Chapters 11, 12, 13 Flashcards
Price Discrimination
occurs when a firm sells same good or service at different prices to different groups of customers
perfect price discrimination
occurs when a firm sells the same good or service at a unique price to every customer
monopolistic competition
type of market structure characterized by free entry, many different firms, and product differentiation
product differentiation
a process that firms use to make a product more attractive to potential customers
markup
difference between the price that firm charges and the marginal cost of production
excess capacity
occurs when a firm produces at an output level that is smaller than the output level needed to minimize average total costs
Oligopoly
form of market structure that exists when small number of firms sell differentiated product in market w/ high barriers to entry
concentration ratios
a measure of oligopoly power present in the industry
-most common measure “four-firm concentration ratio”
duopoly
industry consisting of only two firms
collusion
agreement among rival firms specifies prices each firm charges and quantity it produces
-illegal in US
artel
small group of two or more firms that act in unison
antitrust laws
attempt to prevent oligopolies from behaving like monopolies
mutual interdependence
market situation where actions of one firm have an impact on the price and output of its competitors
Nash equilibrium
occurs when all economic decision-makers opt to keep the status quo
price effect
reflects how change in price affects the firm’s revenue
output effect
occurs when change in price affects the number of customers in market
game theory
branch of mathematics that economists use to analyze strategic behaviors of decision-makers
- determine what level of cooperation most likely to occur
- consists: set of players, set of strategies available, the specification of payoffs for each combination of strategies
- usually represented by playoff matrix
prisoner’s dilemma
occurs when decision-makers face incentives that make it difficult to achieve mutually beneficial outcomes
dominant strategy
exists when a player will always prefer one strategy, regardless of what his opponent chooses
Tit-for-tat
long run strategy that promotes cooperation among participants by mimicking opponent’s most recent decision with repayment in kind
backward induction
game theory is process of deducing backward from the end of a scenario to infer a sequence of optimal actions
decision tree
illustrates all of possible outcomes in a sequential game
Sherman Antitrust Act
(1890) first federal law limiting cartels and monopolies
Clayton Act
(1914) targets corporate behaviors that reduces competition
Predatory pricing
occurs when firm deliberately set their prices below average variable costs w/ intent of driving rivals out of market
network externality
occurs when number of consumers who purchase or use a good influences the quantity demanded
switching costs
costs incurred when a consumer changes from one supplier to another
kinked demand curve
theory states that oligopolists have a greater tendency to respond aggressively to rivals’ price cuts but will largely ignore price increases
price leadership
occurs when a dominant firm in industry sets the price that maximizes profits and smaller firms in industry follow by setting their prices to match price leader
