MISC PT 2 Flashcards
Sunk cost effect
Replacement effect
Efficiency Effect
Sunk cost- too expensive/not worth investing
Replacement - innovation is not available to competitors (you don’t want to replace yourself as a monopolist)
Efficiency Effect: monopolist will have a greater incentive to innovate out of fear that a potential entrant will. The monopolist will invest to remain a monopolist, while the potential entrant may only be able to enter as a duopolist.
Key if the technology is common or not
Lock in
Switching costs
Lock-in occurs when customers face significant costs in switching from one
product/technology/brand to another.
Public policy towards monopoly (prevention, ownership, regulation)
-Prevention : anti-trust laws are designed to prevent formation of monopolies through
limiting mergers and price-fixing.
-Ownership : government can “nationalize” or collectively own an industry (o.e.: U.S.
Postal Service).
-Regulation : for a natural monopoly, government can appoint a commission to regulate
the monopoly and limit returns (by regulating lower price and increasing output).
FIrst-Mover Advantages
A first mover advantage (FMA) arises when the first firm into a market earns higher
returns than subsequent entrants. Usually arises from 3 sources:
○ Learning curve
○ Scarce resources
○ Loyalty
Strategic Trade Policy
● If an industry is a global oligopoly with economies of scale, then only a few firms will
likely dominate the world market.
● It is possible for a government to use tariffs and subsidies in such a way as to favour its
own firms and harm firms from other countries
● In essence, the government may create a first-mover advantage for its own firms, or
allow them to overcome a first-move by a firm from another country by imposing costs on
others and benefits on their own firms.
● This is referred to as strategic trade policy, and the tools by which it could be
implemented include tariffs, production and R&D subsidies, and domestic procurement
rules
4 ways to Escaping Prisoner’s Dilemma
- Changing pay-offs
- Profit sharing through acquisition
- Price matching
- Repeated Interaction
Two kinds of asymmetric:
- Hidden characteristics
- Hidden actions
-Hidden Characteristics: one side of a transaction knows more about themselves (or the
good being sold) than the other side
-Hidden Actions: one side of an economic relationship can take an action that the other
side cannot observe or has information that the other side cannot verify. Also referred to
as principal-agent problem.
DIfference between monopoly and PC
PC: -Price takers -DC is horizontal line - MR curve Monopoly: -Downward sloping since they can set prices
3 types of price discrimination
● First Degree Price Discrimination occurs when each customer is charged her maximum
willingness to pay in order to capture all of the customer surplus. Approximate examples
are used car sales
● Third Degree Price Discrimination: Occurs when consumers are grouped on the basis of
different demand elasticities (based on observed characteristics) and charged different
prices. When consumers can be so grouped, the profit maximizing condition is:
● Second degree price discrimination occurs when firms induce buyers to self-select and
reveal their willingness to pay
Declining price block
Declining block pricing is an example of Second Degree Price Discrimination. It occurs
when consumers are grouped and charged different prices according to the amounts
consumed. Examples are selling goods in different sized containers and block pricing,
practiced by many utilities
Limited Excludability
Non-Rivalrous
Factors that drive info good prices to 0
○ Limited excludability and the ability to make perfect reproductions which create
markets for pirated goods
○ The non-rivalrous nature of the products means that the marginal cost of serving
another customer is near zero (duplication and distribution costs are near zero)
Versioning
Creating different versions of a product allows customers to sort themselves and
minimizes the amount of information required to determine who are the highest value
users:
Bundling
Bundling is a special form of versioning in which two or more distinct products are
offered as a package at a single price. Bundling produces outcomes similar to second
degree price discrimination if taste are heterogeneous
Auction Structure: Private value, common value
○ Private-value auctions: Each bidder knows how much she values the object for sale, but that information is private to herself, is different from, and does not
depend on the valuation of others
■ Each buyer has different WIP, you don’t know how much others value the painting
○ Common-value auctions: The true/ultimate value is the same for all bidders, but
this common value is unknown; the value of a bid depends on private estimates of the item’s value
■ Ex: Gold mine
Types of auctions: Open" -Ascending bid english -Descending bid dutch Sealed: -first price sealed bid -Second price sealed bid
● Open Auctions: bidders can observe each other, only sellers know the bid
○ Ascending bid (english)
■ Winner pays what they bid, all other bids observed
○ Descending bid (dutch)
■ Winner pays what they bid, no other bids observed
■ Bid starts from the highest one, if no one wants it, the price lowers until
one buyer says they want the product.
● Sealed Bid Auctions
○ First price, sealed bid
■ Winner pays what they bid, no other bids observed
■ If I have the highest bid, I will get the product at the bid I entered
○ Second price, sealed bid (Vickrey auction)
■ If i have the highest bid, I will get the product but at the 2nd highest bid
■ You bid a certain amount, but may not pay for that bid
