ECON 11-15
Monopoly Demand
-the pure monopolist is the industry -the demand curve is the market demand curve (down sloping demand curve) -marginal revenue is less than price
innovation
An improvement of an existing technological product, system, or method of doing something.
constant cost industry
Entry (or exit) of firms does not affect resource prices
monopolistic competition and tech progress
Incentive to differentiate but profits are temporary
For productive efficiency to be achieved
P = minimum ATC
Expected-rate-of-return curve
Slopes downward due to diminishing returns for R&D expenditures
terminal node
a place where the game ends
collusion
defined as cooperating with rivals and can benefit the firm
Economic profit in the long run is
possible for a pure monopoly but not for a pure competitor.
Diffusion
spread of innovation
interindustry competition
the competition for sales between the products of one industry and the products of another industry
game theory
the study of how people behave in strategic situations
how to make a profit in the short run
(Price - ATC) * Q = Economic profit or loss
adjustment process in pure competition
- Firms seek profits and shun losses - Firms are free to enter or to exit - Production will occur at firm's minimum average total cost - Price will equal minimum average total cost
Oligopoly Behavior
-Game Theory -Collusion -Incentive to cheat -Prisoner's dilemma
examples of monopolies
-Public companies: Natural Gas, Electric, Water -Near Monopolies: Intel, Wham-o - Pro sports teams
negative effects of advertising
-can be manipulative -contains misleading claims that confuse consumers -consumers pay high prices for a good while forgoing a better, lower priced, unadvertised version of the product
economic effects of monopoly
-income transfer -cost complications -economies of scale -simultaneous consumption -network effects -X-inefficiency -Rent-seeking behavior -technological advance
to be an oligopoly the 4-firm concentration must be at least
40%
invention
A new product, system, or process that has never existed before, created by study and experimentation.
fast-second strategy
An approach by a dominant firm in which it allows other firms in its industry to bear the risk of innovation and then quickly becomes the second firm to offer any successful new product or adopt any improved production process.
examples of price discrimination
Business travel Electric utilities Movie theaters Golf courses Railroad companies Coupons International trade
example of creative destruction
CD (compact disc) being replaced with iPods which in turn are being replaced with smartphones and their ability to play music
Obstacle to Collusion
Demand and cost differences Number of firms Cheating Recession New entrants Legal obstacles
Intrapreneur
Innovators that do not bear any personal financial risk. They often work within existing companies supported by pay incentives that foster creative thinking. For example scientist
positive effects of advertising
Low-cost way of providing information to consumers Enhances competition Speeds up technological progress Can help firms obtain economies of scale
misconceptions concerning monopoly pricing
Not highest price Total profit Possibility of losses They are interested in total profit not per unit profit
repeated game
Often firms continually play the game. In this case, the optimal strategy for the firms is to cooperate and not compete as strongly as possible, as long as their rivals do the same.
monopolistic competition inefficient
P > min ATC is condition for productive inefficiency P > MC is condition for allocative inefficiency
patent
Patents give the inventor exclusive rights to market and sell their product for 20 years. May hinder creative destruction and speed up innovation
imitation problem
The potential for a firm's rivals to produce a close variation of (imitate) a firm's new product or process, greatly reducing the originator's profit from R&D and innovation.
extensive form
Using a game tree to display choices and also shows the order of the moves
strategic form
Using a payoff matrix to represent strategy choices
zero-sum game
a game in which the sum of the two firm's outcomes is zero, an I win-you lose situation
monopolistic competition
a large number of sellers, easy entry and exit , some control over prices and differentiated variety of goods
kinked demand curve
a perceived demand curve that arises when competing oligopoly firms commit to match price cuts, but not price increases
simultaneous consumption
a product's ability to satisfy a large number of consumers at the same time
Nonprice competition refers to:
advertising, product promotion, and changes in the real or perceived characteristics of a product.
dominant strategy
an option that is better than any alternative option regardless of what the other firm does.
