Micro 5: IO Flashcards
What is Bertrand competition?
Under Bertrand competititon, firms produce identical products and choose prices at which to sell.
Why, in Bertrand competition, do firms set price equal to marginal cost?
Suppose some firm is setting p1>c. Firm 2 can undercut them and offer p_1-0.01, take all their profits and improve their payoffs. This can happen until p1=p2=c; there is now no incentive to undercut, as charging below c results in losses. Therefore, the Nash equilibrium is (c,c)
What is Cournot competition?
In Cournot competition, firms with identical products instead choose a quantity to supply to the market. Prices are determined by the demand curve.
What is the difference between horizontal and vertical differentiation?
Vertical differentiation = goods vary in quality. There is an order in which we can place these goods from inferior to superior; if all are sold at the same price, everyone will choose the higher quality variety.
Horizontal differentiation = goods vary in dimensions other than quality and are imperfect substitutes. Eg colour, size, design, etc.
What is collusion?
Collusion is the presence of explicit or tacit anti-competitive agreements between rivals to limit competition and harm consumers.
Why is collusion harder to sustain when there are many firms?
The critical discount factor is increasing in n.
What other factors make collusion easier to sustain?
- Frequent sales
- Multi-market contact
- Easy to detect collusion
- Meeting competition clauses
If there are no efficiency gains, why do mergers make consumers worse off?
Direct effect: merged firm has increased market power and can charge above competitive prices.
Indirect effect: increases the likelihood of tacit collusion.
What is the Herschmann-Herfindahl index?
“The sum of the squared market shares”. It is a measure of market concentration: under monopoly it is 1, under Cournot/Bertrand competition it is 1/n, under perfect competition it is zero.
What is the hypothetical monopolist test?
list test?
It is a test used in market definition. Suppose there exists a hypothetical monopolist that is the only seller of A and B. Would they find it profitable to increase prices above the current level?
If not, because buyers would switch to other substitutes, the considered market is not the whole market and should be broadened. If so, this is a market.
Why can vertical mergers increase consumer welfare?
Solves the double-markup problem - if a monopolist sells to another monopolist who sells to a consumer, consumers are made better off if the two monopolists merge.
