Module 5 Flashcards
______ refers, strictly, to a situation where there is a single firm (or producer) in a market.
“Monopoly”
__________: the ability to set prices above cost without meaningful competitive retaliation.
substantial pricing power
In a perfectly competitive market, price typically falls to where firms earn ______.
zero profits (that is, prices equal marginal costs)
Monopolists typically price above _________.
marginal cost (a monopolist has the ability to set prices above cost without meaningful competitive retaliation)
Optimal pricing requires that firms price where _______ = ________.
Marginal Revenue = Marginal Cost
In a competitive market, the ________ is the same as the demand curve.
marginal revenue curve
For a monopolist, the marginal revenue curve is _____ than the demand curve.
lower
The marginal revenue that a monopolist generates by lowering its price reflects both the _____ from attracting new customers (the “volume” effect) and the ____ from lowering prices to existing or inframarginal customers (the “price” effect).
gain; loss
Just as a monopoly has power to raise prices, a buyer can have power to _____ prices if it is the sole buyer in the
market.
reduce
The analysis of monopoly pricing rests on the assumption that the firm ______ the same price for every unit of the
good, to every customer.
charges
_________: charge different prices to different consumers, or set different prices for different units of a product.
“price discriminate”
________ price discrimination involves setting a different price for each consumer, or for each unit of the
product.
Perfect (or first-degree)
Perfect price discrimination eliminates _________ and _________, and the producer captures all of the value.
deadweight loss; consumer surplus
________ involve firms setting a per-unit price for a product (sometimes equal to $0) and charging a fixed fee to capture additional surplus.
Two-part tariffs
Two-part tariffs are an _______ (and relatively easy) way for firms to price discriminate.
effective
Other approaches to price discrimination include: (a) firms charging different prices based on __________ of consumers (e.g., whether the consumer is a student or senior); (b) firms relying on ________ to price discriminate.
observable characteristics; self-selection
In order to price discriminate, a firm must be able to ______ buyers with high WTP from purchasing at the _____ prices.
prevent; lower
Price discrimination could also be prevented by
competition from other firms, or if customers with low WTP could purchase the product and ______ it to customers with higher WTP.
resell
_________ is another way for firms to effectively price discriminate.
Price bundling
Price bundling is more effective when
consumers’ preferences for the products are ________.
heterogeneous
Firms in nearly every market attempt to avoid the “perfectly competitive outcome” through _______.
differentiation
______ differentiation occurs when firms differ in attributes that all customers value similarly – that is, when some firms produce a version of the product that is perceived as “better” by all customers, or when firms differentiate by lowering prices.
“Vertical”
_______ differentiation occurs when firms differ in attributes that different customers value
differently (e.g., location, color, etc).
“Horizontal”
If firms are __________, some customers will prefer a product from one firm and others will prefer the product from another.
horizontally differentiated
How are these related?
1. Differentiating on factors that matter either to a firm’s consumers or its suppliers (thereby creating more value, or
creating value for a different set of consumers, than its competitors);
2. Searching for ways to differentiate horizontally, not only vertically
3. Differentiating in ways that are robust to competitor reaction.
Effective principles of competitive differentiation
Differentiation protects firms from price _______.
competition; The reason is that a firm that is differentiated from its competitor faces a familiar trade-off when lowering price: on the one hand, it allows the firm to capture a greater share of the market from the competitor, but it does so at the cost of reducing prices to the firm’s existing customers.
