing that gives you the biggest MU/P
2. Since MU changes as you consume more, but price doesn’t, the MU/P will change as you buy more Don't forget about the age old question of Transmission genetics means what?
3. If you hit the point where MU/P is equal between the two choices, you’ve reached a situation where you can’t make yourself better off by changing.
Indifference Curves and Budget Constraints
Set of combination of goods that gave the same amount of utility. Week 16
If we can get to prized happiness consuming only one of two products only, they are substitutes. If you need to consume both products to reach the happiness you desire, than they are complements.
Indifference Curves can’t cross each other.
Budget Constraint - All the combinations you can afford is graphed and called the budget line. All the area below this line is called the opportunity set.
Pricing Strategy or Price Discrimination:
Law of One Price - Identical products should sell for the same price everywhere.
Arbitrage - Buy low and sell high
Transaction Costs - associated with the act of buying or selling. Law of one price holds only if transaction costs are zero. Transaction costs are never zero.
Price Discrimination - charging two different prices to two different people for the same product.
Three necessities to price discriminate:
4. firm must possess some sort of market power. If you want to learn more check out What are the characteristics of living things?
5. consumers must have different willingness to pay and firm knows this 6. firm must be able to segregate customers into groups and prevent reselling.
Three types of price discrimination
1. First Degree - every customer is charged exactly what he or she is willing to pay. (Perfect)
2. Second Degree - Price per unit varies depending on how many units you buy.
3. Third Degree - Customers are spot into groups and each group is charged a different price
Maximizing Profits Using 3rd Degree Price Disc:
1. right quantity to produce overall
2. right quantity in each market
3. Prices in both markets.
Level of overall output:
MR in Market 1 = MR in Market 2 = MC
Two-Part Tariff - Customer pays one price for the right to buy as much of a related good at another price.
PUT MARK UP ON THE INELASTIC THING
1. Monopoly is the firm that is the only seller of a good/service that doesn’t have a close _____. We also discuss several other topics like Why does methylation turn dna into heterochromatin?
d. none of the above’
2. Which of the following is incorrect when you compare the monopolist with the firm in the perfectly competitive market? a. monopolist charges a higher price
b. monopolist produces less output
c. monopolist produces deadweight loss
d. all of the above are correct
3. An automobile company and a tire company merged. This is an example of a _____________.
b. vertical merger
c. horizontal merger
d. none of the above
Company Market Share
4. What is the four-firm concentration in this market? a. 52
5. Dell and Acer are trying to merge. What would you expect regarding this merge?
a. A merge will be approved with no challenge
b. A merge may be challenged
c. A merge will be challenged
d. None of the above
6. According to class, price discrimination is defined as charging
_____ price for the ______ product.
a. same, different
b. same, same
c. different, different
d. different, same
7. Furniture stores often set prices higher and let their sales staff offer price discounts depending on a customer’s willingness to pay. This pricing strategy is an attempt to implement: a. 1st degree price discrimination
b. 2nd degree price discrimination
c. 3rd degree price discrimination
8. Which of the following is not a requirement of third degree price discrimination?
a. producer must have market power
b. consumers are able to resell goods
c. producer can differentiate customers by price elasticity of demand
d. none of the above
9. Indifference Curves can’t cross each other.
10. Which model is present: A firm reacts to the PRICE that another firm is charging.
c. Dominant Firm