Chapter 12: Managerial Decisions for Firms with Market Power Flashcards
consumer lock-in
High switching costs make previous consumption decisions very costly to change.
Lerner index
A ratio that measures the proportionate amount by which price exceeds marginal cost:
marginal revenue product (MRP)
The additional revenue attributable to hiring one additional unit of the input, which is also equal to the product of marginal revenue times marginal product, MRP = MR × MP.
market definition
The identification of the producers and products that compete for consumers in a particular geographic area.
market power
A firm’s ability to raise price without losing all sales.
monopolistic competition
A market consisting of a large number of firms selling a differentiated product with low barriers to entry
monopoly
A firm that produces a good for which there are no close substitutes in a market that other firms are prevented from entering because of a barrier to entry.
network externalities (network effects)
When the benefit or utility a consumer derives from consuming a good depends positively on the number of other consumers who use the good.
strong barrier to entry
A condition that makes it difficult for new firms to enter a market in which economic profits are being earned.
switching costs
Costs consumers incur when they switch to new or different products or services.
total marginal cost curve (MCT)
Horizontal summation of all plants’ marginal cost curves, which gives the addition to total cost attributable to increasing total output (QT) by one unit.
2 ways to determine geographic dimensions of a market
- % of sellers to buyers outside the market
- % of sales from sellers outside the market
LIFO, LOFI
cross-price elasticity of demand
A measure of the responsiveness of quantity demanded to changes in the price of a related good, when all the other variables in the general demand function remain constant.
7 common barriers to entry
- government (patents, licenses)
- economies of scale (can’t create enough output to see cost benefits)
- essential input barriers (one firm controls a crucial input for production)
- brand loyalties (customer allegiance)
- consumer lock-in (high switching costs)
- network externalities (benefit dependent on others use)
- sunk costs (high entry costs harder to earn profit)
Economies of scope
focus on the average total cost of production of a variety of goods.
