Industrial organization perspective 2 Flashcards
Explain the Cournot-Nash Model
- A static (one period simultaneous move) model where actors compete for quantity
- Each firm believe that output of rivals will remain constant if they change own output
(- Barriers to entry are present
- Few firms and many customers
- Firms can produce either homogeneous or heterogenous products)
Explain the Stackelberg Model
Firms competing for quantity just like in the Cournot model. However, here there is a leader who selects a quantity that maximizes profits and a follower that follows a reaction curve.
(This is a dynamic game where firms only interact once)
1. Calculate follower’s reaction function
2. Put reaction function in leaders price function
Explain the Bertrand Model
Firms compete over price where price equilibrium becomes equal to marginal cost.
1. Firm 1 and firm 2 has equal output
2. Firm 1 lowers price by 1 which gives them the total demand
3. Firm 2 conquers this by lowering price to 1 – firm one price
4. This goes back and forth until P=MC (perfectly competitive)
(It thus assumes that if P does not equal MC then there are incentives to lower price and get the whole market)
What’s Perfect Collusion?
When the firms are producing the joint profit-maximizing output. However, both parties have incentives to cheat
Describe a Tit-for-tat strategy
- Start by cooperating the first round
- In every following round, play the strategy played by the opponent in the previous round
(this could be a solution to the prisoners dilemma)
Explain Limit Pricing
Assumes that rational firms will maximize profits in the long run rather than the short run
This means that they would rather charge a low price today to deter entry than charge a high price that attract entry
(However, this has been heavily critizised by Game Theory)
Explain Predatory Pricing
Assumes a monopolist maximizes profit until an entry occurs, and after an entry, the monopolist expands output aggressively and cuts price, so the entrant suffers economic loss
(of course the monopolist does that as well)
Explain Product Proliferation
A strategic decision to prevent entrants by creating brands to fill every available product niche
What six strategic methods are proposed for maintaining long-run market dominance?
- Limit Pricing
- Predatory Pricing
- Creating excess capacity
- Advertising
- Learning by doing
- Product proliferation
(Lobbying)
Explain how creating excess capacity is a method for maintaining long-run market dominance
When the monopolist moves first and selects a level of capacity, then the potential entrant decides whether to enter
How can increased advertising be used as a method for maintaining long-run market dominance?
It can either have a positive or negative effects on profits. However, advertising creates brand loyalty which forces entrants to do the same
What’s Game theory?
The study of how independent decision makers make choices
What’s the different information structures in game theory
Perfect / Imperfect
Complete / Incomplete
Symmetric / Asymmetric
Certain / Uncertain
What is nature referred to in game theory?
Nature, a player of random actions are sometimes required for a game. For example, nature can decide whether one of the players will always take the same action or vary its actions.
What’s a Dominant strategy?
A strategy that outperforms any other strategy no matter what strategy opponent selects
What’s a Nash equilibrium?
A place in the game where both players are doing the best they can when given the choice of the opponent (games without a dominant strategy can have several)
What’s a Zero-sum game?
Games where one player’s gain always is matched by the others loss. The dominant solution to zero-sum games is a minimax strategy
What’s the difference between static and dynamic games?
Static – players move simultaneously
Dynamic – players take turns
What’s a Dominated strategy?
A strategy that is always worse than some other strategy. It can thus be eliminated as a possible solution
What’s a Mixed strategy?
Each player randomly selects its actions with given probabilities that maximize its expected payoff
Explain Price discrimination
When a firm charges either different customers different prices for the same product supplied with identical costs or different consumers the same price even though cost of supplying varies. This can be divided into first degree (perfect discrimination), second degree, and third degree
Explain Adverse selection
Refers to any situation where products of different qualities are sold at the same price because buyers or sellers do not have sufficient information to determine the true quality of the products
What’s Double marginalization?
Is referred to when there are monopolies in both vertical stages. Which hurts both the retailer and the consumer since there is going to be a double monopoly markup.
(With a deadweight loss that increases for each stage there is a monopoly)
What are the three common vertical restraints?
Franchise fees
Resale price maintenance agreements
Exclusive dealing
What’s foreclosure?
When downstream firms have difficulty finding suppliers or upstream firms have difficulty finding buyers
What are the advantages of vertical integration?
- Reduces transaction costs
- Solves potential economic problems (double marginalization, insufficient presale service, inefficient input substitution)
