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G202: Topic 5
Market Pwer and Anti-Trust
41
Economics
Undergraduate 2
03/25/2009

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Term
Market power exists
Definition
when firms are able to restrict compteition to sustain prices above marginal cost.
Term
How much power does a monopoly have?
Definition
100% Market power
Term
Can Market Power exist with with Multiple rival firms?
Definition
Yes, multiple rival firms can exist when the products are differentiated and/or are segmented (firms have loyal customers.
Term
How do managers gain market power?
Definition
Managers attempt to sustain any factors which limit competition
Term
Is competition bad for firms?
Definition
Yes competition is bad for firms and leads to 0 economic profit in the Long Run.
Term
Is Collusion illegal?
Definition
Yes, collusion is illegal because numerous companies act as one to set a price of a good within an industry.
Term
What is a Cartel?
Definition
A cartel is a group of businesses form an alliance and act as a monopoly.
Term
What are the strategies in the Market?
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.
Term
Strategies in Government
Definition
-Patent or copyright protection
-Trade regulations
-Licencing or certification requirements
-parable of parking lots
Term
When does the profit maximizing occur?
Definition
MR = MC
Term
Where can the firm make a profit by selling one more unit?
Definition
MR>MC
Term
How would the firm lose money on selling one more unit?
Definition
MC>MR
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.
Definition
More inelastic demand, more markup over costs.
Term
How does a firm with market power set its prices?
Definition
it is set higher than the efficient quantity.
Term
Compared to demand how fast does MR Fall?
Definition
Twice as fast.
Term
What happens when a firm with market power sets prices too high, and output too low?
Definition
Viewpoint of economic effeciency too few units are produced and sold.
Term
What is perfect price discrimination?
Definition
Each consumer is charged a price at their willingness to pay.
Term
Is there a market ineffiency with perfect price discrimintation?
Definition
No but all the surplus goes to the producer. CS=0
Term
What is imperfect price discrimination?
Definition
Groups of consumers are charged at different prices (Victoria Secret).
Term
With imperfect price discrimination, are the segments clear?
Definition
No, the segments are not always clear.
Term
What are the results of Imperfect Price discrimination?
Definition
-The firm's profits are increased.
-Consumer surplus is decreased, but not equal to 0
Term
What are the Three Main parts to Game Theory?
Definition
Players, Strategies, and Payoffs
Term
What are the PLAYERS in Game Theory?
Definition
-decision makers in the game
-usually within firms, governments, or interest groups
Term
What are the STRATEGIES in Game Theory?
Definition
-The decisions firms make
-eg. price product, promotion, advertising, Campaigning, Regulation, etc.
Term
What are PAYOFFS in game theory?
Definition
-The outcomes of decision choices
-usually in terms of profits and losses
Term
Which players select a strategy in a strategy set within game theory?
Definition
-Both players select a strategy.
-Each Player optimizes strategy to maximize payoffs
Term
What does the OBJECTIVE FUNCTION do in Game Theory?
Definition
the OBJECTIVE FUNCTION is to maximize payoffs
Term
What are the Four Main Strategies in Game Theory?
Definition
-Dominant Strategy
-Secure Strategy
-Think Like Your Rival
-Nash Equilibrium
Term
What is a DOMINANT STRATEGY in Game Theory?
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.
Term
What is a SECURE STRATEGY in Game Theory?
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
Term
What is the THINK LIKE YOUR RIVALS STRATEGY in Game Theory?
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.
Term
What is a NASH EQUILIBRIUM in Game Theory?
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)
Term
What is a NORMAL FORM GAME in Game Theory?
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
Term
What Acts did the US pass to make it illegal to try to monopolize a market?
Definition
Sherman Act (1890)
Clayton Act (1914)
Term
What did the Sherman Act (1890) do?
Definition
-makes monopolizing a market, cartels, and other collusive arrangements illegal
Term
What does the Clayton Act(1914) do?
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
Term
Who looks at the Mergers and Aquisitions (M&A) activity?
Definition
-Department of Justice
-They look at teh M&A activity based on its potential effect on industry competition
Term
What 2 thisng does the Department of Justice use to see the sales level concentrationas an indication of the level of competition?
Definition
-The 4 Firm Concentration Ratio(C4)
-The Herfindahl-Hirshman Index(HHI)
Term
How does the Herfindahl-Hirshman Index (HHI) work?
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
Term
How does the 4-Firm Concentration Ratio(C4) work?
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
Term
What does competition do for a firm?
Definition
It leads to 0 long run economic profit
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