Micro Econ Final Flashcards
Concentration Ratio
the percentage of the market’s total output supplied by its four largest firms.
the higher concentration ratio….
less competition
Oligopoly
market structure with high concentration ratios
HHI
commonly accepted measure of market concentration, used by Department of Justice.
How to calculate HHI…
square the market share of each firm and then sum the result.
HHI<1000
unconcentrated
1000
moderately concentrated
HHI>1800
concentrated
Transactions increasing HHI by more than 100 do what?
raise antitrust concerns
Game theory
study of how people and firms behave in strategic situations
Collusion
an agreement among firms in a market about quantities to produce or prices to charge
Cartel
group of firms acting in unison
Nash equillibrium
situation in which economic participants interacting with one another each chose their best strategy given the strategies that all others have chosen.
Number of firms in market increase…
price effect becomes smaller
- oligopoly looks more like competitive market
- P approaches MC
- market quantity approaches the socially efficient quantity
Dominant strategy
strategy that is best for a player in a game regardless of strategies chosen by other players
Prisoners’ dilemma
a “game” between 2 captured criminals that illustrates why cooperation is difficult even when it is mutually beneficial
What happens when oligopolies form a cartel in hopes of reaching monopoly outcome?
Prisioners delima
Non-cooperative oligopoly equillbrium
BAD for oligopoly firms: prevents them from achieving monopoly profits
-good for society
Sherman antitrust act (1890)
forbids collusion between competitors
Clayton Antitrust act (1914)
strengthened rights of individuals damaged by anticompetitive arrangements between firms
resale Price Maintenance
occurs when manufacturer imposes lower limit on price retailers can charge
-done to reduce competition
Predatory Pricing
occurs when firm cuts prices to prevent enter or drive a competitor out of the market, so it can charge monopoly
Tying
occurs when manufacturer bundles 2 products together to sell for 1 price
Externality
uncompensated impact of one persons actions on the well being of a bystander
-can be negative or positive
Social Cost
private + external cost
external cost
value of negative impact on bystanders
In the presence of a positive externality the sisal value includes…
private value & external benefit
private value
direct value to buyers
external benefit
value of the positive impact on bystanders
At lower Q…
the social value of additional units exceeds their costs.
At higher Q…
the cost of the last unit exceeds its social value
If negative externality
market quantity larger than socially desirable
If positive externality
market quantity smaller than socially desirable
market based
policies provide incentives so private decision makers make the right decisions on own
Regulation policiesq
affect behavior directly
Corrective tax
tax designed to induce private decision makers to take account of the social costs that arise from negative externality
Ideal corrective tax+
negative externality
Coase theorem
if private parties can costlessly bargain over the allocation of resources, they can solve the externalities problem on their own.
excludable good
person can be prevented from using it
rival good
one persons use diminishes someone elses
free rider
person who receives benefit of good but avoids paying for it
