Microeconomics for Life | CH. 10

Prisoners' dilemna

A game with two players who must each make a strategic choice, where results depend on the other players' choice.

Game theory

A mathematical tool for understanding how players make decisions, taking into account what they expect rivals to do.

Natural monopoly

Arises when conditions create an economy of scale that allows only a single seller to achieve lowest average total cost. With natural monopoly, policymakers face the challenge of avoiding the inefficiencies of monopoly's restricted output and higher price.

Cartel

Association of suppliers formed to maintain high prices and restrict competition. There is high temptation for businesses to form cartels because the payoffs are high.

Collusion

Conspiracy to cheat or deceive others. In economics, they are agreements to fix prices in a conspiracy against consumers.

Recipe for profits

Estimate marginal revenues and marginal costs, and then set the highest price that still allows your business to sell the highest quantity for which marginal revenue is greater than marginal cost.

Capture view

Government regulation benefits the regulated businesses, not the public interest. Concentrated benefits to businesses make regulations worth lobbying for, while small costs to individual consumers do not create political pressure for regulators to serve public interest.

Public-interest view

Government regulation eliminates waste, achieves efficiency, and promotes the public interest

Government policy challenge in economies of scale

How do you gain the low-cost efficiencies of economies of scale, but avoid the inefficiencies of monopoly's restricted output and higher price?

Civil offences under the Competition Act

Less serious than criminal offences. Include mergers, abusing a business's dominant market position, and taking actions to lessen competition. Penalties include fines and legal prohibition of mergers and anti-competitive business practices.

Anti-trust laws

Make it illegal for businesses to combine to form monopolies. They drive price-fixing agreements underground, making it more difficult for colluding businesses to communicate, trust each other, and enforce their collusion.

Competition Act

Modern Canada's anti-combines (anti-trust) law, passed in 1986, to promote competition. Includes criminal offences and civil offences.

Nash equilibrium

Outcome of a game in which each player makes their own best choice given the choice of the other.

Criminal offences under the Competition Act

Price fixing, bid rigging, and false or misleading advertising. Penalties include prison and fines.

Government responses to economies of scale

Public ownership (crown corporations) or regulated private monopoly

Crown corporations

Publicly owned businesses in Canada created by the government, which owns 100% of the corporation's assets.

Rate of return regulation

Sets a price allowing the regulated monopoly to just cover average total costs, including normal profits.

Caveat emptor

"let the buyer beware" - the buyer alone is responsible for checking the quality of products before buying

Desirable competitive behaviour . . .

. . . is difficult to distinguish from undesirable collusive behaviour.

Government failure

When government regulations fail to serve public interest.

Market failure

When markets produce outcomes that are inefficient or inequitable.

Key insight of game theory

With the complication of trust, there are two smart choices. (Players who can't trust each other confess, players who trust each other deny)