Industrial Econ Pt1

Economies of Scale

dAC(q)/dq < 0. Average cost per unit is lower when more units are produced

Economies of Scope

C(q1, q2) < C(q1, 0) + C(0, q2). Total cost of producing different products is

lower if produced by the same firm.

Market power

The ability to profitably raise price above marginal cost

Natural monopoly

A setting in which doing all production in one firm would minimize costs, i.e.,

the cost function is subadditive (this holds, for example, if average costs are globally decreasing,

though globally decreasing average cost is sufficient rather than necessary)

Definition of elasticity

-(1/Ed)

When MC < AC and (AC(q)/MC(q))>1 What exists

Economies of scale

When MC > AC and (AC(q)/MC(q))<1 What exists

Diseconomies of scale

When MC = AC and (AC(q)/MC(q))=1 What exists

Constant returns to scale

Arbitrage

Taking advantage of a price difference between two or more markets.

Durable good

Good which is not completely consumed in one use. A durable good monopolist faces the challenge of 1) competing with her future self and 2) consumers' expectations of future

price drops leading them to wait.

Coase Conjecture

When buyers are patient enough (or equivalently, if the time between price

revisions is small enough), a durable good monopolist's market power disappears.

Price discrimination

When very similar goods are sold at different prices to different consumers

(even after accounting for differences in costs)

First degree price discimintation

When the seller knows and can fully extract the willingness-to-pay

of any given consumer.

Second-degree price discrimination

When the seller knows the space of possible types (willingness-to-pay) of consumers but cannot distinguish one type from another, and designs bundles (price/quantity or price/quality pairs) in a way in which different types self-select into purchasing different bundles.

Third-degree price discrimination

When the seller knows something about the demand within a specific group of consumers and can charge different prices based on this observed characteristic. Also referred to as market segmentation.

Sherman Act Section 1 (1890)

Prohibits "every contract, combination . . . or conspiracy, in restraint of trade." The essential element is an agreement between two or more independent parties, so unilateral conduct by

a single firm cannot violate Section 1. Agreements among competitors to fix prices, rig bids, or divide up markets are per se illegal (it is no defense that the agreed price was reasonable);

most other agreements, including vertical ones between a manufacturer and its distributors, are judged under the rule of reason, which weighs anticompetitive harm against procompetitive justifications. Violations can be prosecuted criminally.

Sherman Act Section 1 (1890) Example

Silicon valley "no-poach" agreement

Sherman Act Section 2

Prohibits monopolization, attempted monopolization, and conspiracy to monopolize. Importantly, it does not prohibit simply being a monopolist or charging a monopoly price: a violation requires both (i) monopoly power in a relevant market and (ii) the willful acquisition or maintenance of that power through exclusionary conduct, "as distinguished from growth or

development as a consequence of a superior product, business acumen, or historic accident" (United States v. Grinnell, 1966). Unlike Section 1, Section 2 reaches the conduct of a single firm acting alone.

Sherman Act Section 2 Example

AT&T when they had a contract to be the only cellphone provider

Clayton Act (1914)

Passed to reach conduct the Sherman Act did not clearly cover, using a forward-looking standard: it prohibits practices whose effect "may be substantially to lessen competition, or tend to create a monopoly." Harm need not already have occurred. The key provisions are Section 3, which bans tying and exclusive dealing in goods; Section 7, which bans mergers and acquisitions likely to substantially lessen competition (this is the main merger-control statute in the U.S.); and Section 8, which bans interlocking directorates among competing firms. The Hart-Scott-Rodino Act (1976) amended it to require firms to notify the antitrust agencies before completing large mergers.

