Micro4 theory Flashcards
Perfect price dicsrimination
P=MC
CS = 0
Preference-based (neoclassical model)
Two different consumers, two different demand functions, they value product differently.
Naivete Price Discrimination
Naive Consumers demand more due to a mistake, and not due their actual preferences.
Sophisticated Consumers are the same low-value consumers in the previous model
Bertrand paradox
End up in same eq. as for perfect competition (p = MC)
Facilitating collusion
collusion gets easier as discount factor δ gets higher also, if
(1) there is no uncertainty (about demand, prices, quantities, . . .)
(2) firms are symmetric (e.g. costs, discount factors)
(3) there is multi-market contact
(4) firms share information
rember that the higher the critical discount factor collusion harder
Concentration of industry
Concentration should be higher in industries where economies of
scale are larg
Why firms aren’t the same size in reality
firms may not have access
to the same technology:
* (lower MC), it can gain a first-mover advantage
* Compunded by moving down the learning curve
different market structure
- coordination failures (eg. market only largre for one)
- forecasting mistakes (eg. overestimate demand)
Endogenous entry cost
empirically advertising intensity differs across industries, relationship between market size and concentration should be flatter with higher advertising intensity
intensity competion of entry
Bertrand extreemely competitive (one firm enters)
the higher intensity of competition the more concentrated the market
efficient entry
planner in general does not want super high n, cause of duplication of fixed costs
* cournot entry is excessive
* bertrand entry is insufficient
Regulate entry
- Consumer surplus: increases via lower prices
- Business stealing: total profit increases by less than amount of entrant
For moderate price reductions second effect outweighs the firts -> regulation (imposing licensing fees)
Barry & Waldfogel
- entry is socially excessive
- deadweight loss –> duplication of station operating costs
- advertiser if social optimum however would pay higher prices
Effects on insiders profit
- Fixed cost savings
- Marginal cost savings
- Less competition
- Two profits tuned into one
Effects on outsiders profit
- Fewer competitors
- Tougher competition
Benefit from merger
Lower marginal cost : price ↓.
Less ccompetition : price ↑.
If c′ = c, the outsiders benefit from the merger, because M reduce their
output, so price ↑.
if marginal-cost efficiencies are strong, the outsiders are hurt by the merger.
Differientated bertrand competition
Always profitable
Merger waves
- Exogenous causes: deregulation
- Endogenous causes: a merger between two big firms in the
industry may make it necessary for others to keep pace
Allowing merger?
authorities must weigh:
* insiders (expect to gain)
* outsiders may gain or lose
* consumers tend to lose
if no efficiency gains , mergers are (almost always) welfare-reducing
assessing efficiency gains from merger
- cost efficiencies hard to observe
- caution in assessing claims from both insiders and outsiders
- insiders incentive to overstate efficiency gains
- when merger leads to price decrease –> outsiders worse off
- outsiders call for merger blocked –> might signal merger is welfare-enhancing
collusion and remedies
mergers generate favorable conditions for collusion
(reduce number firms, increasing symmetry)
REMEDIES:
* structural : reallocate property rights –> merger sell assets
* behavioral: constrain property rights–> merger commmit to certain practices
Entry
- entry rates are higher following a merger
- A merger is akin(similar) to an exit. Thus (if barriers to entry are low)
restoring equilibrium may require entry of a new firm → self-correcting dynamics
Entry deterrence
Sequential game , Incumbent receives more than the Cournot profit due to its first-mover advantage.
stackelberg competition
Incumbent must make irreversable capacity investments (strong commitment)
Predatory priciing
Price so low to zero profit,
chicago school not worry low prices can’t go forever. (no money to stay then should borrow)
Long pursue of predatory pricing
Bank loan depends on prob p
p probability bank refuses to loan
Double margialization
U markup on c to determine w
D markup on w to determine p
Both firms and consumers would benefit from correcting inefficieny
Retailer investments
for example: pre-sale trained staff (advice)
-> free rider problem other rretailers
Vertical foreclosure
If contracts were publicly observable,
U can sell to each firm a quantity qm/2 at a wholesale price w = pm.
If no observable, D2 prevede che U vuole incularlo non accetta offer, so U gets less than monopoly profits (no more than Cournot profits)
pm, qm monopoly price & quantity
product differientiation
hotelling model flexible location -> position in the middle. 1/2 (principle of minimum differentiation)
welfare would be max. at location 1/4 and 3/4
Innovation
innovation reducse cost from c0 to c1
- Drastic p(c1) < c0 : the innovator is uncostrained by competition
- Non-drastic p(c1) >c0 : costrained by competition (can’t behave like monopolist without being undercut)
