Term 1 Flashcards Preview

Business Competition > Term 1 > Flashcards

Flashcards in Term 1 Deck (70):
1

What is Cournot competition?

Competing in the same period on Quantity

2

How do you calculate a reaction function?

Differentiate profit and solve for Q1

3

What is revenue destruction?

Where small firms expand output, lowering the market price

4

How would you calculate EOD and Market Share

P-MC/P=-qI/pdp/dq=Si/n

5

What happens if all firms have the same MC?

Share becomes 1/n

6

What is the Herfindahl Hirschamn Index

A measure of market concentration

7

What is the Bertrand Price Paradox

It is hard to believe that industries with a few firms will never manipulate market price
Can be fixed through brand loyalty

8

What four conditions will deter price above MC?

All potential entrants can access the same technology - no cost advantage
No sunk costs
Consumers respond instantly to price changes
Incumbents cannot instantly change prices

9

If the above conditions are met, what occurs?

The monopoly is perfectly contestable
Hit and run competition

10

What are the two types of barriers to entry?

Structural - Legal / Cost Advantage
Strategic - Raising sunk entry costs or lowering post entry profit

11

What strategies are available for deterring entry?

Limit Pricing
Sunk Costs
Blockaded Entry
Predatory Pricing

12

What is limit pricing?

Using the entrants residual demand, the incumbent sets a quantity that prevents entry

This harms the incumbent

13

What is the sunk cost entry decision tree?

Working Backwards:
Incumbent chooses whether to share or fight
Entrant chooses whether to enter
Incumbent chooses whether to invest

14

What is blockaded entry?

The industry is a natural monopoly therefore the incumbent does not need to act

15

What is predatory pricing?

Waging a price war to drive other competitors out of the market

16

What is Selten's Chain store Paradox?

If all players have complete information, predatory pricing fails

As no payoff after final period, no predatory pricing, collapses backward

17

What characteristics should a strategic decision have to be effective?

Visible
Understandable
Credible

18

What is first mover advantage?

As firm 1 moves first, it can produce a higher quantity and gain more profit

Will always earn atleast cournot equilbrium

19

What methods of collusion are available?

Explicit
Tacit
Both are illegal and thus unenforcable

Merger

20

Why is collusion likely to fail?

Both firms have an incentive to cheat

21

What factors effect the sucsess of tacit collusion

Number of firms
Similarity of firms for determing share
The ability to detect and punish cheating

22

What practices help collusion occur?

Price leadership
Public announcment of price changes
Most-Favoured Nation - Promising to pay lowest price

23

What are the two types of product differentiation?

Vertical: Quality - All consumers agree on ranking but not WTP
Horrizontal - Taste

24

What is Hotellngs Spatial Model of Competition?

Linear city, with a shop at either end

Value to costumers at position X is:

V−p1−tx
V−p2−t(1−x)

There is therefore a point of indifference

25

How do you calculate the point of indifference in Hotellngs Spatial Model of Competition?

Equate the values to consumers, and solve for xbar

For Demand, multiply by N, shope one is thus:

X<=N[(p2-p1/2t)+1/2]

T is importance of travel costs, is T=Large, each shop gets half the share, prices irrelevant

26

In Hotellings Model of Spartial Competition, what happens as T approaches 0?

Bertrand price setting arises, as travel costs become irrelevant

Equilibrium = P1=MC+T

27

What else should be discussed in an exam?

The location effect:
Quadratic Transportation costs:
Direct Effect - Both firms move towards centre
Strategic Effect: Direct = less differentiation, firms move apart

Strategic effect dominates therefore maximum diferentiation

28

What are the three types of price discrimination?

First: Highest WTP
Second: Depends on Q purchased
Third: Observable Characteristics

29

What conditions are necessary for effective Price Discrimination?

Market power
Segment-able Market
Prevent Secondary Trade (Customers Re-selling)

30

How can secondary trade be prevented?

Legally - Electricity
Product Characteristics - Transport Costs
Verification by Cons Type - Travel Pass

31

How would you calculate a non-uniform pricing schedule?

Calcualte the profit for each price and quantiy
Choose the best price for each quantity
Check there is no possibility for cheating

32

What are the types of second degree price discrimination?

Block Tariff - Staircase
Two Part Tariff - Licence fee and uniform price - Flat then slanted
Multi-part Tariff

Trade off between complexity and profitability

33

How do you calculate societys welfare?

