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| exist when firms are able to restrict competition to sustain prices above marginal cost |
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| Market power can exist with multiple firms if... |
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| products are differentiated and/or markets are segments (loyal customers) |
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| The manager must attempt to sustain factors which limit competition |
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| 2 Type of Strategies to Restrict Competition |
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1 Guarding trade secretes
2 Control of an essential resource
3 Exclusive contracts and customer lock-in ( coke on campus, extended cell phone contracts)
4 Collusion (form a cartel and act as a monopoly) |
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| Non-Market Strategies (4) |
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1 Patent or copyright protection
2 Trade regulations
3 Government Licensing
4 Government or NGO certification |
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| Profit Maximization occurs when...? |
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| Marginal Revenue = Marginal Cost |
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| the firm could make a profit by selling one more unit |
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| the firm would lose money on selling the unit |
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| More inelastic demand results in |
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| a higher markup over costs |
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| Given the optimal sales target, price is found as... |
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| a markup over cost, where the markup factor depends on the demand for the product. |
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| A firm with market power sets prices and output how? |
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| Sets prices higher and output lower than efficient levels |
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| From the view point of economic efficiency and market power |
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| too few units are produced and sold, giving up some that have value greater than costs |
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| Perfect Price Discrimination |
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Definition
| Each consumer is charged a price equal to her willingness to pay |
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| Inefficiency and Perfect Price Discrimination |
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| No inefficiency occurs, but all market surplus goes to the producer |
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| Profits of Perfect Price Discrimination compared to single price |
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| Imperfect Price Discrimination |
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| Groups of consumers are charged different prices |
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| Imperfect Price Discrimination and Profit |
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| profits are increased compared to single price but not as high as perfect price |
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| Imperfect Price Discrimination and Consumer Surplus |
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| Consumer surplus is decreased but is higher than zero |
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The decisions markers within the game.
Usually within firms, governments or interest groups |
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These are the decision choices.
Price, product, advertising, campaigning, lobbying, regulation, etc... |
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These are the outcomes of the decision choice.
Usually in terms of profits or losses |
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| Game Theory: Dominant Strategy |
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| a strategy that results in the highest payoff for a player regardless of what strategy their rival plays |
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| Game Theory: Secure Strategy |
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| in absence of a dominant strategy, play the strategy that guarantees the highest payoff given the worst payoff |
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| Game Theory: Think like your rivals |
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| in absence of a dominant strategy, look at the game from you rivals perspective |
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| Game Theory: Nash equilibrium |
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| a condition describing a set of strategies in which no player can improve her payoff by unilaterally changing her strategy, given her rivals strategy |
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-a representation of a game that reveals the players, their possible strategies, and the resulting payoffs
- Simultaneous-Move, one-shot, games |
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| Role of gov't and promoting competition |
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-U.S has enacted antitrust policies that make it illegal to attempt to monopolize a market
- The department of Justice uses industry sales concentrations as an indication of the level of competition |
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| 1890: makes monopolizing a market, cartels, and other collusive arrangements illegal |
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| 1914: makes price discrimination illegal, and also targets M and A activity that significantly lessons competition |
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| The Department of Justice looks at M&A activity based on.... |
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| its potential effect on industry competition |
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| 4-Firm Concentration Ratio (C4) |
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1 The fraction of industry sales that goes to the four largest firms in the industry.
2 A C4 closer to one signals an uncompetitive industry |
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| The Herfindahl-Hirshman Index (HHI) |
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1 The sum of squared market shares of firms in an industry multiplied by 10000
2 An HHI above 1800 signal an uncompetitive industry |
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