Module 10

VERY IMPORTANT Free entry will continue in an imperfect market until the price equals the

average cost of the marginal supplier

The firm's demand curve is also the

average revenue curve. This is because your average revenue/ unit is the price

Price discrimination ______ the price depending on what people are willing to pay

changes

perfect price discrimination

charge everyone exact willingness to pay

Group pricing (price discrimination)

charging different groups different prices BECAUSE their demand differs. They target based on verifiable, difficult to change characteristics.

The monopoly price is higher than the

competitive price

Reservation price

exact willingness to pay

The more market power the _____ competitors and the (less or more) unique products

fewer; less

Bundling (group discrimination)

goods that are bought together in a package. Creates a hurdle to get to the 2nd good at a ↓ price. ex: fast food meal combo

The barrier to enter a market that includes *patents & copyrights* (grants firm the exclusive rights to a product). A great example of this is medicine or vaccines. *Licensing* keeps competitors out.

government regulation

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

have a more elastic demand.

Most businesses have _______ competition

imperfect

Market power ______ producer surpus

increases

Price discrimination ____ the price and _______ consumer surplus by an equal amount

increases; decreases

The bargaining power of buyers can affect competition because

it can influence suppliers to lower their prices

The monopoly quantity is ____________ than the competitive quantity

less than

The competitive forces in a market largely determine the _____ of the companies in the market.

long-term profitability

Firms with market power can set the price greater than the

marginal cost

Dead weight loss is created by

market power

Product differentiation gives seller the _________ because it makes products distinct.

market power

People with a low opportunity cost of time are

more willing to pay full price. Rich people won't jump the hurdle.

When economies of scale are so LARGE that one firm can supply the entire market more cheaply than multiple firms.... this occurs

natural monopoly

When a *monopoly* decides to sell one more item it faces the ___________ and ____________ effects

output/quantity effect discount or price effect

If a firm has the market power they can raise the _______ without losing many sales

price

Market power allows firms to be price (maker or taker)

price MAKER

Firms with market power have some control over ______

prices

Non-price competition occurs when businesses compete with __________________

product differentiation

In a monopoly: when *marginal revenue = marginal cost*

profit is maximized

Pro-business

protecting specific businesses from competition

Market power ___________ consumer surplus

reduces

Price competition (when there is multiple rounds of firms lowering prices to win) occurs when

rivals sell similar products, prices are easily observed, and switching costs are low

What solves the underproduction problem?

selective discounts. This is because you are inducing new customers to buy your product.

Price discrimination

selling the same good for different prices

Tying (price discrimination)

sells you a product that can only be used with their product. They do this by ↓elastic price of good and ↑inelastic good price. ex: printer ink with printer.

government policies create barriers to entry through

shaping the rules for entry -parents -shape regulations -impulsing compulsory licenses -lobbying politicians

Perfect price discrimination leads to a _____________ ___________ market output

socially efficient

In the long run, the number of sellers and the level of profit in a market are both affected heavily by the _____ in the market.

strength of the barriers to entry

The bargaining power of suppliers can affect competition because

suppliers can raise the price

Controlling the *key resources* is a __________ factor that barriers a firm from entering the market. Cost advantages as well.

supply side

Potential substitutes threaten competition because of

technology, innovation

In a *monopoly* the demand curve is

the market demand curve (and is downward sloping)

Pro-market

trying to get a more competitive market to increase market efficiency

When calculating a firm's profit under *perfect price discrimination*

use the triangle formula because there is no deadweight loss!!!!

Hurdling (price discrimination)

Customers sort themselves w/ higher or lower reservation prices. Offer ↓P to customers who are willing to jump the hurdle. examples: time, hassle costs, quantity discounts, haggling, coupons, bad customer service

Demand side barriers to entry create

*customer lock-in* through -switching costs -earning goodwill and building your reputation -generating network effects

Supply-side barriers to entry are done by

*developing unique cost advantages* -learn by doing -exploiting benefits of mass production -investing in research and development -creating relationships w suppliers -limiting access to key inputs

How to segment groups

- segment where the demand differs - target group discounts based on verifiable characteristics (FAFSA) - base group discounts on difficult to change characteristics

Know how to find the dead weight loss

...

New competitors will enter a market until the last competitor that enters (marginal supplier) expects an economic profit of ____

0

Market power leads businesses to

1. charge a higher price 2. seller a smaller quantity 3. earn larger profits 4. survive w inefficiently high costs

Oligopoly

1. few competitors 2. products can be same or differentiated 3. some barriers to entry ex: smart phone competitors

Barriers to enter a market

1. gov regulation 2. supply-side factors 3. demand side 4. natural monopoly

How do companies segment (price discriminate)?

1. group pricing 2. hurdles 3. tying 4. bundling

Monopolistic competition

1. many competitors 2. differentiated products 3. low barriers ex: restaurants

Perfect competition

1. many competitors 2. identical products 3. no barriers NO MARKET PWR

A firm can only price discriminate if they have the

1. market power 2. no resale 3. segment the market and target prices to people

Monopoly

1. no competitors 2. unique product 3. barriers to entry LOTS OF MARKET POWER

The output/quantity effect

If you want to ↑quantity sold ↓price

The discount/price effect

If you want to ↓price the ↑discount must be

How can a company's research and development expenditures create a barrier to entry into its market?

It can result in new production technologies that reduce the cost of production.

Why does market power create market failure?

It causes a smaller quantity to be produced.

In a *monopoly* the marginal revenue curve has what behavior?

It diminishes 2x faster than the demand curve

What kind of firm uses product differ & why?

Oligopolies. This is because there are only a few competitors so you are constantly considering what the other firms are doing.

Customers would be less loyal and more price sensitive in which of the following situations?

The switching costs are low.

Why offer selective discounts?

You get more customers who can now buy the product. ↑q sold ↑profit

Deterrence creates barriers to entry by

convincing rivals you will crush them -building excess capacity -keeping cash on hand -building your brand -earning a reputation as a fierce competitor

Perfect price discrimination eliminates _________

dead weight loss This excess now goes to the producer which *↑total surplus*

Set the demand curve = MB curve. If this occurs, *set the price just below the*

demand curve

*Network effects* (Snapchat), *switching costs*, and *brand loyalty/reputation* (Android to iPhone) are all examples of what barrier to enter a market?

demand side

In *imperfect competition* the firm's demand curve is

downward sloping

In *perfect competition* the firm's demand curve is

elastic, horizontal