Herfindahl Index
another measure of industry concentration and it is the sum of the squared percentage of market shares of all firms in the industry. Generally speaking, the lower the Herfindahl, the lower the industry concentration and the more competitive the industry
When a monopoly power results in an adverse effect upon the economy the government can do 3 things
antitrust laws, regulate it or ignore it
Dynamic adjustments will occur
automatically in pure competition when changes in demand, resource supplies, or technology occur
Pure monopolists may obtain economic profits in the long run because of
barriers to entry
rent-seeking behavior
behavior often occurs as monopolies seek to acquire or maintain government‑granted monopoly privileges at someone else's expense. Such may entail substantial costs (lobbying, legal fees, public relations advertising, etc.), which are inefficient.
a purely competitive firm
cannot earn economic profit in the long run.
Purely competitive markets will automatically adjust to
change in consumer tase, resource supplies, tech, invisible hand
price discrimination
charging different prices to different buyers when such price differences are not justified by cost differences
venture capital
consists of that part of household saving used to finance high-risk business ventures in exchange for shares of the profit if the ventures succeed
long-run supply curves
constant-cost industry: # of firms entering or leaving the industry do not affect costs increasing cost industry: entry or exit of firms does affect costs decreasing cost: cost changes are inverse
Entrepreneurs would like to increase profits beyond just a normal profit
decrease costs by innovating and new product development
prices and output in monopolistic comp
demand is highly elastic, short run profit or loss and long run only a normal profit
consumer surplus
difference between the maximum that consumers would be willing to pay and the market price
producer surplus
difference between the minimum producers would be willing to accept for their product and the market price.
The mutual interdependence that characterizes oligopoly arises because
each firm in an oligopoly depends on its own pricing strategy and that of its rivals.
profit maximization in the long run
easy entry and exit, identical costs and constant-cost industry
examples of barriers to entry
economies of scale, patents and licenses, ownership or control of essential resources, pricing and other strategic barriers
mutual interdependence
exists when each firm's profit depends on its own pricing strategy and that of its rivals
Disequilibrium will cause
expansion or contraction of the industry until the new equilibrium at P = MC occurs
oliogopoly
few number of sellers, the goods are standardized or differentiated, there is limited control over price and hard to enter
In pure competition (2nd one)
firm is producing at the MR = MC output level and earning an economic profit, then new firms will enter this market
In pure competition
firms can enter and exit the market in the long run but not in the short run and firms may incur economic losses or earn economic profits, but in the long run they earn normal profits.
interest-rate cost-of-funds curve
graphical portrayal of the relationship between the interest rate and the firm's R&D expenditures
Cartel
group of firms or nations joining together and formally agreeing as to the price they will charge and the output levels of each member
pure monopoly and tech progress
have little incentive to innovate due to lack of rivals and this is the structure type least conducive to innovation
pure competition and tech progression
have the incentive to innovate but may lack the necessary funds to do so
creative destruction
idea that the creation of new products and new production methods destroys the market positions of firms committed to existing products and old ways of doing business
economies of scale
idea that, for a time, larger plant sizes will lead to lower unit costs. An increase in inputs where there are economies of scale will lead to a more than proportionate increase in output
Which of the following correctly orders, highest to lowest, the relative magnitudes of U.S. spending by businesses on components of R&D? innovation, invention, basic research
innovation (79%), invention (16%), basic research (5%)
Technological advance is a three-step process involving
invention, innovation and diffusion
Interest-rate cost-of-funds
is what the firm must pay to obtain the financing for their project. There are many possible sources of funding but, whatever the source of funds, the interest rate is the cost of the investment
When economists view technological change as internal to the economy, they mean that
it arises deliberately from the profit motive and competition.
If a pure monopolist is producing at that output where P = ATC, then:
it's economic profit will be 0
In the short run, a monopolist's economic profits may be positive or negative depending on
market demand and cost conditions
X-efficiency
may occur in monopoly since there is no competitive pressure to produce at the minimum possible costs
one-time game
means that firms make their decisions in a single time period
simultaneous game
means that firms make their decisions simultaneously
positive sum game
means that the sum of the two firms' outcomes is positive, a win-win situation
negative sum game
means the sum of the outcomes is a result less than zero
Subgame
min-game that is within the overall game
technology advance comprises
new and improved goods and services and/or new and improved ways of producing or distributing them.
network effects
occur when the value of a product rises as the total number of users rise. An example would be computer software or Facebook. The more people that use it, the more benefits of the product to each person using it. People tend to use products that everyone else is using.
