Micro4 theory

Question 1

Perfect price dicsrimination

Answer 1

P=MC

CS = 0

Question 2

Preference-based (neoclassical model)

Answer 2

Two different consumers, two different demand functions, they value product differently.

Question 3

Naivete Price Discrimination

Answer 3

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

Question 4

Bertrand paradox

Answer 4

End up in same eq. as for perfect competition (p = MC)

Question 5

Facilitating collusion

Answer 5

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

Question 6

Concentration of industry

Answer 6

Concentration should be higher in industries where economies of
scale are larg

Question 7

Why firms aren’t the same size in reality

Answer 7

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

Question 8

different market structure

Answer 8

• coordination failures (eg. market only largre for one)
• forecasting mistakes (eg. overestimate demand)

Question 9

Endogenous entry cost

Answer 9

empirically advertising intensity differs across industries, relationship between market size and concentration should be flatter with higher advertising intensity

Question 10

intensity competion of entry

Answer 10

Bertrand extreemely competitive (one firm enters)
the higher intensity of competition the more concentrated the market

Question 11

efficient entry

Answer 11

planner in general does not want super high n, cause of duplication of fixed costs
* cournot entry is excessive
* bertrand entry is insufficient

Question 12

Regulate entry

Answer 12

• 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)

Question 13

Barry & Waldfogel

Answer 13

• entry is socially excessive
• deadweight loss –> duplication of station operating costs
• advertiser if social optimum however would pay higher prices

Question 14

Effects on insiders profit

Answer 14

1. Fixed cost savings
2. Marginal cost savings
3. Less competition
4. Two profits tuned into one

Question 15

Effects on outsiders profit

Answer 15

1. Fewer competitors
2. Tougher competition

Question 16

Benefit from merger

Lower marginal cost : price ↓.
Less ccompetition : price ↑.

Answer 16

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.

Question 17

Differientated bertrand competition

Answer 17

Always profitable

Question 18

Merger waves

Answer 18

• Exogenous causes: deregulation
• Endogenous causes: a merger between two big firms in the
  industry may make it necessary for others to keep pace

Question 19

Allowing merger?

Answer 19

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

Question 20

assessing efficiency gains from merger

Answer 20

• 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

Question 21

collusion and remedies

Answer 21

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

Question 22

Entry

Answer 22

• 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

Question 23

Entry deterrence

Answer 23

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)

Question 24

Predatory priciing

Answer 24

Price so low to zero profit,
chicago school not worry low prices can’t go forever. (no money to stay then should borrow)

Question 25

Long pursue of predatory pricing

Answer 25

Bank loan depends on prob p

p probability bank refuses to loan

Question 26

Double margialization

Answer 26

U markup on c to determine w
D markup on w to determine p
Both firms and consumers would benefit from correcting inefficieny

Question 27

Retailer investments

Answer 27

for example: pre-sale trained staff (advice)
-> free rider problem other rretailers

Question 28

Vertical foreclosure

Answer 28

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

Question 29

product differientiation

Answer 29

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

Question 30

Innovation

Answer 30

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)