Clayton Act (1914) Examples

Blocked peguin random house's acquisition of simon and schuster

Robinson-Patman Act (1936)

An amendment to Section 2 of the Clayton Act. It prohibits a seller from charging different prices to competing buyers for commodities of "like grade and quality" where the effect maybe to substantially lessen competition, and it similarly restricts discriminatory promotional allowances. A buyer who knowingly induces a discriminatory price can also be liable. There are two statutory defenses: the price difference can be cost-justified, or it can be offered in good faith to meet an equally low price of a competitor. The Act was passed to protect small independent grocers and druggists from the volume discounts that the emerging chain stores were able to obtain.

Robinson-Patman Act (1936) exaple

Utah pie co v. continental baking (#controversial)

FTC v morton salt (only offered discounts to the big players)

Experience good

A good for which the consumer learns something about how much he/she values the good only after purchasing it.

Credence good

A good for which the consumer may never learn how much value he/she received, even after purchasing and consuming it. Examples include a dentist's recommendation of a filling

or a mechanic's repair: you typically cannot tell whether the work was needed, or done well.

Separating equilibrium

An equilibrium in which distinct types take distinct actions

Ideal way to set a two part tariff

fixed fee captures the WTP and usage fee covers the marginal cost

Five conditions of perfect competition

1. economies of scale are small relative to the size of the market (fixed costs aren't high)

2. homogenous goods

3. perfect information

4. no barriers to entry

5. lots of sellers and buyers

MR = MC for both monopoly and perfect competition but what is the difference

MR is just the price with competition and

with a monopoly it will change based on how much you supply you want to have a supply where MR=MC

Losses from monopolist

1. distributional effects (CS down, PS up, Profit up)

2. DWL (could be eliminated with first degree PD)

3. innovation COULD be lower

4. rent seeking - wasteful spending and time to get your money

Five switching costs of consumers

learning how to use new

invested in complementary product

network effects

consumers unaware of quality

preference match

Multiproduct monopoly when are they substitutes

price goes up, demand of other goes down

dx2/dp1>0

Multiproduct monopoly when are they complements

price goes up, demand of other goes down

dx2/dp1<0

Durable good monopolist problem findings

price goes down when you can't commit and up when you can

Three things for price discrimination to work

1. have to prevent arbitrage - (when you would get a low price and sell at higher price to higher demand)

2. monopoly has to have market power (has to be able to set prices above MC profitably)

3. some kind of sorting mechanism

Seven ways sellers restrict arbitrage

1. name on product

2. require immediate use

3. gov restrictions

4. purchase limits

5. require verification

6. improve high transaction costs

7. general incompatibility

Insights fro the third degree model

1. more elastic group will face lower prices

2. profit and ps will increase and cs will lower

IC

incentive compatability

IR

individual rationality

When might damaged goods be sold

to justify second degree price discrimination

In a two part tariff system where should the entry fee be on the graph

above cost and below (or at) the demand curve

Bundling

sell multiple products together for a single bundled price

When does bundling get higher profits

value for a given product are close enough that it makes sense to sell to both

negative correlation across product WTP within a given consumer type (if you are willing to pay high on one you are willing to pay low on other)

What seven things does the quality and reputation model have to work

1. infinite tme

2. interest rate r

3. each firm chooses one quality to produce in each period

4. consumers buy one a period

5. consumers expect firm quality in period two to be the same as period one

6. new entrants are assumed at low quality

7. competitive market that takes p as given

Four insights from the quality and reputation model

1. firms have to invest to earn rep of producing high quality so they have to charge low prices at first

2. if low quality is up - premium needed to keep honesty is smaller (gov might regulate lower quality)

3. no milking

4. no additional entry

two reasons a firm would want to milk

1. they expect the market to disappear

2. firm wants to acquire and doesn't care so slowly cheapens

Advertising quality model set up

1. two quality levels

2. consumers cant observe quality and can only learn it if the firm takes an action that a low quality firm wouldn't

3. work directly with one-period profit

Social planner vs. monopolist quality decision

Social planner chooses quality such that the marginal cost of quality = marginal benefit for average consumer

Monopolist chooses quality such that the marginal cost of quality = marginal benefit for marginal consumer