ECON EXAM 3/FINAL

Monopoly

A market in which there are many buyers but only one seller.

oligopolistic market

A market structure characterized by (1) few sellers, (2) the production and sale of either identical or slightly differentiated products, and (3) significant barriers to entry.

Oligopoly

A market structure in which a few large firms dominate a market

monopolistic competition

A market with many small businesses competing, each selling differentiated products.

prune the tree method

A method for solving game trees: Start by looking forward to the final period and highlighting out your rival's best responses, then prune the options the rival would never choose—the "dead leaves"—off your game tree.

Strategic Interaction

A social interaction in which the participants are aware of the ways that their actions affect others (and the ways that the actions of others affect them).

grim trigger strategy

A strategy where a firm responds to underpricing by choosing a price so low that each firm makes zero economic profit

corrective subsidies

A subsidy designed to induce people to take account of the positive externalities they cause.

payoff table

A table that lists your choices in each row, the other player's choices in each column, and so shows all possible outcomes, listing the payoffs in each cell.

corrective tax

A tax designed to induce people to take account of the negative externalities they cause. -Causes negative externalities

coordination game

A type of game in which a Nash equilibrium occurs when each player chooses the same strategy; neither player can do better than matching the other player's strategy -When all players have a common interest in coordinating their choices.

collusion

An agreement to limit competition; typically, an agreement by rivals to not compete with each other, but to all charge high prices instead.

Nash Equilibrium two things are true...

Best response and Correct expectations

merger

Combination of two or more companies into a single firm

anti-collision law

Dont take prices or quantities with competitors

product defferentiation

Efforts by sellers to make their products differ from those of their competitors.

game theory

Evaluates alternate strategies when outcome depends not only on each individual's strategy but also that of others.

public goods

Goods that are neither excludable nor rival in consumption

Oligopoly Competition

Handful of competitors selling products that can be similar or different

scheme

High Price/No weekend stay Low Price/ Includes weekend stay

marginal revenue equation

Output effect (P) -Discount effect (DeltaPxQ)

rational rule for society

Produce more of a good if its marginal social benefit is greater than (or equal to) the marginal social cost.

Rational Rule for Sellers

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

Bundling

Selling different goods together as a package.

marginal private benefit

The benefit from an additional unit of a good or service that the consumer of that good or service receives.

market power

The extent to which a seller can charge a higher price without losing many sales to competing businesses.

marginal social benefit

The extra benefit or utility to society of consuming an additional unit of output, including both the private benefit and the external benefits.

marginal social cost

The extra cost to society of producing an additional unit of output, including both the private cost and the external costs.

marginal private costs

The extra costs to producers of producing one more unit of a good.

marginal external costs

The extra external cost imposed on bystanders from one extra unit.

reservation price

The maximum price a customer will pay for a product. It is equal to their marginal benefit.

second mover advantage

The strategic advantage that can follow from taking an action that adapts to your rival's choice.

positive externalities lead to what?

Underproduction

free rider problem

When someone can enjoy the benefits of a good without bearing the costs

nonexcludeable

When someone cannot be easily excluded from using something.

Multiple equilbria

When there is more than one equilibrium.

external benefit

a benefit that an individual or firm confers on others without receiving compensation

rival good

a good for which consumption by one person does diminish the quantity or quality of consumption by others

non-excludable good

a good for which it is difficult (or very costly) to prevent consumption by those who do not pay

non-rival good

a good whose consumption by one person does not prevent consumption by others

perfect competition

a market structure in which a large number of firms all produce the same product

imperfect competition

a market structure that does not meet the conditions of perfect competition

natural monopoly

a market that runs most efficiently when one large firm supplies all of the output

cap and trade

a method for managing pollution in which a limit is placed on emissions and businesses or countries can buy and sell emissions allowances

prisoners dilema

a particular "game" between two captured prisoners that illustrates why cooperation is difficult to maintain even when it is mutually beneficial

Grimm Trigger Strategy

a player cooperates in the first round and in the subsequent rounds as long as his opponent does not defect from the agreement

product differentiation

a positioning strategy that some firms use to distinguish their products from those of competitors

quantity discount

a price reduction offered to buyers buying in multiple units or above a specified dollar amount

