ECON FINAL

Collusion

An agreement to limit competition.

When a seller considers the threat of potential substitutes, what is a substitute product?

Anything that could be consumed in place of a given product to satisfy the need or want of the consumer for the given product.

A market that has a lot of firms producing similar goods is experiencing which of the five forces?

Existing competitors

Informative advertising

Informs potential customers about a product

How do sellers determine their prices and quantities?

Keep selling until your marginal revenue equals your marginal cost, Set your price on the demand curve. Not on the marginal revenue curve

Price discrimination

Selling the same product at different prices. Set prices close to (and just below) marginal benefit.

How should you set group prices?

Set prices for different groups as you would for different markets

The market power of a firm is its

ability to raise its price without losing many of its customers to competing businesses.

When it is difficult for customers to assess quality prior to consuming a product, they tend to rely on ______ as an indicator of quality.

brand reputation

Why would a seller choose the hurdle method instead of group pricing to price discriminate? The seller

cannot find a verifiable, hard-to-change characteristic on which to base the group segmentation.

If a company engages in perfect price discrimination, it is attempting to

charge each customer their reservation price.

Suppose that you are opening a new store in a market with only one competitor. If your objective is to get as many customers as possible, you should position yourself _____ your competitor. If your objective is to avoid price undercutting, your should position yourself_____ your competitor

close to; far away from

How does the threat of potential substitutes lessen the market power of a business? If the substitute becomes available, then the business may

lose customers to the substitute good's market unless it lowers price

Bargaining power is a buyer's of seller's ability to

negotiate a deal to its own benefit.

Pure Price Competition Drives Your Economic Profits to

zero

A Successful Price Discrimination Strategy

1. Charge higher prices for some customers. They'll keep buying the product. You receive a great profit margin on each sale. This transfers consumer surplus into producer surplus, but the total economic surplus is unchanged. 2. Charge lower prices for others. Offer select discounts to increase the quantity you sell. Profits increase. This increases the economic surplus enjoyed by both your business and your consumers.

Five Key Insights into Imperfect Competition

1. Market power allows you to pursue independent pricing strategies. 2. Having more competitors leads to less market power. 3. Successful product differentiation gives you more market power. 4. Imperfect competition among buyers gives them bargaining power. 5. Your best choice depends on the actions that other businesses make.

Conditions for Price Discrimination

1. Your business has market power. 2. You can prevent resale. 3. You can target the right prices to the right customers.

Natural monopoly

A market in which it is cheapest for a single business to service the market

Potential Competitors: Threat of Entry

A new entry can increase supply and intensify competition: Entrepreneurs launch new start-ups. Existing businesses expand. Current competitors enter new distribution channels. The threat of entry depends on the extent to which barriers to entry shield existing businesses from the competition by new entrants. Strategic management can deter entry.

Quantity discount

A per-unit price that is lower when you buy a larger quantity.

Which of the following is an example of non-price competition?

A. Customer service B. Product quality. C. Advertising.

Non-Price Competition

Attract "sticky" customers through product differentiation: Different features Quality Customer service Design Style Reliability Location and convenience Advertising

Bargaining Power of Buyers

Buyers can force you to offer lower prices. Example: In Detroit, many companies make specialized auto parts for General Motors. General Motors is under no obligation to buy from them. Also, GM can threaten either to make the parts itself or to use other suppliers.

Which of the following is NOT a way to differentiate a product?

Charge a lower price than other companies for a given product

Perfect price discrimination

Charging each customer its reservation price.

Non-price competition

Competing to win customers by differentiating your product (market positioning). This makes it harder for your rivals to win your customers with a price cut.

Price competition

Competing to win customers by offering lower prices.

Which of the following markets is closest to an example of a perfectly competitive market?

