Midterm 2 Terms and Definitions Flashcards
(89 cards)
1
Q
In a monopoly, what is the relationship between marginal revenue and marginal cost?
A
MR = MC
2
Q
What is the measure of market power known as?
A
The Lerner Index
3
Q
What is the equation for the Lerner Index?
A
L = (P-MC)/(P)
4
Q
In a monopoly, what does marginal revenue also equal?
A
Price
5
Q
What is the special case equation of the Lerner Index?
A
L = (-1/E)
6
Q
In an oligopoly, what is the Lerner Index equation?
A
Li = (ai)(-1/E)
7
Q
In the Lerner Index equation for an oligopoly [Li = (ai)(-1/E)], what does ai stand for?
A
the market share of each firm within the oligopoly
8
Q
What are the characteristics of a monopoly?
A
Allocative Inefficiency, Production Inefficiency, and Rent Seeking
9
Q
What are the sources of a monopoly?
A
Regulation (patent, intellectual property rights) and “natural” monopoly (IRS technology)
10
Q
What is a positive feedback loop?
A
a loop that leads to multiple equilibrium that result in either a large market share or no market share
11
Q
In which direction can a positive feedback loop go?
A
In either the positive or negative direction
12
Q
How does a dominant firm set price?
A
The dominant firm sets price at PD which is smaller than the PM (they take into account the capacity of smaller firms and the residual demand that the dominant firm faces)
13
Q
What is a cartel?
A
It is a group of firms that act together as a monopoly
14
Q
What is an example of a cartel?
A
OPEC
15
Q
What is the goal of a cartel?
A
to maximize the profit for each firm based upon the output of each firm within the cartel
16
Q
Why form a cartel?
A
Profit would be higher as cartel instead of behaving individually
17
Q
What is the marginal revenue equation for a cartel?
A
MR(Q) = MC(q1) = MC(q2); Q = q1 + q2
18
Q
Why are cartels unstable?
A
- Cartels increase profit for firms but create a DWL (reduction of social welfare) –> why they are against the law
- Every cartel member has an incentive to cheat
19
Q
What is the marginal revenue equation for a multi-plant monopoly?
A
MR(Q) = Mi(qi); i = 1,2,…n
20
Q
What is the equation for MC in a multi-plant monopoly?
A
MC(qi) = AC(qi)
21
Q
What is price discrimination?
A
Selling the same good at different prices
21
Q
What are the characteristics of a multi-plant monopoly?
A
- Variety of product
- Differentiated product
- Costless entry + exit
- Allocative Inefficiency
- Production Inefficiency
22
Q
What are the characteristics we need for price discrimination to be possible?
A
- Market Power
- Different levels of elasticity amongst consumers
- No arbitrage
23
Q
What is arbitrage?
A
Buying something at a low price and selling it at a high price with no risk
24
What is first degree price discrimination?
Each firms know each consumers' WTP and can charge each consumer a different price
25
What is third degree price discrimination?
Firm doesn't know each consumers' WTP but can discern their WTP based on some observable group characteristics. Firm charges different prices to different groups of consumers.
25
What is the CS for first degree price discrimination equal to?
CS = 0
26
What is second degree price discrimination?
We assume monopolist have even less information. Firm designs specific product for each consumer and prices them so that consumers "self-select" into different products and hence pay different prices.
27
What is Participation Constraint?
Consumer must find at least one pricing option preferable to not buying at all
28
What is Incentive Compatability?
Consumer should choose the option intended for them, preventing high-valued consumers from choosing low-valued goods intended for low-value consumers
29
What is Self-Selection Constraint?
Making consumers reveal their type of good truthfully
30
What is Versioning?
pricing strategy in which the firm offers different product options designed to attract different types of consumers
31
What is a tying agreement?
Customer is required to buy a secondary product in order to buy the primary product
32
What is couponing?
Consumers who produce coupons get a discount. Consumers who are less sensitive to price and end up paying the higher, un-discounted price
33
What is a characteristic of an oligopoly?
There are few firms who participate in strategic interaction
34
How do firms in oligopolies participate in strategic interaction?
Game Theory
35
What is Game Theory?
a mathematical tool to measure strategic interation
36
What are cooperative games?
Games that have binding agreements
37
What are non-cooperative games?
Games that have no binding agreements
38
What are the main elements of a game?
1. Players
2. Strategy
3. Payoff
4. Information
5. Timing
39
What are the types of information in a game and what do they represent?
Complete vs. Incomplete information (structure of the game) and Perfect and Imperfect information (history of the game)
40
What are the types of timing in a game?
Simultaneous moves (static) and sequential moves (dynamic moves)
41
In which model do firms in a game compete over the price?
The Bertrand Model
42
What is called when two firms in a game have a price that equals MC and result in no profit?
The Bertrand/Paradox Trap
43
In what model do two firms compete over quantity produced?
The Cournot Model
44
What is the equation for MC in the Bertrand Model?
