Exam 3 Flashcards
monopoly
-industry with a single seller that sells a good for which there are no close substitutes e.g. USPS
in monopolies produce as long as
MR>MC
monopolies - profit maximization
MC=MR
- will charge the highest P willing to pay
- take that Q then go all the way up to the demand curve to find the price
total costs in monopolies
P where the Q intersects the ATC curve
monopolies’ profits
- might not exist
- when do exist will not be competed away
monopolies- price is _____ to MR
greater than MR
MR curve (mathematically)
2 times the slope of the inverse demand curve
-keep y-intercept the same as in inverse D curve
Lerner Index equation
(P-MC/P)=(-1/Ed)
Lerner Index definition
- measure of monopoly power
- % by which its MR (P) exceeded MC
- the higher, the more power
slope=
y intercept/x intercept
price taker
- no market power
- competitive
price maker
- does not have market power
- monopoly
price discrimination
- the practice of charging different prices to difference customers for the same product
- 3 degrees
perfect price discrimination (1st degree)
- charge every consumer the highest price they are willing to pay
- no CS
- no DWL
1st degree price discrimination (monopoly)
CS=A PS=B DWL=C
1st degree price discrimination (competition)
CS=A+B+C PS=0 DWL=0
rent seeking
-try to obtain a monopoly position for yourself so you can get the rents
in perfect price discrimination the MR
=D curve
3rd degree
- you put ppl into different markets and charge a different price per market (segmenting)
- charge a lower price w/markets with greater elasticity b/c Q increases by a bigger % and raises TR
to get customers to reveal themselves
through their elasticities of demand
price sensitive get what price? why?
because they have a higher Ed
segmented profits
exceed those of an unsegmented market
How to find P and Q for both markets without segmenting
- convert to regular demand curve
- add the regular demand curves together
- convert back to inverse and find MR
- set MR=MC to find P
- plug Q into the total demand curve
How to find P and Q and profits for each market with segmenting
- take inverse demand curve
- find MR curve
- set MR=MC
- solve for P
- get Q
- P-MC
- take (P-MC)(profit max. Q)
2nd degree price discrimination
- can’t tell consumer’s demand
- Q discounts
- versioning
- coupons
Quantity discounts
- with lower elasticity of demand, can charge higher price cause so seldomly participate that commission not a big deal
- higher elasticity of demand, charge lower price cause participate often and are sensitive to price
versioning/ price cut margins
- a firm offers diff. product options designed to attract diff. kinds of customers
- will buy what gives them the most surplus
neg. correlating bundling
then bundling will allow company to raise revenues and profits
pos. correlating bundling
bundling doesn’t impact TR and profits
simultaneous games
the participants choose their actions at the same time with out knowing each others actions
repeated games
series of simultaneous games among the same set of actors
sequential games
players take turns making decisions
prisoner’s dilemma
any game where if the players do what is in their own self interest they end up worse off
games of pure strategy
a player chooses an action w/100% certainty
mixed strategy
player chooses a strategy randomly
maximin strategy
used to minimize loss
use what to solve repeated games?
backward induction- start in the last round and determine the outcome then work your way back to the starting point
if there is a definite stopping point in a repeated game then…
there will be no cooperation
grim trigger strategy
start out cooperating but if the other player ever failts to cooperate, will punish the player until the end of time no matter what the other player does
discount rate
how you value the future
- closer to 1=more patient
- closer to 0=more impatient
tit for tat
do what the other person did to you–willing to forgive
how to solve a sequential game
use backward induction
- determine the outcome for the second chooser
- then choose the best outcome for the 1st chooser based on the 2nd chooser’s actions
first mover advantage
if you’re the first mover and you make a commitment it is often seen as credible so have the advantage and achieve goals
