EM 5 - Competition and Differentiation Flashcards
Monopoly
Situation where there is a single firm or producer
Perfectly competitive market
Market characterized by consumer indifference between firms’ products and identical firm cost structures.
Results in zero profits as a result of price wars ending with firms selling at marginal cost.
Competitive firms don’t usually sell at marginal cost because it’s important to consider the cost of loss of inframarginal customers while seeking to acquire marginal customers.
Optimal pricing
Marginal Revenue = Marginal cost
This is the optimal spot for the price-volume tradeoff
(no deadweight loss, but not always profit maximizing I think)
MR and demand for monopolist
MR curve = demand curve for a monopolist
First degree price discrimination
aka Perfect Price discrimination
Setting a different price for each unit of the product, for each consumer where price = WTP.
Eliminates deadweight loss and consumer surplus - producer captures all the value.
Two-part tariffs
Setting per-unit price (usually equal to MC) and charging a fixed fee to capture additional surplus.
Third degree price discrimination
Charging different prices based on observable characteristics - e.g. seniors, children, students
Second degree price discrimination
Self-selection
e.g. bulk discounts, coupons, business class, etc.
Creative design of different versions of a product leads consumers to reveal their preferences to the firm rather than the firm spending effort in trying to figure it out.
Strategy for price discrimination
Firm must be able to prevent buyers with high WTP from purchasing at lower prices, while creating opportunities for buyers with low WTP to engage as well
Price bundling
The pairing of different goods to be sold together.
Price bundling mimics the mechanism of price discrimination.
Most effective when:
i. Customers have different WTP; and
ii. There’s a negative correlation of preferences across customers.
Vertical differentiation
when firms differ in attributes that all customers value similarly - e.g. competing by lowering prices or by creating a product perceived as “better”
Horizontal differentiation
when firms differentiate in attributes that customers value differently - this usually results in customers preferring one firm over another
Effective differentiation
i. On factors that matter either to consumers or suppliers;
ii. Differentiating horizontally, not just vertically; and
iii. Differentiating in ways that are robust to competitor reaction - i.e. how fact can they react?