Nash Equilibrium

a situation in which economic actors interacting with one another each choose their best strategy given the strategies that all the other actors have chosen

Play off matrix

a tool that is used to simplify all of the possible outcomes of a strategic decision

Firm's Demand Curve

an individual firm's demand curve, summarizes the quantity that buyers demand from an individual firm as it changes its price

Firms will choose a Grim trigger strategy if they:

believe that the firms in the industry will compete with each other for a long time to come.

positive externalities

benefits created by a public good that are shared by the primary consumer of the good and by society more generally

perfect competition Outcome

businesses keep producing until price equals marginal cost

private goods

goods that are both excludable and rival in consumption

club goods

goods that are excludable but not rival in consumption

common resources

goods that are rival in consumption but not excludable

Multiple Equilibria Rule

if a reaction can be expressed as the sum of two or more reactions, K for the overall reaction is the product of the equilibrium constants of the individual reactions

Monolistic Competition

many producers, few barriers to entry, some control over prices, ex: restaurants

output effect

more output is sold, so Q is higher, which tends to increase total revenue

nonrival

one person's consumption does not interfere with another person's consumption

group pricing

price discrimination by charging different prices to different groups of people

Tragedy of the Commons

situation in which people acting individually and in their own interest use up commonly available but limited resources, creating disaster for the entire community

For price discrimination to work a firm must have

some market power, a product that is difficult to resell, distinct customer groups

marginal external benefit

the addition to external benefits created by one more unit of the good

marginal revenue

the additional income from selling one more unit of a good; sometimes equal to price

price discrimination

the business practice of selling the same good at different prices to different customers

marginal revnue

the change in total revenue that results from a one-unit increase in the quantity sold

external costs

the costs of a market activity paid by people who are not participants

negative externality

the harm, cost, or inconvenience suffered by a third party because of actions by others

Externality

the impact of one person's actions on the well-being of a bystander

socially optimal

the outcome that is most efficient for society as a whole, including the interests of buyers, sellers, and bystanders

hurdle method of price discrimination

the practice by which a seller offers a discount to all buyers who overcome some obstacle

segment the market

the process of breaking the market into subgroups or submarkets based on certain characteristics, such as geography, age, gender, education, lifestyle, and/or ethnicity, to effectively select a marketing strategy that allows the business to provide customers greater value

In an indefinitely repeated game, the players face:

the same strategic interaction an unknown number of times.

Exclusionary Practices

when a firm gets its suppliers or distributors to agree not to provide goods or services to potential competitors

hurdle pricing

when firms create an obstacle that consumers must overcome in order to get a lower price

indefinitely repeated game

when you face the same strategic interaction an unknown number of times

Strategic Interactions

when your best choice may depend on what others choose, and their best choice may depend on what you choose.

anti-coordination game

when your best response is to take a different (but complementary) action to the other player

The four steps for making good strategic decisions

#1 Consider all the possible outcomes. #2 Think about the "what ifs" separately. #3 Play your best response. #4 Put yourself in other people's shoes.

The shape of the demand curve of a firm can be relatively flat, or steep, depending on:

-Market Power

the spectrum of market power

-Perfect -Imperfect -Monopoly

analyzing externalitties

-Predict equilibrium -Assess what externalities are involved -Find the socially optimal outcome that is in society best interest, and then compare this to the equilibrium

Coase Theorem

If bargaining is costless and property rights are clearly established and enforced, then externality problems can be solved by private bargains.

check mark method

If you put a check mark next to each players' best response, then an outcome with a check mark from each player is a Nash equilibrium

playoff matrix

In game theory, shows the outcomes of a game for the . players given different possible strategies.

best response

In game theory, the strategy that will give a player the highest payoff, given the strategies that the other players select.

marginal social benefit equation

MSB = MB + MEB

Marginal social cost equation

MSC = MPC + Marginal external cost

What shapes a firms demand curve?

Market Power

perfect price discrimination

Occurs when a firm charges the maximum amount that buyers are willing to pay for each unit.

first-mover advantage

Occurs when an organization can significantly impact its market share by being first to market with a competitive advantage

hurdle method

Offer lower prices only to those buyers who are willing to overcome some hurdle, or obstacle.

marginal revenue formula

change in total revenue / change in quantity