6)Competition and Market Power Flashcards
Rules of the game?
-who makes an offer
-Price discrimination
-free entry
-price vs quantity
Does number of firms affect market power or profit?
-depends on rules of the game
What is a monopoly rules of the game?
price = marginal cost x markup factor
take it or leave it offer
no entry
uniform price
Perfect Competition rules of the game?
MC = price
perfect info
free entry and exit
homogenous products
many buyers and sellers
Nash equilibrium?
No incentive to deviate from chosen strategy/action, given strategies of others
best response in response to belief and belief is correct
Types of Bertrand market?
-firms with same marginal cost
-firms with different marginal cost
-loads of firms with different costs
Cournot market?
-Each firm chooses its output (quantity) to maximize profit, taking the output of other firms as given.
-Market price adjusts based on the total quantity supplied by all firms.
What is firms A response to an increase in quantity by firm B in a Cournot market?
-as yb goes up ideal choice of ya goes down, as prices go down
Lerner index?
-what percentage of price is profit
-P-R/P
What happens when n goes to infinity in Cournot market?
-P→R (Price approaches marginal cost)
Two sided market?
-Links to groups together
e.g. Passengers +drivers (uber)
Benefits of two sided market?
-we get a lot of revenue from sellers
-this revenue increase with consumers
-so we lower price to attract these consumers
Second best theory?
-Multiple distortions and friction, removing one can make you worse off
Example of second best theory?
-Monopoly + Externality vs Perfect Competition and Externality
-Lower price and higher quantity, more Externality as more things sold (externality = pollution)
What does Lerner index equal to?
-1/ε
-inverse of price elastic of demand
-more elastic less profitable
