eco 3101

monopoly

market with only one seller

monopsony

market with only one buyer

market power

the ability of a seller or buyer to affect the price of a good

marginal revenue

change in revenue resulting from a one-unit increase in output

Lerner Index of Monopoly Power

the measure of monopoly power calculated as the excess of price over marginal cost as a fraction of price

barrier to entry

a condition that impedes entry by new competitors

rent seeking

spending money in socially unproductive efforts to acquire, maintain, or exercise monopoly

natural monopoly

a firm that can produce the entire output of the market at a cost lower than what it would be if there were several firms

rate-of-return regulation

maximum price allowed by a regulatory agency is based on the (expected) rate of return that a firm will earn

oligopsony

market with only a few buyers

monopsony power

buyer's ability to affect the price of a good

marginal value

the additional benefit derived from purchasing one more unit of a good

marginal expenditure

the additional cost of buying one more unit of a good

average expenditure

price paid per unit of a good

bilateral monopoly

market with only one seller and one buyer

antitrust laws

rules and regulations prohibiting actions that restrain, or are likely to restrain, competition

parallel conduct

form of implicit collusion in which one firm consistently follows actions of another

predatory pricing

practice of pricing to drive current competitors out of business and to discourage new entrants in a market so that a firm can enjoy higher future profits

price discrimination

practice of charging different prices to different consumers for similar goods

reservation price

maximum price that a customer is willing to pay for a good

first-degree price discrimination

practice of charging each customer her reservation price

variable profit

sum of profits on each incremental unit produced by a firm; i.e., profit ignoring fixed costs

second-degree price discrimination

practice of charging different prices per unit for different quantities of the same good or service

block pricing

practice of charging different prices for different quantities or "blocks" of a good

third-degree price discrimination

practice of dividing consumers into two or more groups with separate demand curves and charging different prices to each group

intertemporal price discrimination

practice of separating consumers with different demand functions into different groups by charging different prices at different points in time

peak-load pricing

practice of charging higher prices during peak periods when capacity constraints cause marginal costs to be high

two-part tariff

form of pricing in which consumers are charged both an entry and a usage fee

bundling

practice of selling two or more products as a package

mixed bundling

selling two or more goods both as a package and individually

pure bundling

selling products only as a package

typing

practice of requiring a customer to purchase one good in order to purchase another

advertising-to-sales ratio

ratio of a firm's advertising expenditures to its sales

advertising elasticity of demand

percentage change in quantity demanded resulting from a 1-percent increase in advertising expenditures

horizontal integration

organizational form in which several plants produce the same or related products for a firm

vertical integration

organizational form in which a firm contains several divisions, with some producing parts and components that others use to produce finished products

transfer prices

internal prices at which parts and components from upstream divisions are "sold" to downstream divisions within a firm

double marginalization

when each firm in a vertical chain marks up its price above its marginal cost, thereby increasing the price of the final product

quantity forcing

use of a sales quota or other incentives to make downstream firms sell as much as possible

monopolistic competition

market in which firms can enter freely, each producing its own brand or version of a differentiated product

oligopoly

market in which only a few firms compete with one another, and entry by new firms is impeded

cartel

market in which some or all firms explicitly collude, coordinating prices and output levels to maximize joint profits

Nash equilibrium

set of strategies or actions in which each firm does the best it can given its competitors' actions

duopoly

market in which two firms compete with each other

Cournot model

oligopoly model in which firms produce a homogeneous good, each firm treats the output of its competitors as fixed, and all firms decide simultaneously how much to produce

reaction curve

relationship between a firm's profit-maximizing output and the amount it thinks its competitor will produce

Cournot equilibrium

equilibrium in the Cournot model in which each firm correctly assumes how much its competitor will produce and sets its own production level accordingly

Stackelberg model

oligopoly model in which one firm sets its output before other firms do

Bertrand model

oligopoly model in which firms produce a homogeneous good, each firm treats the price of its competitors as fixed, and all firms decide simultaneously what price to change

noncooperative game

game in which negotiation and enforcement of binding contracts are not possible

payoff matrix

table showing profit (or payoff) to each firm given its decision and the decision of its competitor

prisoners' dilemma

game theory example in which two prisoners must decide separately whether to confess to a crime; if a prisoner confesses, he will receive a lighter sentence and his accomplice will receive a heavier one, but if neither confesses, sentences will be lighter than if both confess

price rigidity

characteristic of oligopolistic markets by which firms are reluctant to change prices even if costs or demands change