MC = C
45
What is the equation for q1, q2, and P for the Cournot Model?
q1 = (a-c)/(3b)
q2 = (a-c)/(3b)
P = (a+2c)/(3)
46
What is the NE for the Cournot Model?
NE = (q1,q2)
47
What is the equation for Q in a perfect competition?
Qc = (a-c)/(b)
48
What is the equation for Q in a monopoly (cartel)?
Qm = (a-c)/(2b)
49
What is the equation for Q in an oligopoly?
Qo = (a-c)/(3b)
50
What is the equation for industry market power?
L = (-1/E)∑ai^2
51
What is I4?
the sum of market share of the 4 largest firms in the industry
52
T/F: In a competitive selection model, firms may have differentiated products and varying efficiencies, while in a perfect competition model, all firms produce identical goods and have the same cost structure.
True
53
T/F: Perfect competition allows firms to earn long-run economic profits, just like the competitive selection model
False
54
T/F: The competitive selection model considers firm entry and exit based on efficiency and innovation, whereas the perfect competition model assumes free entry and exit without efficiency differences
True
55
T/F: Market prices in a competitive selection model are solely determined by supply and demand, just like in perfect competition
False
56
T/F: In a perfect competition model, firms are price takers, whereas in a competitive selection model, some firms may have slight price-setting power due to product differentiation or cost advantages
True
57
T/F: In the competitive selection model, simultaneous firm entry and exit are possible as less efficient firms leave the market while more efficient ones enter, where as in the perfect competition model, firm entry and exit occur sequentially based on profitability conditions
True
58
T/F: The competitive selection model predicts a skewed firm size distribution, where more efficient firms grow larger and dominate the market, whereas the perfect competition model assumes a uniform firm size distribution, as all firms operate at the same minimum efficient scale
True
59
T/F: A monopoly is less efficient than perfect competition because it restricts output to raise prices, leading to deadweight loss
True
60
T/F: A monopoly always results in higher consumer surplus compared to a perfectly competitive market
False
61
T/F: One source of monopoly power is economies of scale, where large firms can produce at a lower average cost, making it difficult for new entrants to compete
True
62
T/F: Monopolies always arise due to government regulations
False
63
T/F: A natural monopoly occurs when a single firm can supply the entire market at a lower cost than multiple competing firms due to high fixed costs and economies of scale.
True
64
T/F: A network externality occurs when the value of a good or service increases as more people use it.
True
65
T/F: Network externalities can lead to monopoly power because early adopters attract more users, making it difficult for new entrants to compete
True
66
T/F: Network externalities always result in a single market equilibrium
False
67
T/F: The concept of critical mass in network externalities refers to the minimum number of users needed for a product or service to sustain growth and become self-reinforcing
True
68
T/F: In the presence of strong network externalities, small firms with superior technology will always outcompete larger firms
False
69
T/F: A multi-plant monopoly sets different prices for each plant's output to maximize total profit
False
70
T/F: Cartels are generally unstable because individual firms have an incentive to cheat by secretly lowering prices or increasing output to gain a larger market share
True
71
T/F: The first-order condition for profit maximization of a cartel requires that the marginal revenue of the cartel equals the sum of the marginal costs of all member firms at the jointly optimal output level
False
72
T/F: First-degree price discrimination (also called perfect price discrimination) occurs when a firm charges each consumer the maximum price they are willing to pay, capturing all consumer surplus at profit
True
73
T/F: Third-degree price discrimination involves charging different prices to individual consumers based on their willingness to pay
False
74
T/F: Price discrimination can increase a firm's profits compared to uniform pricing by extracting more surplus from consumers with different price sensitives
True
75
T/F: First-degree price discrimination leads to deadweight loss, just like a standard monopoly
False
76
What does subgame perfect equilibrium imply?
There is a NE and there are credible threats or premises
77
What is Subgame Perfect Equilibrium?
it is a nash equilibrium that induces the best response in each subgame
78
How do you find SPE?
Backward Induction
79
What is Backward Induction?
you start at the end of the game and move backwards
80
What is Explicit Collusion?
a repeated game that has binding agreements
81
What is Implicit Collusion?
it is a repeated game that has no binding agreements and it is in the self-interest of the firms to collude
82
What is Grim Strategy?
You start with cooperation. You then check history: if other player cooperates, continue cooperation; if other player cheats, cheat forever.
83
What is competition externality?
each firm maximizes own profit, because of this each firm have incentive to internalize externality
84
What is the simple equation for discount factor?
d = 1/1+r
85
What is the complex equation for discount factor?
d = [(1+g)(1-h)]/[1+(r/f)]
86
In the complex discount factor equation, what does g, h, r, and f stand for?
g = growth rate
h = hazard rate
r = annual interest rate
f = frequency of interaction
87
What are the ways to escape the Bertrand trap?
1. Repeated Games
2. Cournot/Stackelberg Model
3. Cut costs
4. Product Differentiation
