Economics Of Market And Organisations

Front 1

Backward induction

Back 1

Solution principle according to which one starts by solving the last stage of a game, then the penultimate stage, and so forth, up to the first stage. The solution for each stage is the Nash equilibrium in that stage, where players take into account the actions that will be chosen in later stages of a game.

Front 2

Bertrand game

Back 2

Model of competition, named after J.L.F. Bertrand, used to describe an industry structure in which firms set prices and customers choose quantities at the prices set.

Front 3

Bertrand paradox

Back 3

The outcome of the Bertrand game in which, despite higher market concentration compared to perfect competition, the price in the Nash equilibrium equals marginal costs.

Front 4

Best response (Game theory)

Back 4

Action that results in at least as high a payoff as any other action the player can choose from given the choices by the other players.

Front 5

Comparative performance evaluation

Back 5

Situation in which a worker’s payment is based on his performance relative to the performance of other workers.

Front 6

Competition policy

Back 6

Policy and law that promotes or maintains market competition by regulating anti-competitive conduct of firms.

Front 7

Consumer surplus

Back 7

Net value gained by consumers. In the price-quantity space, it is equal to the surface enclosed by the price-axis, the inverse demand curve, and the line representing the product’s price.

Front 8

Coordination costs

Back 8

Particular costs that parties incur to complete a transaction. These include the costs trading partners incur to learn about each other’s existence, to determine the price and the other terms of the transaction and to come together to complete the transaction.

Front 9

Cournot competition

Back 9

Model of competition, named after A.A. Cournot, used to describe an industry structure in which firms compete on the output they produce, which they decide on independently of each other and at the same time.

Front 10

Differentiated goods

Back 10

Goods that are not homogeneous.

Front 11

Double marginalization problem

Back 11

Occurs when both the upstream and downstream firms have monopoly power and each firm reduces output from the competitive level to the monopoly level, thus creating two deadweight losses.

Front 12

Economic regulation

Back 12

Part of competition policy that enforces regulation into specific markets.

Front 13

Efficient (allocation)

Back 13

An allocation of goods and services is efficient if no reallocation of goods and services exists that makes somebody better off without making someone else worse off.

Front 14

Equal compensation principle

Back 14

Economic principle, which refers to the case that an agent can expend effort on two tasks and that the principal cannot monitor how he divides his efforts over the two tasks. It states that an agent will only expend effort on both tasks if their marginal rate of return is the same. Otherwise, he will exert zero effort on the task with the lower marginal rate of return.

Front 15

Externality

Back 15

Cost or benefit which results from an activity or transaction and which affects an otherwise uninvolved party who did not choose to incur that cost or benefit.

Front 16

Fundamental theorem of welfare economics

Back 16

Economic principle, which states that an efficient allocation of goods emerges at a competitive equilibrium.

Front 17

Herfindahl-Hirschman index

Back 17

Most commonly used measure of market concentration. It is equal to the sum of the squares of the market shares of the firms active in the market.

Front 18

Hotelling game

Back 18

Game that models firms’ location choice, either literally or in terms of product positioning.

Front 19

Imperfect commitment

Back 19

Situation in which trading partners cannot bind themselves to fulfil promises they would like to make before a transaction takes place.

Front 20

Imperfect performance measure

Back 20

Measures of performance that result to the agents’ output not being perfectly measurable by the principal.

Front 21

Incentive intensity principle

Back 21

Economic principle, which states that the optimal intensity of incentives is higher the more responsive the agent is to incentives, the greater the principal’s incremental profits from additional effort, the more precisely performance can be measured and the greater the agent’s risk tolerance.

Front 22

Information asymmetry

Back 22

Situation in which one party engaged in a transaction has more or better information than another.

Front 23

Informativeness principle

Back 23

Economic principle, which states that the total value is increased by correcting for events beyond the agent’s control in such a way that the error with which the principal measures the agent’s performance is reduced.

Front 24

Lerner Index

Back 24

Measure of a firm’s market power.

Front 25

Market

Back 25

Place (in the broadest sense of the word) where buyers and sellers can trade goods and services, usually in exchange for money.

Front 26

Market concentration

Back 26

Measure of the number of firms and their respective shares of the total production in a market.

Front 27

Market power

Back 27

Ability of a firm to sell its products at a price above marginal costs.

Front 28

Multiple tasks

Back 28

When an agent performs more than one task simultaneously.

Front 29

Nash equilibrium

Back 29

Players’ strategies constitute a Nash equilibrium if none of the players has a reason to choose another strategy given the other players’ strategies.

Front 30

Network externality

Back 30

A consumer purchasing the product has an impact on the product’s value for other consumers.

Front 31

Objectively measurable output

Back 31

When a court can verify the output of an agent.

Front 32

Organization

Back 32

Entity in which people interact to reach economic goals.

Front 33

Principal-agent problem

Back 33

Problem arising in motivating one party (the agent), to act in the best interests of another (the principal) rather than in his or her own interests.

Front 34

Producer surplus

Back 34

Net value gained by producers. It equals the sum of the profits of the firms that are active in the market.

Front 35

Product differentiation

Back 35

The process of distinguishing a product or service from others (for firms). Also, the setting where consumers differ in terms of preferences over products (for consumers).

Front 36

Ratchet effect

Back 36

Instance in which the principal can partly take away the risk of uncertain future performance by letting the agent’s performance standards depend on his performance in early periods.

Front 37

Risk averse

Back 37

Aversion of a person in accepting a lottery with an uncertain payoff rather than another lottery with a more certain, but possibly lower, expected payoff.

Front 38

Search costs

Back 38

Costs the consumers incur to find out about the existence of firms supplying the goods they need.

Front 39

Simultaneous move game

Back 39

Games where both players move simultaneously, or if they do not move simultaneously, the later players are unaware of the earlier players' actions.

Front 40

Subgame perfect Nash equilibrium

Back 40

Players’ strategies form a subgame perfect Nash equilibrium if the players play a Nash equilibrium in each ‘subgame’ of the entire game.

Front 41

Switching costs

Back 41

Costs incurred by consumers when having to change supplier.

Front 42

Tournament

Back 42

Participants in a tournament compete for one or several prizes that will be allocated to the best performer(s).

Front 43

Transaction cost

Back 43

Cost incurred in making an economic transaction.

Front 44

Value maximization principle

Back 44

Economic principle, which states that an allocation of goods and services is efficient (only) if it maximizes the total value among the affected agents.

Front 45

Vertical chain

Back 45

Series of firms, starting with the firms exploiting raw materials to firms selling the final products to end consumers.

Front 46

Welfare (economic)

Back 46

Total value that a market generates. It is equal to the sum of the consumer and producer surpluses.