CS + Profit

34

What is Posner's theory on rent seeking?

If there is competition to becoming a monopolist, there is gains to being one

35

What are the costs of X-Inneficency?

Lack of competition causes laziness
Wastes Resources

36

What are the barriers to entry?

Government Grant of Monopoly - Raise Revenue
Patents to Reward Innovation - Promote Dynamic Efficency
Control of Inputs
Brand Loyalty
Economies of Scale

37

What are the benefits of market power?

Technological Efficiency - Low concentration raises costs due to lack of economies of scale
Allocative Efficency - Price discrimination can allow market segmentation, resulting in better coverage of market

38

How is a market defined?

XPED - High XPED means same market
PES - Similar means same

39

How can a losses of DWL be defined?

DWL = 1/2DPDQ
Harberger = ED/2P*Q^r^2
r is ROR on sales
He assumed DWL = 1

40

What are the two areas legislation can be targeted at?

Structural - Enhance Comp Forces
Conduct - Tackle actions by players

41

What is US legislation like?

All collusion and attempts to monopolise are illegal

Price Discrimination, Exclusiviyy Contracts and Acquisitions are also illegal if they harm competition
Must prove they occured

42

What is EU legislation like?

Same as US, but with exeptions for Technical and Dynamic efficency

43

What is UK Legislation like?

Same as US and EU, only do not need to prove an agreement

44

How do you calculate the Lerner Index?

P-MC/P

45

What effect does rising MC have?

Reduces market power

46

What is competitive fringe analysis?

One monopolist and many small firms
Monopolist receives whatever demand is left

47

Discuss US v Du Pont

A celophane company was considered to be in the packing materials market, as consumers can switch between products

48

Discuss Brown Shoe v US

A shoe company market was split into 3, judge ruled against merger

This is as company could easily switch between different genders

49

Discuss United Brands v Commission

Should a market be determined by those with the highest WTP?

Elderly need Banannas therefore yes

50

Discuss Hugin v Commission

Market defined as Hugin spare parts despite other registers available

51

What are the issues with detecting barriers to entry?

If barriers are good, nobody will enter and complain

Is actually better for consumer in SR

In PC, low prices are result whilst in Mono, low prices are cause

52

Discuss Texas International and National Air

Merger was allowed on the grounds of potential, rather than actual, competition

53

Discuss Du Ponte

Courts allowed non-licensing to benefit the innovators

54

What reduces the likelihood of collisions success

Large no of firms
Large penalties
Threat of potential competition
Cost Asymetries

55

What are the four tests of EU and UK exemptions for collusion

Must improve efficency
Consumers are given a share
No restrictions
Does not weaken competition

56

What is the 5 point screening process for US mergers?

Define Market
Calculate Change in concentration
Entry conditions
Look at collusion
Efficency Gains

57

In what way is the EU different to the US?

No efficency expemption

58

Discuss US v Trans Missouri Freight

Illegal price setting despite the defence it was reasonable

59

Discuss US v Socony Vacuum Oil

Firms illegally colluded to buy oil of competitiors to maintain price

60

Discuss Chicargo Board of Trade v US

Choosing not to trade when market closed is ok

61

What are the 3 conditions necessary for effectivce price discrimination?

Market Power
Varying WTP
Secondary trade not possible

62

Who is harmed through price discrimination?

Firms paying higher prices
Consumers paying hgher prices

63

How does price discrimination and linear demand curves effect welfare?

Linear: Overall welfare is higher with uniform pricing

Non-Linear: If lower output, welfare falls

Non-Linear: If higher output, unclear

64

What are some key cases on US price Discrimination Policy

FTC v Anheuser-Busch: Any price difference is discrimination

FTC v Borden Company: Differing prices can be allowed if costs differ

FTC v Morton Salt: If reasonable policy of competition being effected, illegal

65

What is EU policy on price discrimination

United Brands v EU comission

66

What is the UK policy on price discrimination?

Second degree allowed, as long as it relates to differences in costs or large purchases

67

What is the test for predatory pricing?

Areeda v Turner:
P

68

What is the US policy on predatory pricing?

Must prove:
Anticompetetive Behaviour
Intent
Serious prob of sucsess

69

What are the key cases on US preadatory pricing?

Utah Pie: Suit was sucessful despite no harm

Matsusha v Zenith: Two Conditions for PP, Geographical and Intertemporal

70

What is the UK policy on predatory pricing?

Did market conditions make it feasable
Was P