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Industrial Organisation > Term 2 > Flashcards

Term 2 Flashcards

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1
Q

What is the SSNIP Test?

A

Small and Significant non-Transistory increase in prices
Tests for market
Does a monopoly result in a profitable 5-10% increase in prices
Yes: No subs
No: Repeat with new larger market

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2
Q

What are the limitations of the SSNIP?

A

High PED prevents price rise
Market may already be a monopoly
Just because A is art of B does not mean B includes A

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3
Q

What is the SCP scheme

A

Basic Market Conditions
Market Structure
Conduct of Firm
Market Performance

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4
Q

What are some basic market conditions?

A

Supply:
Tech, Raw materials, Regulations

Demand
PED, YED, Seasonality

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5
Q

What are the market structures?

A

Perfect Competition
Monopolistic Competition
Oligopoly
Monopoly

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6
Q

How do we identify the market

A

Number oof Firms
Barriers to Entry
Product Differentiation
Market Knowledge

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7
Q

What are the key areas of conduct?

A 
Price/Output decisions
Product differentiation
Entry detterence
Advertising
R&D
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8
Q

What are the key points of performance?

A 
Profits
Productive and allocative efficiency
Technological progress
Equity
Product Quality
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9
Q

What are the limitations of the SCP paradigm?

A

Focuses on a snapshot of market performance
How do you distinguish between S C and P
What is meant by performance, how do we measure it?

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10
Q

What is the Chicago school?

A

Uses theoretical analysis, assumes PC is the long term

Dislikes Gov intervention

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11
Q

What is teh Austrain School?

A

Competition is driven by innovation

Profits are part of the competitive process

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12
Q

What is Tobins Q?

A

q=Market Value / Replacement rate of capital

Q>1 means the firm has to invest in more capital

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13
Q

What is the Lerner Index?

A

L=P-MC / P

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14
Q

What is the differential collusion hypothesis?

A

The positive correlation between concentration and profitability is caused by:
The more concentrated an industry, the more likley collusion, thus prices are higher

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15
Q

What is the differential efficiency hypothesis?

A

The positive correlation between concentration and profitability is caused by:
Long lived efficency differences, which when relevant, cause concentration to be high

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16
Q

What factors effect firm survival?

A

Individual - Human capital
Firm Level - Size, age, R and D
Industry Level - R & D, Barriers to entry
Other Factors - Business Cycle

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17
Q

What is the effect of size and age on surivial?

A

Older and Bigger firms are more likley to exist

Due to learning by doing

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18
Q

What is the effect of innovation on surivial?

A

If entry is possible, current firms innovate

If firm is small, entry is very important

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19
Q

What are the incentives to innovate?

A

Profit

Strategic - alter structure

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20
Q

What are the profit incentives to innovate in a PC market?

A

If only one firm can innovate, the price can drop from C0 to C1
He can thus serve the whole market

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21
Q

What makes a PC innoation drastic?

A

IF the monopoly optimal price is below the old price, the innovation is drastic

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22
Q

What occurs if a monopoly innovates?

A

Profits will increase

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23
Q

Whuch firm has a bigger incentive to innovate?

A

A PC firm, as it will create a profitable opportunity

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24
Q

Discuss incentives in an oligopoly

A

Follow an inverse U shape as profits decrease an firms increase but the benefit of innovating increases

