3101 pt 2 Flashcards
monopoly
Market with only one seller.
monopsony
Market with only one buyer.
market power
Ability of a seller or buyer to affect the price of a good
Lerner Index of
Monopoly Power
Measure of monopoly power calculated as excess of
price over marginal cost as a fraction of price.
L= P-MC/P = -1/Ed
What 3 factors determine a firm’s monopoly power/ elasticity of demand?
- The elasticity of market demand. Because the firm’s own demand will be at least as elastic as market demand, the elasticity of market demand limits the potential for monopoly power.
- The number of firms in the market.
- The interaction among firms - Even if only two or three firms are in the market, each firm will be unable to profitably raise price very much if the rivalry among them is aggressive, with each firm trying to capture as much of the market as it can.
If there is only one firm—a pure monopolist—its demand curve is…
…it is the market demand curve.
barriers to entry
Condition that impedes entry by new competitors.
- Patents, copyrights, and licenses
- Economies of scale may make it too costly for more than a few firms to supply the entire market.
rent seeking
Spending money in socially unproductive efforts to
acquire, maintain, or exercise monopoly
natural monopoly
Firm that can produce the entire output of the market at a
cost lower than what it would be if there were several firms
monopsony power
Buyer’s ability to affect the price of a good.
oligopsony
Market with only a few buyers.
antitrust laws
Rules and regulations prohibiting actions that restrain, or are likely to restrain, competition.
parallel conduct
Form of implicit collusion in which one firm consistently
follows actions of another.
predatory pricing
Practice of pricing to drive current competitors out of business and to discourage new entrants in a market so that a firm can enjoy higher future profits.
price discrimination
Practice of charging different prices to different
consumers for similar goods.
-used for vapturing even more of the CS
reservation price
Maximum price that a customer is willing to pay for a good.
first degree price discrimination
Practice of charging each customer her reservation price.
second-degree price
discrimination
Practice of charging different prices per unit for different
quantities of the same good or service.
third-degree price discrimination
Practice of dividing consumers into two or more groups with separate
demand curves and charging different prices to each group.
Perfect price discrimination:
profit from producing and selling an incremental unit is the difference between demand and marginal cost. pg 17
block pricing
Practice of charging different prices for different quantities or “blocks” of a good.
variable profit
Sum of profits on each incremental unit produced by a firm; i.e., profit ignoring fixed costs.
If third-degree price discrimination is feasible, what price should the firm charge each group of consumers?
- Total output should be divided between the groups so that the MR is the same for each group
- Total output must be such that the MR for each group of consumers is equal to the marginal cost of production.
pg 34 example
-the higher price will be charge to the people with the lower price elasticity!
What is monopolistic competition, and what are 2 key features?
Market in which firms can enter freely, each producing its
own brand or version of a differentiated product.
- product differentiation - sell products that are highly substitutable for one another but not perfect substitutes.
- There is free entry and exit (no barriers to entry/exit)
oligopoly
Market in which only a few firms compete with one another, and entry by new firms is impeded(barriers).
- strategic behavior (how do I think the other firms
will behave?)
- Nash equilibrium
cartel
Market in which some or all firms explicitly collude, coordinating prices and output levels to maximize joint profits.
Nash equilibrium
Set of strategies or actions in which each firm does the best it can given its competitors’ actions.
or
Each firm is doing the best it can given what its competitors are doing.
duopoly
Market in which two firms compete with each other
Cournot model
Oligopoly model in which firms produce a homogeneous good, each firm treats the output of its competitors as fixed, and all firms decide simultaneously how much to produce.
reaction curve
Relationship between a firm’s profit-maximizing
output and the amount it thinks its competitor will
produce.
Cournot equilibrium
Equilibrium in the Cournot model in which each firm correctly assumes how much its competitor will produce and sets its own production level accordingly.
Stackelberg model
Oligopoly model in which one firm sets its output before
other firms do
Bertrand model
Oligopoly model in which firms produce a homogeneous
good, each firm treats the price of its competitors as
fixed, and all firms decide simultaneously what price to
charge.
payoff matrix
Table showing profit (or payoff) to each firm given its
decision and the decision of its competitor
noncooperative game
Game in which negotiation and enforcement of binding
contracts are not possible.
prisoners’ dilemma
Game theory example in which two prisoners must
decide separately whether to confess to a crime; if a
prisoner confesses, he will receive a lighter sentence and his accomplice will receive a heavier one, but if neither confesses, sentences will be lighter than if both confess.
externality
Action by either a producer or a consumer which affects other producers or consumers, but is not accounted for in the market price. (exhaust emissions, vaccinations)
marginal social cost/benefit
Sum of the marginal cost of production and the
marginal external cost(from externalities).
Coase theorem
Principle that when parties can bargain without cost and to their mutual advantage, the resulting outcome will be efficient regardless of how property rights are specified.
nonrival good - nonexclusive good - public good
nonrival good:Good for which the marginal cost of its provision to an additional consumer is zero
nonexclusive good:Good that people cannot be excluded from consuming, so that it is difficult or impossible to charge for its use.
public good:Nonexclusive and nonrival good: The marginal cost of provision to an additional consumer is zero and people cannot be excluded from consuming it.
adverse selection
Form of market failure resulting when products of different qualities are sold at a single price because of asymmetric information
moral hazard
When a party whose actions are unobserved can affect the probability or magnitude of a payment associated with an event.
(Examples:
- insurance fraud
- shirking on the job when employer cannot monitor workers)
market signaling
Process by which sellers send signals to buyers conveying information about product quality.
Example: education for employers
Which formula can we use as a rule of thumb for pricing by a monopolist?
MC/1+(1/Ed)
