Term 1 Flashcards by Jake Skelton

What are the four Hannah and Kay Criteria?

A steeper Cumulative Market Share = higher concentration
A transfer of sales will increase concentration
If a new firm enters, concentration decreases
A merger will increase concentration

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What are some popular measures of concentration?

Reciprocal
K-Firm Concentration Ratio
Hirschamn-Herfindahl Index
Hannah-Kay Index

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Discuss the Reciprocal of firm numbers?

1’N

Easy to calculate but attaches zero weight to size inequality

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Discuss the K firm concentration ratio?

Sum the market share of top K firms
Easy to calculate
But sales transfers are not captured

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Discuss the Hirschman-Herfindahl Index?

Sum the square of the market share
1/H gives a numbers equivalent
Satisfies Hannah-Kay
Cannot measure all firms

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Discuss the Hannah-Kay index?

Sum S^a ^(1/1-a)
Gives a larger weight to larger firms
Higher numbers imply lower concentration

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Discuss international trade?

C=Qx-Xx / Q-X+M

Qx=Total Sales of x largest
Xx = Exports of x Largest

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What is the Deterministic approach to market concentration?

Emphasises the role of technology as a determinant of market concentration
Fixed costs and demand

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How do you calculate N* in a U shaped curve market?

=Qc/Q*
Qc is demand
Q is bottom of LRAC

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How do you calculate N* ibn a L shaped curve market?

Qc/MES

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What effect do barriers to entry have?

They will raise P>Pc, reducing demand

Thus concentration will increase

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Discuss the exogenous fixed cost model

Profit = (N, S, T)
N is number of firms (negative)
S is market demand (posititve)
Tao is measure of price competition(negative)

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What is the equilbrium in an exogenous model, how does changing tao and fixed costs effect it?

All firms make zero net profit after fixed costs
If Fixed costs increase, N falls
If Tao increases, N falls

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Discuss the endogenous fixed costs model?

Profit = (N, S, T, Ai, A-i)
N is number of firms (negative)
S is market demand (posititve)
Tao is measure of price competition(negative)
A is own firms fixed costs (Positive - advertising)
A-i is other firms fixed costs (negative)

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What is the equilbrium in an endogenous model? How does Changing fixed costs effect it?

All firms do same level of A and make zero profit

An increase in A reduces number of firms

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What is the contradiction in the endogenous model?

An incrase in Tao should reduce number of firms

However, tao increasing will cause fixed costs to increase, reducing the number of firms

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What is the Sutton Lower Bound

CR(K) >= (K/N)(1-Ln(K/N)
CR is concentration ratio
K is K 
N is total number
The concentration ratio must exceed the RHS, or prices are not high enough to give returns on fixed costs

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What is the Gibrat Process?

The log of the firms sizes in two periods follows a random normally distributed error

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Describe the Gibrat process graphically?

A left skew indicates that most firms do not grow but some grow very well
The variance increases over time

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How do you compare two industries

The lower the peak, the more concentrated

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What is the formula for the Gibrats CR5?

CR5 = (1-y)^1/a X {5a/a-1 X MES/Q} ^a-1/a
a=1/(1-0)

0 is the rate at which firms move above the MES
Y is the share of firms that are suboptimally scaled
MES/Q is the market size

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How do the variables effect Gibrats CR5?

Study These Flashcards

An increasing function of MES/Q
A decreasing funciton of y
A decreasing function of 0

What is the Cowling-Waterson Model?

Study These Flashcards

Assumes no patrties have market powers

What is the industry in the CW model?

Study These Flashcards

Pi+F/R=H(1+u)/n
LHS is profit to revenue
H is HH
u is HH*Lamda / HH
n isped

What is the firm in the CW model?

p-c/p=s(1+lamda)/n

What are some special cases of the CW model?

Perfect Competition: H=0 therefore LHS = 0 Bertrand Competition Lamda = -1 thefore LHS = 0 Monopoly N=H=1 therefore LHS = 1/n Cournot Lamda = 0 therefore Industry and Firm = share / n

Discuss Collusion in the CW Model

Works like a monopoly, therefore profit = 1/n

Discuss the Clarke Davis model

Firms decide their output based on an implicit degree of collusion

How do you solve a game based on dominance?

Remove a stratergy that is beaten by all others until one left

How do you solve a game via Nash?

Choose best given opponents strategy

What are the 5 Problems faced by Cartels?

``` Predict and discourage non-member production Locate the contract surface Pick a point on the contract surface Detect Cheating Deter Cheating ```

What are the sources of non-member production?

New firms entering | Current firms who choose not to particpate

How do you find the contract surface?

All points of tangential iso profit curves

What causes issues when locating the contract surface?

Differentiated products | Unknown cost functions

What point is chosen on the contract surface?

Within the core | Between the IC on the contract surface

How can you detect cheaters?

Monitor old customers, new customers | If attracting alot, likley cheating

What makes detecting cheating easier?

Small number of firms / buyers | Higher probability of repeat purchase

Discuss Osbornes Quota Rule?

If firm 1 increases its production, firm 2 will also, reducing the profit for both firms

What are the Caveats of Osbornes Rule?

Relies on swift retaliation | Is not the optimal response

In game theory, what occurs if there is a finite number of periods?

In final period, no retaliation therefore cournot | Repeates

What occurs in a infinitive number of periods?

They can either JPM in every period or defect in cournot and remain -If alpha is high enough, JPM may produce higher profits

What facilitates Tacit collusion?

Price leadership Trade associations Meet the competition clause

Name some sources of barriers to entry?

Sunk costs Statuatory barriers Economies of scale

What is the sylos postulate?

Entrant believes incumbent will remain constant post entry

Discuss the sylos postulate graphically?

If both firms produce below a certain level, they will incur infinite fixed costs Therefore incumbent can produce beyond monopoly level to prevent entry

What are the three main extensions to deter entry?

Repeated entry Asymmetric Information Strategic pre-commitment

Discuss repeated entry

Predatory pricing in previous periods can prevent entry in future if game is infinite

What is a perfect equilibrium?

Each stage of a game is nash

Discuss assymetric information?

Incumbent is either a high or low cost producer, and can indicate this by production

Discuss Strategic pre-commitment

Invest in an irreversible, visible and credible deterent

What are the four Fudenberg and Tirole Stratergies

Top Dog: Excess capacity Puppy Dog ploy: Allow entry Fat Cat: Brand loyalty Lean and Hungry: Reduces investments in all but one market

Discuss detterence with differentiated products?

Preferences are located along a line with N brands

How does entry work here?

Entry is only profitable if N*>2N | Thus if N*/2

Term 1 Flashcards

(53 cards)