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25
When licenscing to a duopoly, what is the optimal structure?
Sell one patent if innovation is drastic | Sell 2 if innoviation is non-drastic
26
Discuss RnD with homogenous products?
The monopolist will not benefit from innovation, but will pay to prevent entry Entrant will pay new profit Incumbent will pay difference
27
What is teh replacement effect?
Innovation is more benefical for an entrant than a monopoly
28
What is the efficency effect
A monopoly threatened by entry will pay more to remain a monopoly Thus low profit incentive but high strategic incentives
29
In a differentiated products, what is the optimal ?
X=Pe-PI/2t +0.5 | P=P2+t+c / 2
30
What is strategic RnD
A one stage race to be the first to innovate If one firm does not innovate, the other will not If one firm does, the other does
31
What are the types of advertising?
``` Persuaive = Alters tastes and creates differentiation Informative = Creates awareness Complementary = Does not change preferences or convey information ```
32
What is advertising intensity equal to?
A/Pq = Advertising EOD / PED
33
What is the effect of structure on advertising?
If N increases, PED increases thus A/Pq decreases
34
What is the effect of persuasive advertising?
IS higher on those with a high WTP
35
Discuss information advertising
The consumer cannot buy a product if he is not aware: E ^ -A/N Thus demand is N(1-e^_a/N)P
36
What is the overvall effect of informative and persuasive advertising?
I: Does not increase price, socially inefficent if MC is not increasing P: Increases price, welfare effect is unclear
37
Review Hotellings Model?
Consumers distributed along line UP1= V - tx-P1 UP2= V-T(1-X)-P2 X=P1-P2/2T +0.5
38
Discuss informative advertising in hotellings model?
Lamda is probability of awareness The cost of informing is: A=Lamda^2/2 Demands become Lamda1((1-Lamda2)+Lamda2(t-p1+p2)/2t PED = -Lamda2P/2-Lamda2)t
39
What are the best response functions under informative advertising
P1=P2+c+t/2 + (1-Lamda2)/Lamda2 *t Lamda1 = 1/a(P1-c)(1-Lamda2+lamda2(0.5+(P2-p1/2t)))
40
What are the main conclusions of informative advertising?
An increase in t causes the price and advertising to increase If advertising is cheaper, advertising increases and price falls Higher advertising = more market power
41
Discuss persuasive advertising in hotellings model?
Changes preferences via V= V + BLamda Indifference thus occurs at X=0.5- p2-P1/2T +B(Lamda1-Lamda2)/2t
42
What are the best response functions under persuasive advertising?
P1=0.5 (c+t+p2+Blamda1-Blamda2) Lamda1=(3t-Blamda1)B/9at-B^2
43
What are the main conclusions of persuasive advertising?
Price is independant of advertising, thus the best possible level is A=0
44
Discuss advertising that increases differentiation
The model occurs where t=t+Blamda1+BLamda2 Indifference is thus x=0.5 (P2-P1)/2+t+Blamda1+Blamda2
45
What are the main of persuasive advertising conclusions?
Persuasive advertising increases product differences, creating a free riding problem
46
Define a natural monopoly?
LRAC declines, | One firm is optimum
47
What are the solutions to a natural monopoly?
Public ownership Privatization Franchise Price Regulations
48
Discuss private ownership?
Monopoly is owned by government, preventing explotiation | Issue of too big to fail and inefficency due to competition and profit incentives
49
Discuss privatiazation?
State owned assets to prviate sector | Reduces inefficency through profit motives
50
Discuss Franchising?
Exclusive rights sold at auction Issue of possible collusion and length
51
How do you determine if a natural monopoly is efficent and sustainable?
For efficency, check costs of one firm and two firms For sustainable, check if entry is profitable for new firm
52
What is required for a sustainable multi-product economy?
Economies of scale and economies of scope
53
What are the two types of price regulation?
First Best: P=MC Second Best: P=AC
54
Evaluate P=MC
Allocativley efficient Minimal incentives to innovation May lead to firm exit
55
Evaluate P=AC
Maximises total welfare Regulator needs to know AC Creates a deadweight loss
56
What is a more realistic price regulation measure?
RPI-X ROR
57
Discuss RPI-X
RPI-cost savings Has incentives to innovate as can keep profits for short term Easy How frequently do you adjust How do you estimate cost savings
58
Discuss ROR
A maximum PQ-WL-UK/pkK Easy to compare Creates an incetive to overinvest in capital Inefficency
59
What is the Averch-Johnson effect?
The ROR inefficeny causes a suboptimal expansion path with a greater focus on capital investment
60
What is the ramsey rule?
Finds the optimal prices to maximise social welfare when MC is not available Max SW s.t. Profit = 0 P-MC/P = Lamda/EOD
61
Evaluate Horizontal Mergers?
Positive: Economies of scale Promotion of innovation Negative: Increases market power High barriers to entry
62
What variables effect market power?
Concentration Market Share Entry Demand Variables
63
Discuss mergers without effiencency gains?
Will always lower consumer surplus and total welfare
64
Discuss mergers with efficency gains
With differentiated products, higher prices for all firms will result CS falls, Profits increase Total effect is negative If reduction is high, it can benefit consumers
65
Evaluate vertical mergers
Benefits: Avoids double marginalisation Increases market power Reduces Costs Drawbacks: Negativley imapcts competition Raises entry barriers
66
What are the types of competition policy?
Maximisation of total surplus Maximisation of consumer surplus Defence of small firms Promoting market integration
67
What is the US History of competition policy?
Sherman Act Clayton Act FTC
68
What is the UK history of competition act
Profiteering Act Monopolies and Restrictive Practies Act Competition Act
69
What is the EU history of competition act
1951 Treaty of Paris | Regulator : EU comission
70
How does competition policy work in practice?
SSNIP test Market power is assessed Lerner Index

Industrial Organisation (2 decks)

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