Exam 3 Econ 1014H Mizzou

Number of Firms in Oligopoly?

A Few Sellers

How do Oligopolies pick best price-output combo?

Game Theory

Are Oligopolies Price takers or makers?

Price Makers

Profit Max of Oligopoly?

MR=MC

Do Oligopolies have no, small, or large barriers to entry?

Large, so few firms

5 barriers to entry

Scale Economies, Switching Costs, Product Differentiation, Absolute Cost Advantage, Government Regulations

Two Types of Oligopoly Models

Cournot and Bertrand

Cournot Competition

-Homogeneous Goods

-Competition based on quantity

-Equilibrium price is lower than the monopoly equilibrium

-Equilibrium quantity is higher than monopoly equilibrium quantity

-Firms that make price/quantity decisions independently

Bertrand Competition

-Based on price

-results in pricing at MC

-heterogenous goods

-equilibrium price likely to be higher than homogenous goods

Bertrand Paradox

Without product differentiation, any competition drives profits to ZERO.

-> Rivals will always want to undercut each other by charging $0.01 less until Price equals Marginal Cost.

Solution: Product differentiation

Cartel

a formal organization of producers that agree to coordinate prices and production

Problems with Colluding?

-Illegal

-Incentives to Cheat

Public Policy?

When there is a proposed acquisition of substantial scale, the government reviews it and decides whether to challenge it

Network Effects?

-increases in the value of a product to each user, including existing users, as the total number of users rises

- can counteract the law of demand

Network Good?

a good whose value to one consumer increases the more that other consumers use the good

Market?

a group of buyers and sellers of a particular good or service

Platform?

market where digital tech facilitate interaction

Two-Sided Market?

Network markets comprised of two distinct categories of participant, both of which that are needed to deliver value for the network to work (e.g., video game console owners and developers of video games).

Cross-side network effect?

-positive

- buyers prefer large number of sellers and sellers prefer large number of buyers

same-same network effect

-negative

-large number of sellers means severe competition among sellers

"Subsidy side" of two sided network?

-group of users who when attracted in volume, are highly valued by the "money side" the other user group

positive network externalities

when the value of a product increases with the number of users

Does the internet facilitate price discrimination?

-Yes

-More individualized and interactive

-purchases can be tracked

-easier to personalize price

Search good?

A product with characteristics that enable an individual to evaluate the product's quality in advance of a purchase.

experience goods

refer to those about which the consumer gets relevant information after purchasing them, such as food and entertainment

credence goods?

Like insurance coverage, consumers may rarely learn product attributes

information goods?

Technological products and services

Properties of Information Goods

-Economies of Scale: typically high fixed cost of production but zero or very low cost of reproduction

-Public good traits: non-rival and sometimes non-excludable

-Tech adoption speed is fast

game theory

the study of how people behave in strategic situations

dominant strategy

a strategy that is best for a player in a game regardless of the strategies chosen by the other players

Pareto Effect

no individual can be made better off without making someone else worse off

Pareto efficient

a situation is efficient if no change is possible that will help some people without harming others

Nash Equilibrium

a situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the other actors have chosen

Schelling points

focal point of equilibrium determined by experience

maximin strategy

-in game theory, a strategy chosen to maximize the minimum gain that can be earned

-minimize risk

mixed strategy

-maximize payoff by switching strategy

-no pure Nash equilibrium

-gambling and sports

extensive form game

a representation of games that specifies the order of play

cheap talk

message said without talk to you

costly signal

conveying info in a way only if it costs you something

credible commitment

a long-term strategic decision that is both difficult and costly to reverse

factor of production

an input used in the production of a good or service

Marginal Revenue Product

the change in total revenue associated with one additional unit of input

If wages go down, should you hire less or more workers?

hire more

superstar phenomenon

large scale, perceived as slightly better --> exponential increase in marginal revenue (small dif in quality, huge dif in marginal revenue, huge dif in wage)

Baumol's cost disease

workers have to be paid the market rate even though they a aren't more productive

Leisure

Free time not taken up with work.

Wage Properties

-People work harder up until a point

-Backward bending supply curve

-Income effect

income effect

the change in consumption resulting from a change in real income

What is pay based on?

Marginal revenue of product

subsitution effect

when consumers react to an increase in a good's price by consuming less of that good and more of other goods

Properties of Low Skilled Workers?

-Used to be a higher demand

-With free trade, most of the work by them is done overseas

-Relative demand dropped for this labor

Properties of High-skilled workers?

-Bachelors degree

-large wage differential

Human Capital?

the skills and knowledge gained by a worker through education and experience

signaling theory

employers value educated people not bc of the knowledge they learned but bc getting a degree sorted people into high-skilled and low-skilled workers

sheepskin effect

The phenomenon that the return to a year of education is higher when that year includes the awarding of a degree or education credential

efficiency wages

above-equilibrium wages paid by firms to increase worker productivity

Gini Coefficient

A measure of income inequality within a population, ranging from zero for complete equality, to one if one person has all the income.

Basic Themes of Inequality?

-inequality produces incentive to produce wealth

Endowment effect

we place greater value on objects we own over objects we do not own

Standard Economics

people take a broad, long-term view in which their utility is based on the discounted value of future wealth

Behavior Economics

people are motivated by gains and losses, which are temporary events

framing effect

one of two equivalent outcomes is consistently preferred merely because it is positively presented or framed

Prospect theory

describes how people choose between alternatives that involve risk, including both gains and losses

Disposition Effect

the tendency of investors to sell shares whose price has increased, while keeping assets that have dropped in value

choice architecture

a framework setting out different ways in which choices can be presented to consumers, and the impact of that presentation on consumer decision making

Libertarian Paternalism

a policy that tries to influence people to choose in a way that will make them better off (as judged by themselves) but in a way that also preserves freedom of choice

Consumer Theory?

characterizes consumers choices in a systematic way

indifference curve

-a curve that shows consumption bundles that give the consumer the same level of satisfaction

-slopes downward

Labor Market Graph

Strategic form game

players make their choices simultaneously

monopoly graph

monopolistic competition graph

natural monopoly graph