Unit 3

what is oligopoly

• when few dominant firms

• products can be homogeneous or different

what are forces that affect competition in oligopoly

• suppliers

• buyers

• substitutes

• potential entrants

what does it mean when a market is perfectly contestable

there are no barriers to entry, if Oligopoly is this, it is like a perfectly competitive market

what is a cartel (basically monopoly)

a group that sets the price and quantity of a product in the market

like drug cartel

what is game theory

the idea that your outcome depends on other people’s actions

what is strategy

a complete and contingent plan

• You know what you will do in every situation

what is dominant strategy

when you take the same action no matter what the opposition does

what is bridge-crossing dilemma

when you don’t have a complete strategy

what is demand schedule

a table with the prices and quantities demanded

what is cournot model

basically duopoly

when deciding to collude (work together) or cheat (one firm sells more quantity of a product):

• if one firm cheats

  • that firm earns more money

• if both firms cheat

  • the firms earn the same amount, but less than if they colluded

what is nash equilibrium

when both firms in a duopoly play their best response/dominant strategy (best quantity to always max out their possible profit)

BASICALLY A BOX WHERE THERE ARE 2 CIRCLES

how can oligopoly behave?

like monopoly - cartel (control price and quantity)

oligopoly - normal

like perfectly competition - perfectly contestable (no barriers to entry)

what is best response

when you choose the action that gives you the highest payoff (can be different for each of the other player’s possible actions)

what are the antitrust stuff

• mergers

what is merger

when one firm wants to buy another

the department of justice (DOJ) or federal trade commission (FTC) evaluates mergers

what are arguments in favor and against mergers

favor

• efficiency

• economies of scale or scope (scale is produce more good bc cheaper price, scope is costs go down if produce more than 1 type of product)

against

• less competition

• more power to charge a price higher than MC (P>MC)

what is Herfindahl-Hirschman Index (HHI)

index of market concentration

found by adding the square of % shares of firms in the market

results of HHI

if HHI > 1000

• challenge merger if HHI goes up by 100 or more after merger

if HHI > 1800

• challenge merger if it goes up by 50 or more after merger

what is in monopolistic competition

• different products (“brand name”)

• many firms

• no barriers to entry

what is horizontal differentiation

personal opinions on different types of products

what is vertical differentiation

facts that makes some products better than others

are there profits in the long-run for monopolistic competition?

no

when do monopolistic competition firms produce in the long run

when PRICE > MC, thus they are inefficient

what is marginal social cost (MSC)

the cost of society caused by the production of an additional unit of a good or service

MSC = MC + MEC (marginal external cost)

what does social optimum graph look like

basically demand and supply curves

how to fix externalities

• private bargaining and negotiation (coase theorem)

• government regulations

• taxes (for negative externalities) and subsidies ($ support for positive externalities)

• sale or auction of rights to impose externalities (like creating a market for the problem, cap and trade)

what is coase theorem and what are 3 conditions for it

it is idea that sometimes the government doesn’t need to be involved to solve problems (mainly PROPERTY LAWS)

conditions

• property rights

• few people involved

• clear communication (low transaction costs)

how to do cap and trade (reduce externalities)

• the gov’t sets a limit for a good

• the firm in the industry for the good that has the LOWEST cost should reduce its quantity

• that firm can then sell their permits to the other firm in the industry, price depends on MC

how to find market demand for private vs public goods

private - add horizontally

public - add vertically

how to tell negative externalities based on a graph

the MSC (marginal social cost) line is to the LEFT of MC curve

how to tax to fix negative externalities

tax the market so that MC + tax = MSC

what is cap and trade example

MC are the numbers in the boxes

firm B would save 6 dollars if firm A sells the rest of its permits (6,3,1)

what should total willingness to pay equal

MC

what is tiebout hypothesis

public goods are affected by consumer preferences, which are based on housing prices

what is expected value

each payoff weighted by the probability of something occurring (basically weighted average)

what is risk-averse

when someone prefers an option that is certain rather than an uncertain one

what is risk-neutral

when a person likes options that have expected value of 0

what does risk-averse, neutral, and loving look like on graph

averse - decreasing slope (exponential decrease)

neutral - constant positive slope (linear increase)

loving - increasing slope (exponential increase)

what is averse selection

when there is asymmetric information and one high-quality product is taken out of a market bc the seller cannot prove its high quality

what is a moral hazard

when people in a contract change their behavior in response to that contact (like when seatbelts were made, ppl drove faster)

what is progressive tax

a tax that makes income distribution more equal (usually rich ppl pay)

what is regressive tax

a tax that makes income distribution less equal (usually poor ppl pay)

what is expected utility

the sum of all utilities, which weighs the probability of events occuring.