Corn

least market power demand curve

Flat (horizontal)

Least to greatest market power and why: - perfect competition - imperfect competition (Oligopoly, Monopolistic) - Monopoly

Least - perfect competition (many competitors, identical products) Middle-imperfect competition (Oligopoly, Monopolistic), (few competitors, differentiated products) Highest - Monopoly (no competitors, unique product)

What are the main positive and negative impacts of mergers?

Lower costs and increased market power

What is the relationship among marginal revenue, marginal cost, and price in a firm with market power?

Marginal cost = Marginal revenue < Price

Comparing the outcomes of market power and perfect competition leads us to four important lessons:

Market power leads to higher prices. 2. Market power leads to inefficiently smaller quantities. 3. Market power yields larger economic profits. 4. Businesses with market power can survive even with inefficiently high costs.

Monopoly markets

Monopolistic markets are markets in which there is only one seller. The seller has a lot of market power.

A product market has one seller and that seller has a high level of market power. There are no close substitutes for the product. What type of market is this?

Monopoly

Existing Competitors: Type and Intensity of Existing Competition

More rivals yield more intense competition. Extreme case: perfect competition You can compete on price and on the product:

Which of the following is an example of a company practicing price discrimination?

Most passengers traveling on an airplane pay different prices for their tickets.

Hurdle method

Offering lower prices only to buyers who are willing to overcome some hurdle or obstacle

hold-up problem

Once you have made a relationship-specific investment, the other side may try to renegotiate so that they get a better deal (and you get a worse one)

The Role of Advertising

One approach to positioning your product is through advertising. Advertising aims to shift and steepen your demand curve

Firm demand curve

Summarizes the quantity that buyers demand from an individual firm as it changes its price.

In which of the following situations would Allie's Donuts have the greatest market power?

The closest donut shop or bakery is 25 miles away from Allie's.

What 3 conditions must be present before a company can price discriminate?

The company can identify how much each customer is willing to pay; the product cannot be resold; the company has market power.

In deciding how many segments to divide the market into, a company should look for ways to identify clear segments that have ______ demand.

distinctly different

What distinguishes persuasive advertising from informative advertising? Persuasive advertising

focuses on emotions and provides few facts about the product.

When a market is perfectly competitive, advertising typically is done _________ because ________.

for the entire industry; it affects market demand more effectively than some individual company demands

Perfectly competitive markets are relatively rare in the real world because most

goods are not identical and most markets have some dominant firms.

According to the Five Forces framework, the greater the _______ in an industry, the ________ the average profits will be in the industry.

greater; lower

Vertical integration occurs in a merger when the companies that merge

had a buyer-seller relationship prior to the merger, with each covering a different stage in a production chain.

A market with price discrimination has a _____ quantity and a _____ price than a market without price discrimination

higher; lower

Price discrimination

increases efficiency relative to a market without price discrimination

A business owner spends on advertising with the intent that it will affect demand for the company's product in what two ways? By

increasing the company's demand and making its demand more inelastic.

Output in a market with market power is

inefficient because the marginal benefit to society of extra output exceeds the marginal cost.

marginal revenue curve

is the addition to the total revenue you get from selling one more unit. Calculate marginal revenue as the change in total revenue from selling one more unit. Marginal revenue lies below the demand curve and declines faster.

Successful advertising will make your firm's demand curve

less elastic

Negative outcomes of market power include all of the following EXCEPT

lower prices

The price in perfect competition is _____ than the price under imperfect competition. The quantity in perfect competition is _____ than the quantity under imperfect competition.

lower; higher

A seller's demand curve summarizes its _____, and its marginal revenue curve measures its ______.

market power; incentive to increase production

Monopolistically competitive markets

markets in which many small businesses compete, each selling differentiated products. Seller has some market power

Oligopolistic markets

markets with only a handful of large sellers. The sellers have some market power

According to the Five Forces framework, how can producers of potential substitute goods impact a company's profits? The producers of potential substitute goods

may become actual competitors, causing market demand to be spread across a larger number of companies and thereby reducing the profits of the original companies.

