Microeconomics Flashcards
What is the optimal access fee for a two-part tariff?
Area of CS = ((P-MC)*Q)/2
What is the goal of a two-part tariff
Extracting all consumer surplus
How much is consumed in units, when a two-part tariff is used?
After paying access fee, customers will consume up to where MC meets D.
Name two characteristics of public goods
Non-rivalrous
Non-excludable
What does “non-rivalrous” mean?
The marginal cost of providing the good for another consumer is 0
What does “non-excludable” mean?
Individuals cannot be excluded from consuming the good, making it difficult to charge for the good
How are marginal social costs calculated?
MSC = Marginal external cost + Marginal cost
What is the function for price elasticity?
P/Q * deltaQ/deltaP
Which factors can lead cartel formation
High barriers to entry Price transparency Few players Homogenous products Static industry / overcapacity
Which are the four microeconomic assumptions?
People make choices given certain restrictions
People react to incentives
We are forward looking – we consider how our actions today will affect costs and benefits, given others’ actions (that can also change)
We equate allocations on the margin – we want the marginal cost of an action to be equal to its marginal benefit
Which are the three conditions for third-degree price discrimination?
- Demand must be heterogeneous
Perhaps due to income, tastes, etc, different price elasticities… - Managers can identify and segregate the different segments
- Markets must be successfully sealed
= difficult to transfer product from one group to another
How should MR be set for different groups in third-degree price discrimination?
The split between groups should be such that MR is the same in all groups.
What characterizes monopolistic competition?
1 Many firms and free entry
2 Non-homogenous good
3 Differentiation
2 and 3 are different from in perfect competition!
Name four characteristics of perfect competition
Products are standardized (identical)
No barriers to entry/exit
No non-price competition
Firms are price takers
How do you find the firm’s supply curve in perfect competition?
It is the MC curve above the AVC curve
and the AVC curve looks like the ATC curve, but is generally lower
Why do oligopolies exist?
High barriers of entry
Government fiat
Economies of scale
What is another word for Bertrand competition?
Price competitions
What is another word for Cornout competition?
Quantity competition
What is the definition of a monopolist?
Someone who is the only seller of a product for which there are no close substitutes and which is protected by barriers to entry
Give for examples of how monopolies can emerge
Geographic monopoly
Natural monopoly
Production has very high fixed costs
Scale must be very large to cover these
Legislated monopolies (e.g. patent legislation)
lllegal reasons
Which are the two basic types of rules that form the cornerstones of competition law?
- When there are no ways of getting a competitive environment, firms in a monopoly situation are generally forbidden to “abuse their market power”
- In situations where a market can naturally be a competitive environment it is illegal to act so as to prevent this
How is producer surplus defined?
A firm’s producer surplus is the sum of differences between the market price and the marginal cost for all units produced
How is consumer surplus defined?
Individual consumer surplus: the difference between what a consumer is willing to pay and what she actually pays
What is social welfare?
SW = producer surplus + consumer surplus
Define dominant strategies
Strategies which are preferred no matter what the other player does
Define dominated strategies
Strategies which are never a best response to anything that the other player may do
Name three reasons for cooperation breakdown in the Prisoner’s Dilemma (repeated play)
Changes in demand
Changes in costs
Difficult to reach implicit agreement
What are the four fields of the Prisoner’s Dilemma called?
Reward
Temptation
Punishment
Sucker’s payoff
Define moral hazard
A situation in which a party insulated from risk behaves differently from how it would behave if it were fully exposed to the risk
Define adverse selection
Market failure since because products that differ in quality sell for the same price because of asymmetric information, so that too much of the product of bad quality is sold and too little of the product of good quality
Name four cartel strategies
- Price fixing (alt. quantity rationing)
- Market sharing (products/regions)
- Bidrigging
- Restrictive agreements (pay-for-delay)
Name two types of dominance abuse
Exclusionary abuse
Exploitative abuse
Describe Exclusionary abuse
Exclusionary abuse
• Refusal to deal
• Rebate arrangements
• Predatory pricing
What is Exploitative abuse?
Exploitative abuse
= Excessive pricing
How can dominance be achieved?
- The legacy of privatizing state monopolies
- Through innovation (creating a new market!)
- Patent protection!
- Resilience (in the case of declining industries)
- Through Mergers & Acquisitions (market concentration)
What is the fundamental difference between horizontal and vertical control? (in relations to mergers and cartels)
Horizontal = you want other party to worsen their offering (raise prices)
Vertical = you want other party to improve their offering (lower prices)
What is the lecture example of a unilateral effect (of a merger)?
Raising prices in firm A, diverting customers to firm B, the merging with firm B (= unfair advantage)
Name the potential unilateral and coordinated effects of mergers
• Unilateral effects:
Elimination of independent substitute goods Reduced competitive pressure = price rise
• Coordinated effects:
Increased concentration
Increased risk of explicit/implicit ”cartel”
Which are the two types of relevant markets?
Product market & geographic market
What does the SSNIP-test stand for?
Small but Significant Non-transitory Increase in Price
What is the algorithm of the SSNIP-test?
a. Start with narrowest possible relevant product market
b. If all actors in this product market were to be replaced by a Hypothetical Monopolist, would it be able to profitably increase prices by a small but significant amount (5-10%)?
c. If yes, you have established your relevant market, if no, broaden your market definition by including more products, and try again.
d. But which products should be added next? Good question, no good answer (hence the algorithm’s imperfection).
Define a “relevant product market”
A relevant product market comprises all those products which are regarded as interchangeable or substitutable by the consumer, by reason of the products’ characteristics, their prices and their intended use
