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Bus-G202 Exam 2 Part 1
Topic 4
35
Business
Undergraduate 2
10/29/2011

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Term
Market Power
Definition
exist when firms are able to restrict competition to sustain prices above marginal cost
Term
Monopoly has....
Definition
100% market power
Term
Market power can exist with multiple firms if...
Definition
products are differentiated and/or markets are segments (loyal customers)
Term
How to gain market power
Definition
The manager must attempt to sustain factors which limit competition
Term
2 Type of Strategies to Restrict Competition
Definition
Market and Non-Market
Term
Market Strategies (4)
Definition
1 Guarding trade secretes
2 Control of an essential resource
3 Exclusive contracts and customer lock-in ( coke on campus, extended cell phone contracts)
4 Collusion (form a cartel and act as a monopoly)
Term
Non-Market Strategies (4)
Definition
1 Patent or copyright protection
2 Trade regulations
3 Government Licensing
4 Government or NGO certification
Term
Profit Maximization occurs when...?
Definition
Marginal Revenue = Marginal Cost
Term
MR>MC
Definition
the firm could make a profit by selling one more unit
Term
MC>MR
Definition
the firm would lose money on selling the unit
Term
More inelastic demand results in
Definition
a higher markup over costs
Term
Given the optimal sales target, price is found as...
Definition
a markup over cost, where the markup factor depends on the demand for the product.
Term
A firm with market power sets prices and output how?
Definition
Sets prices higher and output lower than efficient levels
Term
From the view point of economic efficiency and market power
Definition
too few units are produced and sold, giving up some that have value greater than costs
Term
Perfect Price Discrimination
Definition
Each consumer is charged a price equal to her willingness to pay
Term
Inefficiency and Perfect Price Discrimination
Definition
No inefficiency occurs, but all market surplus goes to the producer
Term
Profits of Perfect Price Discrimination compared to single price
Definition
they are increased
Term
Imperfect Price Discrimination
Definition
Groups of consumers are charged different prices
Term
Imperfect Price Discrimination and Profit
Definition
profits are increased compared to single price but not as high as perfect price
Term
Imperfect Price Discrimination and Consumer Surplus
Definition
Consumer surplus is decreased but is higher than zero
Term
Game Theory: Players
Definition
The decisions markers within the game.
Usually within firms, governments or interest groups
Term
Game Theory: Strategy
Definition
These are the decision choices.
Price, product, advertising, campaigning, lobbying, regulation, etc...
Term
Game Theory: Payoff
Definition
These are the outcomes of the decision choice.
Usually in terms of profits or losses
Term
Game Theory: Dominant Strategy
Definition
a strategy that results in the highest payoff for a player regardless of what strategy their rival plays
Term
Game Theory: Secure Strategy
Definition
in absence of a dominant strategy, play the strategy that guarantees the highest payoff given the worst payoff
Term
Game Theory: Think like your rivals
Definition
in absence of a dominant strategy, look at the game from you rivals perspective
Term
Game Theory: Nash equilibrium
Definition
a condition describing a set of strategies in which no player can improve her payoff by unilaterally changing her strategy, given her rivals strategy
Term
Normal Form Game
Definition
-a representation of a game that reveals the players, their possible strategies, and the resulting payoffs
- Simultaneous-Move, one-shot, games
Term
Dominant
2
1
0
Definition
1
1
0,2
Term
Role of gov't and promoting competition
Definition
-U.S has enacted antitrust policies that make it illegal to attempt to monopolize a market
- The department of Justice uses industry sales concentrations as an indication of the level of competition
Term
Sherman Act
Definition
1890: makes monopolizing a market, cartels, and other collusive arrangements illegal
Term
Clayton Act
Definition
1914: makes price discrimination illegal, and also targets M and A activity that significantly lessons competition
Term
The Department of Justice looks at M&A activity based on....
Definition
its potential effect on industry competition
Term
4-Firm Concentration Ratio (C4)
Definition
1 The fraction of industry sales that goes to the four largest firms in the industry.
2 A C4 closer to one signals an uncompetitive industry
Term
The Herfindahl-Hirshman Index (HHI)
Definition
1 The sum of squared market shares of firms in an industry multiplied by 10000
2 An HHI above 1800 signal an uncompetitive industry
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