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Economics > Micro > Flashcards

Micro Flashcards

1
Q

Posner

A

(2003)

Cartels can cause price increase of between 30% (sugar) and 100% (rubber), causing social costs (as a percentage of industry sales) of 35% (sugar) to 75% (rubber).

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2
Q

Likelihood of collusion factors (8)

A 
8, 5 with models.
discount rate
# Firms 
Sales frequency
Ease of detecting cheating
Cost asymmetry
Multimarket contact
Leniency Programmes
Coordination difficulties
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3
Q

Connor

A

(2003)

Median number of cartel participants is 5. 77% have less than 6.
Supports the Bertrand # firms argument.

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4
Q

Cabral

A

(2000)

Danish authorities gathered and published concrete prices. Average prices rose by 15-20% in less than a year, with lower variance.
Supports the ease of detection argument.

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5
Q

Rees

A

(1993)

Two firms, British Salt and ICI Weston Point.
British Salt had greater market share and lower costs.
Homogenous good, no prospects of entry.
17 price changes in ten years (1974-1984). Weston Point (the smaller firm) led with price increases from 81-84.

Rees finds that collusive outcomes sustianed: punishment significant enough and threat of punishment credible. Interestingly, smaller firm is price leadrer.

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6
Q

Measuring market power

A

Lerner Index

L = (Price - MC)/Price
What is L for monopoly? For Cournot? Perfect competition?

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7
Q

Measuring market concentration

A

Herfindahl Index

H is the sum of squared market shares. WHAT IS THE EQUATION?
What is H for monopoly? For oligopoly? Perfect competition?

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8
Q

CRRA formulae

A

= CRRA * Y

with two other equivalent forms.

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9
Q

CARA formula

A

A(y) = - U’’ (y) / U’ (y)

REMEMBER THE NEGATIVE

For small gambles, r(y) is approx. by 1/2A(y)variance

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10
Q

Baye and Morgan

A

(1999)

In the absence of a finite choke price, i.e. firms can raise prices indefinitely, there is a Bertrand-Nash equilibrium with P>C and positive profits.

I.e. Can have Bertrand with positive profits. Other possibility for this is Bertrand with diffrentiation.

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11
Q

Nash Equilibrium

A

Set of strategies such taht each player’s strategy is a best response to the other player’s.

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12
Q

Certainty Equivalent

A

U bar = U ( Ycertainty)

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13
Q

4 Conditions for GCE

A
  1. Households max utility subject to their budjet constraints
  2. Firms max profit subject to production function
  3. Profit is distributed to households according to shareholdings
  4. Supply = demand for each good
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14
Q

First Theorem

A

GCE is Pareto efficient.

Proof: At equilirium, MRS = price ratio for both consumers and firms.

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15
Q

Second Theorem

A

Assume preferences and production sets are convex (!). Then an Pareto efficient allocation can be achieved as a GCE with appropriate initial endowments.

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16
Q

5 Duopoly assumptions

A
  1. Two firms
  2. One shot
  3. HOMOGENOUS GOODS
  4. Linear inverse market demand. Q = Q1 + Q2
  5. Cost functions with CONSTANT MC and no fixed costs
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17
Q

Bertrand with Diffrentiation equations

A 
q1 = a - bP1 + g P2
q2 = a - bP2 + g P1
18
Q

Preference ordering assumptions

A

Complete

Transitive

19
Q

Adoption Game

A

asdf

20
Q

Matching Pennies

A

asdf

21
Q

Prisoner’s dilemma

A

ads

22
Q

Bertrand with Diffrentiation assumptions

A

b > 0
g > 0
b > g
a > c(b-g)

23
Q

Define Subgame perfect

A

A strategy profile is a subgame perfect equilibrium if it represents a Nash equilibrium of every subgame of the original game.

24
Q

Minmax Punishment

A

Worst one player can do to the other, given that the other player responds optimally.

25
Q

Folk theorem

A

Any reasonable payoff pair which gives each player at least their minmax payoff can be supported as a Nash equilibrium of a infinitely repeated game if discount rate is sufficiently close to one (firms are patient).

26
Q

Lerner Index Equation

A

L = (Price - MC)/Price

27
Q

Herfindahl Index equation

A

Sigma [ (Si)^2 ]
Si = qi / Q

Si is simply market share

28
Q

Starting point for all infinite collusion games.

A

Profit from deviating =< Discount rate adjusted profit from not deviating

29
Q

Maths Definition of Nash Equilibrium

A

Notes

30
Q

Define a market

A

US Department of Justice Guidelines 1992:

A market is the minimal set of products (over product and geographical space) over which a hypothetical monopolist would find it profitable to raise price (from the non-cooperative level)

31
Q

Cellophane Fallacy

A

any profit-maximizing firm will set its prices at a level where demand for its product is elastic. Therefore, when a monopolist sets its prices at a monopoly level it may happen that two products appear to be close substitutes whereas at competitive prices they are not. In other words, it may happen that using the SSNIP test one defines the relevant market too broadly, including products which are not substitutes.

32
Q

Introduction of SSNIP test into DOJ Guidelines

A

1982

33
Q

European Comission official adoption of SSNIP

A

1997

34
Q

Define market power

A

Ability of a firm to raise prices above marginal cost

35
Q

UK Merger Policy

A

UK: merger disallowed if it would lead to a ‘substantial lessening of competition’ (Enterprise Act 2002)

36
Q

Arrow’s impossibility therem

A

UPID

Unrestricted domain: works for all possible individual preferences.
Pareto Principle
Independence of irrelevant alternatives
non-Dictatorship

37
Q

Incentive Compatability

A

What is the math equation? This is needed for A.

Choose effort levels and wage such that the agent wants to choose effort that maximises profit

38
Q

SSNIP Test Steps

A

Take one good, say A, find price elasticity for it. If it is inelastic (<1), it is a market.
If not, take A + B, where B is the good with highest cross-price elasticity with A. Repeat test. If <1, then this is the market.
Repeat.

39
Q

Diversion ratio

A

Farell and Shapiro

Assume n>3 and firms select prices non-cooperatively
Firm A will increase its price in a merger with B if

B’s pre-merger margin* Diversion RatioAB > Fall in MCA

where diversion ratio is fraction of A’s sales lost that go to B.

40
Q

Risk Premium

A

The maximum amount of money that a risk-averse person would pay to avoid taking a risk.

Mathematically, E ( Y ) - certainty equavialent

41
Q

Pareto Efficient

A

An outcome is pareto efficient if there is no other feasible outcome Parto superior to it.

42
Q

Pareto Superior

A

B is pareto superior to A if no one finds B worse than A and at least one person finds B strictly better

Economics (4 decks)

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