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42 Cards in this Set

  • Front
  • Back

Monopoly

- Identical products


- 1 seller


-High barriers for entry

Oligopoly

-Identical or differentiated branded products


-Few sellers


-Some barriers for entry


-Will take competing firms' actions into consideration

Monopolistic competition

-Differentiated products


-Many sellers


-No barrier to enter

Perfect competition

-Identical products


-Many sellers


-No barrier to enter

4 threats of entry

1. Economies of scale (If you can produce a lot, other companies find it harder to enter)


2. Product differentiation


3. Cost advantages (Due to technology, know-how, favorable access to raw materials, etc)


4. Government regulations

Price taker

-A company that is too small to have influence on the price


-Price takers have a horizontal demand curve

Residual Demand

-Firms individual demand

Shutdown point

Although a firm might make a short-term loss. If they can cover their variable costs, they should continue to operate.

Price discrimination

-Charging different prices to different consumers for the same product. To turn a DWL into a consumer proft


---Different customers get different prices


---Each customer pays a price that varies depending on the quantity bought



3 conditions for price discrimination

1. You need to have market power


2. You need to be able to guess accurately what the consumers are willing to pay. Depending on the elasticity of different groups


3. You need to prevent resale and be able to separate the different groups (adult using a children's ticket)

1.Perfect price discrimination

-Hypothetical


-Changing the price for every single customer


-Knowing all the information about the customer before the purchase

2. Second-degree price discrimination Definition

-Indirect, meaning that they have no information before the purchase


-Consumer picks among a variety of pricing options

2. Second-degree price discrimination Different types

-Quantity discounts (bulk prices)


-Versioning (MC must be equal of all products)


-Coupons (To target low-income consumers)


-Bundling (You have to buy them together)


- Two-part tariff (Fixed cost along with a per-unit price)

3. Third-degree price discrimination Definition

-There is some information available before the purchase


-Can identify specific groups, but not single individuals

3. Third-degree price discrimination Different types

-Customer characteristics


---Age/sex


-Past purchase behaviour


-Location (local demand characteristics)


-Over time

4 theories about oligopoly pricing

1. They collaborate to charge monopoly prices


2. They compete with each other


3. They are between competing and collaborating


4.They are indeterminate due to the difficulties in modelling interdependent price and output decisions.

Nash equilibrium

-Given the behaviour of the competitors, you will not change you own behaviour


-Nash Equilibrium is when P = MC

3 Assumptions Betrand Competition

1. Firms sell identical products


2. Competition is based on price


3. Every firm sets its price simultaneously but can react after all prices are set.


-Very elastic model

3 Assumptions Cournot Competition

1. Firms sell identical products


2. Competition is based on quantity


3. Firms set their own quantity, so the market sets the price.


Here the Nash equilibrium is when the quantities are set in a way that maximises the profit for both parties

Reaction curve

-A graphical illustration of the relationship between two companies output

3 assumptions Stackelberg Competition

1. Firms sell identical products


2. Competition is based on quantity


3. Firms do not set their quantities simultaneous


which allow a First mover advantage (the advantage of setting a quantity first, forcing other firms to react)

Cartel

-An illegal cooperation between a small number of firms with the goal to increase economic profit

Why are cartels formed?

-They can fix the price above perfect competition, which increases profits


-They don't expect a high penalty


-The costs of organising a cartel is low

Outcomes when a firm cheats in a cartel

-More products on the market than originally planned


-The price is lower than it is supposed to be


-Cartel starts experiencing disagreements

Ways to inhibit cheating within a cartel

-Involving a small number of companies


-The price does not vary independently


-Transparent prices


-Identical products at the same point in the distribution chain

Consequences for a Consumer as a result of a cartel

-Loss in prosperity


-Positive consequences occur when a cartel has failed

Monopolistic competition compared to monopoly

-Both are inefficient resulting in a DWL


-Unlike a monopoly, monopolistic competition can't make an economic profit in the long-run

Main focus of monopolistic competition

-Differentiating the products, resulting in a mini-monopoly.


-They compete on differences rather than on prices.

Advertisement with monopolistic competition

-Differentiation will exist as long as advertisements convince the buyers that it does exist.


-Companies will keep advertising as long as the marginal benefits exceeds the marginal costs

How does monopolistic competition firms increase sales?

-By lowering the price


-Maximised profit is when MC=MR while charging the demand price bound to that quantity.

Causes of Imperfect competition: Information

-The information is not certainly true

Causes of Imperfect competition: Search Costs

-The costs that are connected to the effort of searching for information

Causes of Imperfect competition: Consumers' selective memory

-People remember impressions rather than facts

Causes of Imperfect competition: Bounded rationality

- The cognitive limitations of their brains which affect their decisions. The processing within our minds is called: Processing costs

Causes of Imperfect competition: Limited capacity or experience

-Consumers might not be experienced enough to get informed properly. This can also be due to limited capacity.

Three attitudes towards risk

1. Risk averse: Avoid risk


2. Risk loving: Prefer a high risk due to its high potential result


3. Risk neutral: Maximise expected value without paying attention to the risks (We assume that people are Risk neutral)

Adverse selection

-When a market where low-quality products are becoming more frequent and high-quality products become less frequent.

Solutions to prevent a failing market due to imperfect information: Reduce asymmetric information

-Trusted third-party quality examination


-Offering standardized, unbiased information on the product.

Solutions to prevent a failing market due to imperfect information: Incentives

-Having a good reputation


-Offering warranties and return policies


-Laws that are issued by the government

Moral hazard

- When a person is willing to take more risk because he/she is X (eg. insured) anyway.

Moral hazard can be mitigated by (3)

-Group policies (the group has no choice)


-Screening (individuals get a tailor made product due to their risk)


-Deny coverage (Deliberate risk can be punished by denying coverage, eg. the costs of a surgery are not covered if you got your insurance after your operation.

Supply curve deducted from TC

S=MC=TC'