Micro exam 2

oligopoly: collusion

(players working together) when firms in an oligopoly come to n agreement about how to act during a strategic interaction

Static Games of Complete Info: Nash Equilibrium

(the solution) -the strategy pair in which each player is playing a best response

Characteristics of a monopoly

-1 seller of good/ service, many buyers -product is unique (no close substitutes -firms in monopoly have lots of market power -high barriers to entry

natural monopoly

-a barrier to entry also known as economies of scale -when 1 single producer of a good could supply entire industry at a lower per unit cost than could 2 or more other firms -ATC and MC curves are lower than deman curve on graph

monopolistic competition: advertising

-advertising often happens in industries that are characterized as monopolistically competitive -advertising good: conveys info, asymmetric information (situation where 1 party to a transaction has more information about product than does the other party), could cause demand to shift right -advertising bad: influence and manipulate consumer tastes

in the short run, a firm operating in a monopolistically competitive market can earn:

-economic profits (P> ATC) -zero economic profit (P= ATC) -economic losses (P < ATC)

the 3 barriers to entry in a monopoly

-exclusive ownership of a resource -government regulation -economies of scale (natural monopoly)

characteristics of monopolistic competition

-many buyers & sellers -products are heterogeneous/ differentiated (not price takers) -free entry & exit (0 long-run profit)

market structures that 2 extremes

-perfect competition: no firm has any market power -monopoly: 1 firm has so much market power that it completely dominates market

monopolistically competitive market: shortrun vs. long run

-short-run: firm experiences positive or negative profit -long-run: firm experiences a zero profit

characteristics of Oligopoly

An oligopoly is a market structures in which there are few sellers (two or more). Products can be either homogeneous or heterogeneous, and entry and exit is hard.

in the long-run equilibrium of a competitive market, the # of firms in the market adjusts until the market demand is satisfied at a price equal to the minimum of the

Average total cost of the marginal firm

predatory Pricing

If product must be sold at a certain price, the seller of the product may have a greater incentive to attract buyers to the product. Without such protection any advertising by the seller would benefit competitors who sell the same product at a lower price.

MR & Price relationship in a monopoly

MC=MR < Price

For a firm in perfect Competition, MR=

MR= D= AR

Profit maximization in a monopoly

MR= MC, findQ*,then follow Q* vertically up or down until it hits demand curve, this will show you P* and Q*

At profit-maximizing level of output for a firm in a perfectly competitive industry,

Marginal Revenue = Marginal Cost

Total Revenue in a monopoly

P( Q)

for a monopolistically competitive firm, at the profit maximizing quantity of output price:

Price > MC

critics of advertising argue that

advertising creates desires that otherwise might not exist

perfect competition: allocative efficiency

allocative efficiency is achieved because the firm produces until the point where price is equal to marginal cost. In the market, the industry produces at the quantity where demand and supply intersect.

oligopoly: cartel

an organization of firms that comes together for the purposes of coordinating actions in order to collude. While cartels are illegal in the US and many countries, OPEC is a famous international cartel in the production of oil.

Profit-maximizing firms enter a perfectly competitive market when existing firms in the market have

average total costs that are lower than market price ATC<P

monopoly: allocative efficiency

because monopoly produces less than the total maximizing output, a monopoly is not allocatively efficient

Static Games of Complete Info: Prisoner's Dilema

case when there is a better solution for both players than the nash equilibrium ex: advertising

Marginal Revenue in a monopoly

change in total revenue/ change in quantity **** if a firm wants to increase output and move down the demand curve, price also has to change

Static Games of Complete Info: strategy

choice a player makes when playing a game

oligopoly: tacit collusion

collusion that occurs when no formal agreement is discussed, but firms act in a way in hopes of the other form following suit. This type of collusion is not illegal in the US -As the # of firms in an oligopoly grows, the likelihood of tacit collusion will fall

in both perfect competition and monopolistic competition, each firm: a) has some monopoly of power b) sells a product that is at least slightly different from those of other firms c)faces a downward facing slope d) has many competitors

d) has many competitors

which of the following is not a characteristic of a perfectly competitive market: -buyers & sellers are price takers -each firm sells virtually identical product -entry is limited -each firm chooses an output level that maximizes profits

entry is limited -perfectly competitive markets have free entry & exit, meaning it is cost less & easy to enter/ exit

