Flashcards in Term 1 Deck (70):
What is Cournot competition?
Competing in the same period on Quantity
How do you calculate a reaction function?
Differentiate profit and solve for Q1
What is revenue destruction?
Where small firms expand output, lowering the market price
How would you calculate EOD and Market Share
What happens if all firms have the same MC?
Share becomes 1/n
What is the Herfindahl Hirschamn Index
A measure of market concentration
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
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
If the above conditions are met, what occurs?
The monopoly is perfectly contestable
Hit and run competition
What are the two types of barriers to entry?
Structural - Legal / Cost Advantage
Strategic - Raising sunk entry costs or lowering post entry profit
What strategies are available for deterring entry?
What is limit pricing?
Using the entrants residual demand, the incumbent sets a quantity that prevents entry
This harms the incumbent
What is the sunk cost entry decision tree?
Incumbent chooses whether to share or fight
Entrant chooses whether to enter
Incumbent chooses whether to invest
What is blockaded entry?
The industry is a natural monopoly therefore the incumbent does not need to act
What is predatory pricing?
Waging a price war to drive other competitors out of the market
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
What characteristics should a strategic decision have to be effective?
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
What methods of collusion are available?
Both are illegal and thus unenforcable
Why is collusion likely to fail?
Both firms have an incentive to cheat
What factors effect the sucsess of tacit collusion
Number of firms
Similarity of firms for determing share
The ability to detect and punish cheating
What practices help collusion occur?
Public announcment of price changes
Most-Favoured Nation - Promising to pay lowest price
What are the two types of product differentiation?
Vertical: Quality - All consumers agree on ranking but not WTP
Horrizontal - Taste
What is Hotellngs Spatial Model of Competition?
Linear city, with a shop at either end
Value to costumers at position X is:
There is therefore a point of indifference
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:
T is importance of travel costs, is T=Large, each shop gets half the share, prices irrelevant
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
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
What are the three types of price discrimination?
First: Highest WTP
Second: Depends on Q purchased
Third: Observable Characteristics
What conditions are necessary for effective Price Discrimination?
Prevent Secondary Trade (Customers Re-selling)
How can secondary trade be prevented?
Legally - Electricity
Product Characteristics - Transport Costs
Verification by Cons Type - Travel Pass
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
What are the types of second degree price discrimination?
Block Tariff - Staircase
Two Part Tariff - Licence fee and uniform price - Flat then slanted
Trade off between complexity and profitability
How do you calculate societys welfare?
CS + Profit
What is Posner's theory on rent seeking?
If there is competition to becoming a monopolist, there is gains to being one
What are the costs of X-Inneficency?
Lack of competition causes laziness
What are the barriers to entry?
Government Grant of Monopoly - Raise Revenue
Patents to Reward Innovation - Promote Dynamic Efficency
Control of Inputs
Economies of Scale
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
How is a market defined?
XPED - High XPED means same market
PES - Similar means same
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
What are the two areas legislation can be targeted at?
Structural - Enhance Comp Forces
Conduct - Tackle actions by players
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
What is EU legislation like?
Same as US, but with exeptions for Technical and Dynamic efficency
What is UK Legislation like?
Same as US and EU, only do not need to prove an agreement
How do you calculate the Lerner Index?
What effect does rising MC have?
Reduces market power
What is competitive fringe analysis?
One monopolist and many small firms
Monopolist receives whatever demand is left
Discuss US v Du Pont
A celophane company was considered to be in the packing materials market, as consumers can switch between products
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
Discuss United Brands v Commission
Should a market be determined by those with the highest WTP?
Elderly need Banannas therefore yes
Discuss Hugin v Commission
Market defined as Hugin spare parts despite other registers available
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
Discuss Texas International and National Air
Merger was allowed on the grounds of potential, rather than actual, competition
Discuss Du Ponte
Courts allowed non-licensing to benefit the innovators
What reduces the likelihood of collisions success
Large no of firms
Threat of potential competition
What are the four tests of EU and UK exemptions for collusion
Must improve efficency
Consumers are given a share
Does not weaken competition
What is the 5 point screening process for US mergers?
Calculate Change in concentration
Look at collusion
In what way is the EU different to the US?
No efficency expemption
Discuss US v Trans Missouri Freight
Illegal price setting despite the defence it was reasonable
Discuss US v Socony Vacuum Oil
Firms illegally colluded to buy oil of competitiors to maintain price
Discuss Chicargo Board of Trade v US
Choosing not to trade when market closed is ok
What are the 3 conditions necessary for effectivce price discrimination?
Secondary trade not possible
Who is harmed through price discrimination?
Firms paying higher prices
Consumers paying hgher prices
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
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
What is EU policy on price discrimination
United Brands v EU comission
What is the UK policy on price discrimination?
Second degree allowed, as long as it relates to differences in costs or large purchases
What is the test for predatory pricing?
Areeda v Turner:
What is the US policy on predatory pricing?
Serious prob of sucsess
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