Week 8: decision-making for firms Flashcards
Revenues for Monopolistic Competitor
- D = AR downward slope the MR is always below it bringing it down
- same as its downward-sloping demand curve
- marginal revenue is below its demand curve because demand (average revenue) falls as quantity increases
Profit-Maximization for a Monopolistic Competitor
- found where marginal revenue and marginal cost are equal
- price is found with the business’s demand curve
- may make a profit or a loss at its profit-maximizing point in the short run
Profit-Maximization for a Monopolistic Competitor In the long run
- breaks even (profits (losses) are being made in the short run, new businesses enter (leave) the industry, pushing businesses’ demand curves leftward (rightward) and making them more (less) elastic)
- business meets neither the minimum-cost pricing nor the marginal-cost pricing rules, since too few units of output are produced
Revenue Conditions for an Oligopolist
- in a market characterized by rivalry, average revenue is identical with its kinked demand curve
- this business’s marginal revenue curve has two linear segments which are below its kinked demand curve
- difficult to enter and leave
Profit-Maximization for an Oligopolist
- profit-maximizing quantity for a rivalrous oligopolist is found where marginal revenue and marginal cost are equal
- price is found using the business’s kinked demand curve
- neither meet the minimum-cost pricing nor the
marginal-cost pricing rules
Game Theory
- the analysis of how mutually interdependent actors try to achieve their goals through the use of strategy
- in mathematics, game theory has become a set of concepts whose use has spread to all social sciences, especially economics
- uses mathematical models to study conflict and cooperation
- assumes rational actors
The Prisoner’s Dilemma
- a classic example of how players’ self-interested actions can be self-defeating
- each prisoner has an incentive to confess, even though the best possible result would be if both stayed silent
- sub optimizing
ex. both get 1 year
The Case of Oligopoly Example
- optimal profit
ex. both get $20k
Anti-Combines Legislation
- represents laws aimed at preventing industrial concentration and abuses of market power
- The Competition Act of 1986 was a major reform of Canada’s anti-combines legislation
Criminal offences under the Competition Act
- conspiracy
- bid-rigging
- predatory pricing
- abuse of dominant position
Conspiracy
a secret plan by a group to do something unlawful or harmful
Bid-rigging
a particular form of collusive price-fixing behaviour by which firms coordinate their bids on procurement or project contracts
Predatory pricing
the illegal act of setting prices low to attempt to eliminate the competition
Abuse of dominant position
when a dominant business (or group of businesses) engages in activity that stops or substantially reduces competition in a market
Civil matters reviewed by the Competition Tribunal
- abuse of dominant position
- mergers: horizontal, vertical, and conglomerate
Nonprice Competition
- by monopolistic competitors and oligopolists includes: product differentiation and advertising
- raises a business’s revenue and costs
- may or may not be beneficial to businesses and consumers
Product differentiation
the characteristic or characteristics that make your product or service stand out to your target audience
Advertising
a strategy that involves a company creating marketing campaigns that appeal to two or more segments of their target audience
Concentration Ratios
- how industrial concentration is measured
- the four-firm concentration ratio
The four-firm concentration ratio
- shows the percentage of total sales revenue in a market earned by the four largest business firms
- 30% okay, 50% is bad
ex. tobacco products highest, contruction lowest
Industrial Concentration
- refers to market domination by a few large businesses
- can provide the consumer with benefits due to increasing returns to scale
- can impose costs on the consumer due to market power
- may or may not encourage technical innovation
Marginal benefit
- the extra satisfaction, expressed in dollar terms, from consuming a certain unit of a product
- it’s the max price that a customer will pay for a certain unit of a product
Total benefit
- the total satisfaction, expressed in dollar terms, from consuming a product
- it can be found by adding together the marginal benefits of all units consumed during a given time period
Consumer surplus
- shows the extent to which consumers pay a lower price than the highest one they are willing to pay
- defined as the net benefit, expressed in dollar terms, from buying a product at its market price
- found, either for an individual or in an entire market, by subtracting total expenditure from total benefit
Producer surplus
- shows the extent to which producers receive a price that is different from the lowest one they are willing to accept
- defined as the difference between the price received from selling each unit of a product and the marginal cost of producing it
When a Market Becomes Uncompetitive
- a portion of the consumer surplus becomes producer surplus
- deadweight loss
Deadweight loss
a net reduction in both the consumer surplus and producer surplus due to the reduction in market output
Spillover costs
- are the negative external effects of producing or consuming a product
Adding Spillover costs to private costs…
vertically raises the supply curve
Preferred outcome of Spillover costs
is at a lower quantity than in a perfectly competitive market
Spillover cost examples
- Government intervention (excise tax: carbon tax used to counteract spillover costs associated with pollution)
Spillover benefits
are the positive external effects of producing or consuming a product
Adding Spillover benefits to private benefits…
raises the demand curve
Preferred outcome of Spillover benefits
is at a higher quantity than occurs in a perfectly competitive market
Spillover benefits examples
- Government intervention (ex. a consumer subsidy: education)
