1/26
Looks like no tags are added yet.
Name | Mastery | Learn | Test | Matching | Spaced |
---|
No study sessions yet.
invisible hand properties
short run: by maximizing profits and producing where P=MC, firms minimize total industry production costs
long run: by responding to profits in a market/industry, firms assure that resources move toward their most productive use and the balance of industries is efficient
ONLY WORKS with no externalities and competitive market (no monopoly/oligopoly)
competitive market
free entry/exit of firms
many buyers and sellers
each buyer/seller is a price-taker
monopoly
barriers to entry
may be (regulatory) barriers to exit
one seller, many buyers
downward-sloping demand curve
not a price-taker
inefficient
P>MC → DWL
natural monopolies
large fixed costs, relatively low marginal costs
increasing returns to scale over the relevant range of output
imply that AC>MC
a single firm can produce the good much more cheaply than several smaller firms
price discrimination
charging more than one price for the same product
can increase surplus as compared to simple monopoly
simple case: 2 markets or groups with different demand curves (third degree price discrimination)
identical marginal cost for both groups
key assumption: no arbitrage
monopolists can increase profits by charging different prices in the different markets
elasticity=escape
principles of price discrimination
if the demand curves are different, it is more profitable to set different prices in different markets than a single price that covers all markets (firm wants to price discriminate)
to maximize profits, the monopolist should set a higher price in markets with more inelastic demand
arbitrage may make it difficult for a firm to set different prices in different markets, thereby reducing the profit from price discrimination
perfect price discrimination
charging each buyer their maximum willingness to pay
need to prevent arbitrage (resale)
difficult to implement because it requires very detailed information on consumers’ maximum willingness to pay
still, producers go to great lengths to gather information on their consumers
tying
consumption of one good requires the consumption of a second good produced by the same firm
allows firms to price discriminate by pricing the base good below cost and the variable good above cost
consumers reveal their willingness to pay through the variable good
bundling
requiring that a good be bought along with other goods
most beneficial in high fixed cost, low marginal cost industries where consumers value the bundle similarly but differ in which of the individual components they view as high vs. low value
quality discrimination (versioning)
when firms sell different versions of a product with different features at different prices (and the price difference > cost difference)
lower priced version costs more to produce
cartel
attempts to move a market from a competitive one to what would occur if the market were controlled by a monopoly
undifferentiated product (Q)
small number of producers
when firms form one:
set overall production level at the monopolist quantity where industry profits are maximized
once overall production level set, set a production quota for each cartel member
work best for commodities with limited geographic options for entry
most successful ones operate with explicit support of (and enforcement by) the government
redeeming quality of oligopoly
pursuit of market power can lead to innovation and product differentiation
one reason firms innovate is to produce a product with fewer substitutes
fewer substitutes → more inelastic demand → higher prices/profits
firms also compete by differentiating their products with different styles/features
network goods
a good whose value to one customer increases the more that other customers use the good
usually produced by monopolies or oligopolies
competition is “for the market” rather than “in the market”
best product may not always win (suboptimal equilibrium)
contestability matters
network externality (positive externality)
typically involve one firm providing a dominant standard at a high price
markets usually also include a number of other smaller firms offering a slightly different product
tend to service niche areas in the market
platform firms
connect two or more sides of a market
seek to maximize total transaction value
lowering transaction costs → facilitates trade and helps transfer resources from low to high-value uses
increasing the number of transactions by expanding the 2 sides of the market (network externalities)
providing the product for free to one side of the market can be a profit-maximizing strategy
as they have grown, their policies have sometimes become as powerful as government regulations
Nash equilibrium
a situation in which neither player has an incentive to change their behavior or response
no player wants to unilaterally defect, i.e. knowing the other player’s strategy wouldn’t cause either to change their strategy
contestability
occurs if a competitor could credibly enter and take business away from the incumbent
fixed costs of entry are low
few/no legal barriers to entry
incumbent has no unique or hard-to-replicate resource
consumers are open to the prospect of dealing with a new product
winner may not last for long
firms may try to limit it with consumer loyalty plans, increase switching costs
monopolistic competition
lots of competitors
differentiated products
in the minds of consumers, the products are good, but not perfect, substitutes
advertising produces product differentiation (feature of monopolistically competitive and oligopolistic markets)
zero economic profits in long-run equilibrium
inefficiency
not producing at minimum AC (excess capacity) (not productively efficient)
not producing where P=MC (not allocatively efficient)
added variety may make up for lost efficiency
downward-sloping demand curve
informative advertising
price, quality, and availability information
advertising as a signal
“if they’re spending so much money on advertising for this product, they must expect it to be profitable and around a long time, so it must be good”
advertising as part of the product
even if no information is given, “branding” might make the product more enjoyable
tasters enjoy it more if it’s labeled as Coke
arguments in favor of advertising
informs consumers
may enhance enjoyment of the product
lowers prices of some products
arguments against advertising
can be manipulative
can increase monopoly power
provides a barrier to entry
marginal product of labor (MPL)
increase in revenue created by hiring an additional worker
falls as more labor is used
diminishing returns to labor/any factor of production
holding capital constant, just varying labor
human capital theory
treats acquisition of education and training as “investment” decisions by individuals
assumes individuals treat these decisions as rational investment decisions and compare benefits (future earnings gains) against costs (opportunity cost of time, tuition, etc.)
compensating differential
a difference in wages that offsets differences in working conditions
fewer people are willing to work in dangerous or unpleasant jobs, so the supply of labor is reduced and the wage is increased
statistical discrimination
decisions about individuals based on group characteristics
preference-based discrimination
can be employer-based, employee-based, customer-based, or governmental