Term
| When does market power exist? |
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Definition
| When firms are able to restrict competition to sustain prices above marginal cost |
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Term
| How can market power exist with multiple firms? |
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Definition
| If products are differentiated and/or markets are segmented (i.e. firms have loyal customers) |
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Term
| What is the manager's job when it comes to gaining market power? |
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Definition
| To attempt to sustain any factors which limit competition |
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Term
| Market strategies to restrict competition |
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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 a monopoly). |
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Term
| Non-market strategies to restrict competition |
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Definition
Patent or copyright protection.
Trade regulations.
Government Licensing
Government or NGO certification. |
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Term
| Where does the profit maximization sales target occur? |
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Definition
| Where marginal revenue equals marginal cost |
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Term
| Describe profit maximization in terms of MR and MC |
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Definition
If MR>MC then the firm could make a profit by selling one more unit.
If MC>MR then the firm would lose money on selling the unit. |
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Term
| How is price found given the optimal sales target? |
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Definition
| Price is found as a markup over cost, where the markup factor depends on the demand for the product. |
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Term
| Describe how a firm with high market power sets prices and efficiency level |
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Definition
| Price higher and output lower than efficient levels. |
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Term
| Perfect Price Discrimination |
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Definition
| Each consumer is charged a price equal to her willingness to pay |
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Term
| Effects of perfect price discrimination |
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Definition
No inefficiency occurs, but all market surplus goes to the producer (CS = 0).
Profits are increased relative to using a single price. |
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Term
| Imperfect Price Discrimination |
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Definition
| Groups of consumers are charged different prices |
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Term
| The effects of imperfect price discrimination |
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Definition
Profits are increased relative to using a single price, but not as high as using perfect price discrimination.
Consumer surplus is decreased, but consumer surplus is not equal to zero. |
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Term
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Definition
These are the decision makers within the game.
Usually within firms, government, or interest groups. |
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Term
| Strategies of Game Theory |
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Definition
These are the decision choices.
Price, Products, Advertising, Campaigning, lobbying, Regulation, etc… |
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Term
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Definition
These are the outcomes of the decision choices.
Usually in terms of profits or losses. |
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Term
| Dominant Strategy of Game Theory |
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Definition
| A strategy that results in the highest payoff for a player regardless of what strategy their rival plays. |
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Term
| Secure Strategy of Game Theory |
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Definition
| In absence of a dominant strategy, play the strategy that guarantees the highest payoff given the worst payoff. |
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Term
| In the absence of a dominant strategy, who's perspective should a company look at the situation? |
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Definition
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Term
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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. |
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Term
| What is a normal form game? |
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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, games. |
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Term
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Definition
| A representation of a game that summarizes the players, the available information, the available strategies, the resulting payoffs, and the sequence of moves. |
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Term
| How does the government promote competition? |
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Definition
| The Department of Justice uses industry sales concentrations as an indication of the level of competition. |
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Term
| The 4-Firm Concentration Ratio |
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Definition
The fraction of industry sales that goes to the four largest firms in the industry.
A C4 closer to one signals an uncompetitive industry |
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Term
| The Herfindahl-Hirschman Index |
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Definition
The sum of squared market shares of firms in an industry multiplied by 10,000.
An HHI above 1800 signals an un-competitive industry |
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Term
| When should a domestic country export? |
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Definition
When the world price is above the domestic price, the domestic industry has the comparative advantage.
The domestic industry exports to the world. |
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Term
| When should a domestic country import? |
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Definition
When the world price is below the domestic price, foreign producers have the comparative advantage.
The domestic industry imports from the world. |
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Term
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Definition
A tax placed on imports.
-The tariff directly affects the domestic price charged on imports. |
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Term
| What do tariffs result in? |
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Definition
Higher Domestic prices.
Under-consumption in the domestic market.
Over-production by domestic producers.
Less imports to the domestic market. |
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Term
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Definition
A maximum quantity placed on imports.
The quota indirectly affects the domestic price by creating a situation of excess demand. |
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Term
| What do quotas result in? |
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Definition
Less imports to the domestic market.
Under-consumption in the domestic market.
Over-production by domestic producers.
Higher Domestic prices. |
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Term
| What is the difference between a tariff and quota? |
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Definition
Tariffs raise revenue while quotas do not.
However, if quotas are combined with a licensing fee, they can raise revenue. |
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Term
| How can quotas result in more inefficiency? |
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Definition
If the license fee does not take away the price premium in the domestic market (PQ—PW), foreign producers will have an incentive to lobby to get into the domestic market (to sell at the higher price).
Resources spent on lobbying will lead to the increased inefficiency. |
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Term
| Why do nations adopt trade restrictions? |
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Definition
National Defense Reasons.
-The good is essential for national defense.
Retaliation against dumping.
-Dumping: sale of goods at prices lower than production costs in foreign markets.
Infant Industry Argument.
-New domestic industries need to be protected.
Special Interests Influences.
-Businesses try to gain market power over competitors.
-Businesses try to save jobs and stop creative destruction. |
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Term
| How are imports and exports linked? |
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Definition
Through income creation
- Restrict Imports, and exports will also fall.
- Jobs will be lost in the exporting industries. |
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Term
| What do import restrictions do to the price of inputs? |
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Definition
Raise prices on inputs.
-Jobs will be lost in industries that rely on cheap imported materials. |
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Term
| What happens to jobs with increases in trade restrictions? |
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Definition
Increase
But, this has more workers working in inefficient industries. |
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