price war
occurs when two or more firms compete primarily by lowering their prices
sequential game
one firm moves first and then the rival responds. Being first by a firm may lead to the establishment of a Nash equilibrium that works in its favor
Nash Equilibrium
outcome from which neither firm wants to deviate. And is described as where rivals see their respective current strategy as the optimal choice, given the other firm's strategy, and is the only outcome that is considered stable and that will persist
4 firm concentration ratio
output of four largest firms / total output in the industry
Technological advance is shown as a(n)
outward shift of a production possibilities curve
Two different ways to display a game using a strategic form
payoff matrix and extensive form
Resources are efficiently allocated when production occurs where
price equals marginal cost
subgame perfect equilibrium
process of working backwards to identify the path that represents the rational profit maximizing choice made at every decision node relies on both firms having perfect information about the decisions that will be made in each subgame.
A firm that is producing an output such that the benefit from one more unit is more than the cost of producing that additional unit. This means the firm is
producing less output than allocative efficiency requires.
Homogeneous oligopoly exists where a small number of firms are:
producing virtually identical products.
Economic analysis of a monopolistically competitive industry is more complicated than that of pure competition because
product differentiation and consequent product promotion activities.
Kodak introduced to the marketplace a digital camera that uses no film but takes photos that can be shown on personal computers. This is an example of?
product innovation
Triple Equality
pure competition leads to the most efficient use of society's resources P=MC=minimum ATC
fair-return price
set price equal to average total cost
socially optimal price
set price equal to marginal cost
the MR = MC rule applies in both
short & long run
pure monopoly
single seller, unique product, price maker, blocked entry and non- price comp
Stackelberg Duopoly
strategic situation where the leader firm choses how big a factory to build and based on that decision the follower firm(s) then decides how big a factory to build
Industry Concentration
tells my ratios how much competition is there or not
optimal amount of R&D
that amount where the expected rate of return is equal to or exceeds the interest rate cost of borrowing to finance it.
An unregulated pure monopolist will maximize profits by producing
that output at which MR = MC.
In the long run, a pure monopolist will maximize profits by producing
that output at which marginal cost is equal to marginal revenue.
import competition
the competition that domestic firms encounter from the products and services of foreign producers
To maximize profit, a pure monopolist must maximize
the difference between total revenue and total cost.
Productive efficiency refers to
the production of a good at the lowest average total cost.
price leadership
the strategy by which one or more dominant firms set the pricing practices that all competitors in an industry follow
In economists' models, technological advance occurs in?
the very long run
Inverted-U theory of R&D
theory suggests that research and development rises with the industry's concentration ratio, reaches a peak at 50% and then declines. Empirical evidence generally supports this, but the technological opportunities that are available may matter more than industry concentration
a pure monopoly has no supply curve because
there is no unique relationship between price and quantity supplied. The price and quantity supplied will always depend on the location of the demand curve.
backward induction
two-stage process that divides the game into subgames before working back from right to left
In seeking the profit-maximizing output, the pure monopolist
underallocates resources to its production.
Kinked Demand Model
used for non-collusive oligopolies to explain their behaviors and pricing strategies
pure competition
very large # of sellers, the goods are standardized, no control over price and easy barriers to entry
long-run equilibrium of a perfectly competitive market occurs when
when marginal revenue equals marginal costs, which is also equal to average total costs.
allocative efficiency is achieved
when the production of a good occurs where P = MC.
MR = MC rule
will tell the monopolist where to find its profit‑maximizing output level
long run equilibrium results in
zero economic profits
Role of the Entrepreneur
•Initiator, innovator, and risk bearer •Forming start-ups •Other innovators •Innovating within existing firms •Anticipating the future •Exploiting university and government scientific research
Oligopoly and tech progess
•Large size •Ability to finance R&D •Barriers to entry can foster R&D •Complacency is a negative
tech with the short, long and very long run
•Short run- No change in technology, plant, or equipment •Long run- No change in technology •Very long run- Technology changes with R&D
The following analysis of monopoly demand makes three assumptions
•The monopoly is secured by patents, economies of scale, or resource ownership. •The firm is not regulated by any unit of government. •The firm is a single‑price monopolist; it charges the same price for all units of output.
credible threat
•Threat that is believable by the other firm •Can establish collusive agreements •A strong enforcer can prevent cheating •Can generate higher profits •May be countered with threat by rival