ECON Exam 3 Flashcards
rent-seeking behavior
attempts by firms to get special treatment from the government in order to maintain Monopoly control. Increases cost –> profit decreases in short term
An EXCEPTION in Monopoly systems
what does “rent” mean in a general sense?
any payment to a resource above it’s opp cost
Price discrimination
figuring out who you should charge higher or lower prices to in order to max profit
- can charge differently for diff quantities (BOGO) / or for diff groups of ppl (student, senior citizen discounts)
EASIER in a monopoly (less comp) but not required
Price discrimination: requirements
- Have to be able to identify diff groups
2. Have to be able to prohibit resale (ex. A student buying at discounted price, v reselling for much higher)
Price discrimination: 3 types
- Perfect: most extreme, every customer charged a diff price = to their marg benefit
- ex. insurance, cars
- NO DWL
- A perfect price discriminating monopoly produces the same quantity of output as a perfectly competitive market.
- diff prices for diff quantities: less elastic D
- diff prices for diff groups:
natural monopoly
- where it’s cheaper for just 1 firm to produce everything
- The monopolist charges a price below its average cost of production
what are characteristics of monopolistic competition? (4)
- LOTS of firms –> low HHI, CR
- products across firms are a little diff from each other
- diff in price, quality, marketing (advertising + packaging ex. celebrity), location
- Demand is elastic / NOT price-takers / Demand w very low slope [flat] / MR is 2x slope of D curve
- no barriers to entry
monopolistic competition - where is max profit?
- max Prof where MR = MC
game theory - what is the prisoners dilemma?
- 2 suspects, both committed crime, questioned separrately
1. can confess / or deny
what is a cartel?
- a group of firms in an oligopoly that agree to act like a monopoly (able to limit output, raise price, and increase economic profit.)
* ex. drugs, OPEC (oil), - requires repetition and punishment for maintenance (so that people don’t cheat)
what when there’s no dominant strategies?
- coordination game
- game of chicken
- research and development; results are shared (Ex. a new tech is developed, and not patented, other co’s can co-opt it)
monopolistic competition - what is excess capacity?
- occurs when a firm produces below it’s “efficient scale” (min of avg total cost)
- amount by which the efficient scale exceeds the quantity that the firm produces.
- p294
monopolistic competition - what is markup?
- markup is the amount by which price EXCEEDS MARGINAL COST
monopolistic competition - where is economic profit/loss?
- space in between Demand and ATC curves to Y axis (Rectangle)
- if D is above ATC –> PROFIT and viceversa
oligopoly: what is game theory?
- way of studying strategic behavior; used to study oligopoly
oligopoly: game theory - what is a Nash equilibrium?
- Prisoner’s dilemma
- Player 1 makes the best decision based on player 2’s actions, Player 2 makes the best decision based on player 1’s actions
- Nash equilibrium delivers a bad outcome for both players because the best option for both is to confess, and both prisoners confess.
This outcome is worse for both prisoners than if they each denied the crime, which creates the dilemma - there can be more than 1 in a game!
oligopoly: game theory - what is dominant strategy equilibrium?
- Prisoner’s dilemma
oligopoly: game theory - why do firms in a collusive agreement have motive to cheat?
- All firms in a collusive agreement face the same strategies.
Their payoff is high if they all comply, but the payoff to any one firm that cheats is even higher if all the other firms comply.
This motivates each firm to cheat on the agreement.
what is a contestable market?
- A contestable market is a market in which firms can enter and leave so easily that firms in the market face competition from potential entrants.