kinked demand curve model

oligopoly model in which each firm faces a demand curve kinked at the currently prevailing price: at higher prices demand is very elastic, whereas at lower prices it is inelastic

price signaling

form of implicit collusion in which a firm announces a price increase in the hope that other firms will follow suit

price leadership

pattern of pricing in which one firm regularly announces price changes that other firms then match

dominant firm

a firm with a large share of total sales that sets price to maximize profits, taking into account the supply response of smaller firms

game

situation in which players (participants) make strategic decisions that take into account each other's actions and responses

payoff

value associated with a possible outcome

strategy

rule or plan of action for playing a game

optimal strategy

strategy that maximizes a player's expected payoff

cooperative game

game in which participants can negotiate binding contracts that allow them to plan joint strategies

dominant strategy

strategy that is optimal no matter what an opponent does

equilibrium in dominant strategies

the outcome of a game in which each firm is doing the best it can regardless of what its competitors are doing

maximin strategy

the strategy that maximizes the minimum gain that can be earned

pure strategy

strategy in which a player makes a specific choice or takes a specific action

mixed strategy

strategy in which a player makes a random choice among two or more possible actions, based on a set of chosen probabilities

repeated game

game in which actions are taken and payoffs received over and over again

tit-for-tat strategy

repeated-game strategy in which a player responds in kind to an opponent's previous play, cooperating with cooperative opponents and retaliating against uncooperative ones

sequential game

game in which players move in turn, responding to each other's actions and reactions

extensive form of a game

representation of possible moves in a game in the form of a decision tree

auction market

market in which products are bought and sold through formal bidding processes

English (or oral) auction

auction in which a seller actively solicits progressively higher bids from a group of potential buyers

Dutch auction

auction in which a seller begins by offering an item at a relatively high price, then reduces it by fixed amounts until the item is sold

sealed-bid auction

auction in which all bids are made simultaneously in sealed envelopes, the winning bidder being the individual who has submitted the highest bid

first-price auction

auction in which the sales price is equal to the highest bid

second-price auction

auction in which the sales price is equal to the second-highest bid

private-value auction

auction in which each bidder knows his or her individual valuation of the object up for bid, with valuations differing from bidder to bidder

common-value auction

auction in which the item has the same value to all bidders, but bidders do not know that value precisely and their estimates of it vary

winner's curse

situation in which the winner of a common-value auction is worse off as a consequence of overestimating the value of the item and thereby overbidding

partial equilibrium analysis

determination of equilibrium prices and quantities in a market independent of effects from other markets

general equilibrium analysis

simultaneous determination of the prices and quantities in all relevant markets, taking feedback effects into account

exchange economy

market in which two or more consumers trade two goods among themselves

Pareto efficient allocation

allocation of goods in which no one can be made better off unless someone else is made worse off

Edgeworth box

diagram showing all possible allocations of either two goods between two people or of two inputs between two production processes

contract curve

curve showing all efficient allocations of goods between two consumers, or of two inputs between two production functions

excess demand

when the quantity demanded of a good exceeds the quantity supplied

excess supply

when the quantity supplied of a good exceeds the quantity demanded

welfare economics

normative evaluation of markets and economic policy

utility possibilities frontier

curve showing all efficient allocations of resources measured in terms of the utility levels of two individuals

social welfare function

measure describing the well-being of society as a whole in terms of the utilities of individual members

technical efficiency

condition under which firms combine inputs to produce a given output as inexpensively as possible

production possibilities frontier

curve showing the combinations of two goods that can be produced with fixed quantities of inputs

marginal rate of transformation

amount of one good that must be given up to produce one additional unit of a second good

comparative advantage

situation in which Country 1 has an advantage over Country 2 in producing a good because the cost of producing the good in 1, relative to the cost of producing other goods in 1, is lower than the cost of producing the good in 2, relative to the cost of producing other goods in 2

absolute advantage

situation in which Country 1 has an advantage over Country 2 in producing a good because the cost of producing the good in 1 is lower than the cost of producing it in 2

public good

nonexclusive, nonrival good that can be made available cheaply but which, once available, is difficult to prevent others from consuming

asymmetric information

situation in which a buyer and a seller possess different information about a transaction

adverse selection

form of market failure resulting when products of different qualities are sold at a single price because of asymmetric information, so that too much of the low-quantity product and too little of the high-quantity product are sold

market signaling

process by which sellers send signals to buyers conveying information about product quality