Which of the following is NOT an example of a relationship-specific investment that could result in a hold-up problem?

organizing the layout of a factory for the most efficient flow of the production line.

When price competition occurs

price is pushed down, reducing profits.

Barriers to entry _______ existing businesses ______.

protect; from competition by new entrants

Toyota has ongoing relationships with its part manufacturers, due in large part because the manufacturers believe that Toyota will not try to renegotiate lower prices. This is an example of

reputation and repeated interaction

Rational Rule for Sellers

tells us to sell one more item if the marginal revenue is greater than (or equal to) the marginal cost.

Imperfect competition stems from _____ and whether the product is ______.

the number of sellers; differentiated

bargaining power

the pressure that a supplier or buyer can exert on a company

Early bird specials at many restaurants are an example of using ______ to create ______.

timing; a hurdle

When setting prices for different groups of customers, a manager should charge higher prices for groups that

value the product more.

The basis of product differentiation is to convince your customers that your product _______ so that customers will ______ for your firm's product.

will more completely satisfy their wants; pay a higher price

Market power

is the extent to which a seller can charge a higher price without losing many sales to competing businesses

next best alternative

is the value of your best option, outside of this deal

For effective segmentation of market demand, the basis for putting each customer into a given price segment requires criteria that are _______ and ______.

easy to check; hard to change

Product differentiation

efforts by sellers to make their products different from those of their competitors.

The threat of entry includes

expansion of existing businesses into the market, the addition of new distribution channels by existing businesses, and new entrants.

Competitors in Other Markets: Threat of Potential Substitutes

Potential substitutes can come from unrelated industries. Substitutes come from innovations that offer better performance. But often the disruption comes in the form of a cheaper alternative. Substitutes are bigger switching costs are low. Complements can point to new opportunities.

Group pricing

Price discrimination by charging different prices to different groups of people

How does price discrimination move a market that is not perfectly competitive to a more efficient output level?

Price discrimination gives businesses the incentive to increase output to the level where their marginal cost equals the marginal benefit of their last customer.

The Efficiency of Price Discrimination

Price discrimination increases the quantity you sell. Selective discounts induce additional sales. Selective discounts help solve the underproduction problem. When you don't price discriminate: The discount applies to all customers.

Solution

Product differentiation reduces the incentive for your rival to undercut you. This raises bargaining power and profitability.

Reservation price

The maximum price a customer will pay for a product.

how to find marginal revenue

The output effect is the revenue increase from selling one more unit. Output effect = P The discount effect is the revenue loss from cutting the price on all the units sold. Discount effect = ΔP×Q MR = P − ΔP×Q (Δ is change)

Problem

There's an irresistible incentive for your rival to undercut you.

Persuasive advertising

Tries to persuade or manipulate you into believing you'll enjoy a particular product. It's usually not informative

Price ceilings _____ economic surplus in perfectly competitive markets and _____ economic surplus in imperfectly competitive markets.

decrease; increase

The Need for Product Differentiation

With no price differentiation, even one competitor can force your economic profits to zero

Bargaining Power of Suppliers

Your suppliers can threaten your success by charging you higher prices. The ability of your suppliers to charge you high prices depends on the amount of bargaining power they have, including the following: refusing to do business raising the price of inputs.

most market power demand curve

a diagonal line, Market demand curve = firm demand curve

Some market power demand curve

a downward cross-over demand curve (looks like an X)

Search good

a good that you can easily evaluate before buying it

Perfectly competitive markets

all businesses in an industry sell an identical good and there are many sellers and many buyers, each of whom is small relative to the size of the market. Sellers have no market power.

A city has 4 hospitals, and there are no other hospitals within 200 miles. Two of the hospitals are specialized -- one has a large cardiac unit and the other has a cancer treatment center. The local market for hospital services can most likely be described as

an oligopoly.

Price discrimination is when a company

charges different prices to different customers who are buying the same product.

A company will be subject to price competition if

customers view its product as the same as or very similar to the products of rival companies.