Suppose a competitive market is in long-run equilibrium. If demand increases, we can be certain that price will:

fall in the short run. All, some, or no firms will shut down, and some of them will exit the industry. Price will then rise to reach the new long-run equilibrium

monopolistic competition differs from perfect competition because

in monopolistically competitive markets each of the sellers a somewhat different product, while in perfect competition all products sold a homogeneous

Consider a perfectly competitive market w/ a large # of identical firms. The firms in this market do not use any resources that are available only in limited quantities. In this market an increase in demand will:

increase price in the short run, but not in the long run

oligopoly: resale price maintenance

is a practice in which the produce of a good sets a minimum price below which retailers of a good cannot sell their product.

because monopoly has one firm in the market, in a monopoly, a firm's demand curve,

is the market demand curve

Static Games of Complete Info: A players best response to a strategy by an opponent

is the strategy that gives the highest possible payoff

imperfect competition markets

markets that fall in between the 2 market extremes (Perfect competition & monopoly) -oligopoly (closer to monopoly) -monopolistic competition (closer to perfect competition)

When profit maximizing firms in perfectly competitive markets are earning profits

new firms will enter the market

monopolistic competition: productive efficiency

not productively efficient

productive efficiency

occurs in a market when output is produced at the lowest possible cost. A firm will achieve productive efficiency if it is producing at a quantity that corresponds to the minimum of it's average total cost curve.

allocative efficeient

occurs in a market when total surplus is maximized. In such a scenario, all transactions where the buyer has a willingness to pay that exceeds the marginal cost of the seller will take place.

price discrimination

occurs when the same good is sold to different people at different prices. -legal & common in our daily lives - comes in 3 different forms: first degree, second degree, and 3rd degree -can be a profitable strategy for a monopolist

oligopoly: non-tacit collusion

occurs when two firms come together to formally agree to collude. This is illegal in the US

Static Games of Complete Info: payoff

outcomes of a player from a strategy, given the choice of strategy by an opposing player

monopolistic competition: brand names

popular firms in an industry that consumers have grown to recognize -positive aspects of brand names: companies w/ brand names will want to maintain positive reputation & will strive to produce products of high quality -negative aspects of brand names: customers often think there are differences between brand name companies & non-brand name companies that often don't, and as a result pay too much for a product

Total Revenue=

price x quantity

perfect competition: productive efficiency

productive efficiency is achieved by firms in the long run equilibrium. As we have seen, the long run equilibrium for perfectly competitive firms occurs at a quantity where price crosses average total cost at the minimum of the average total cost curve. In the short run, firms may or may not achieve productive efficiency.

dead weight loss in Monopoly

profit maximization in monopoly doe not maximize total surplus, because price on a demand curve can be though of as the customer's willingness to pay. If customer's willingness to pay> cost of producing the good, additional units of good can be sold & total surplus could increase

the short-run supply curve Perfect competition

refers to the part of the marginal cost curve that is greater than AVC

when a new firm enters a monopolistically competitive market, the individual demand curves faced by all existing firms in the market will:

shift to the left (decrease) -when a new firm enters market, that firm will take some customers, so demand for existing firms in market will fall (shift left)

Static Games of Complete Info: dominant strategy

strategy for a player that is the best response to all strategies of the other player

Static Games of Complete Info: dominated strategy

strategy that is never best response

when new firms enter a perfectly competitive market, how are the supply and demand curves affected

the short-run market supply curve shifts right

for a firm in a perfectly competitive industry, which of the following statements is not correct? - P= Average Revenue - P= Marginal Revenue - Total Revenue is constant - Marginal Revenue is constant

total revenue is constant -P=D=MR=AR, and is a horizontal line when shown on firm graph

Tying

when you sell 2 products physically together