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.