Exam 4 in econ201

market power

the extent to which a business/firm/seller can charge a higher price w/o losing many customers

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.

The following figure shows a business that price discriminates. What range of buyers will be given a discount so that they are induced to buy the good?

Between B and C

Based on the figure, which firm has the most market power?

C

Which of the following is NOT a way to differentiate a product?

Charge a lower price than other companies for a given product

What are the main positive and negative impacts of mergers?

Lower costs and increased market power

reservation price

The maximum price a customer will pay for a product.

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.

When price competition occurs

price is pushed down, reducing profits.

rule

produce up to where MR=MC then charge price according to demand curve

non-price competition

product differentiation

Barriers to entry _______ existing businesses ______.

protect; from competition by new entrants

bargaining power of suppliers

-suppliers of your key inputs may have power (of raw materials,key inputs,workers) to dictate prices or sales -lowers ability to increase mkt power + profitability

Using the figure below, what output and price should the firm choose to maximize profit?

4; $7

Which of the following markets is closest to an example of a perfectly competitive market?

Corn

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

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.

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.

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.

market power

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

marginal revenue

extra revenue from the sale of one additional unit of output

Perfectly competitive markets are relatively rare in the real world because most

goods are not identical and most markets have some dominant firms.

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.

Examples of persuasive advertising

movies and dining

monopoly

one seller in market faces entire markets demand curve

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.

market structures

perfect competition-no mkt power and most competition monopoly- most mkt power and least competitive oligopoly- 2nd most, monopolistic competition- in the middle

how to regulate firms w/ market power (pricing solutions)

regulations to increase/ensure competition -anti collusion regulations to prevent firms from colluding in an agreement to act as one - merger regulations/reviews to prevent firms from combining for mkt power - increase international trade (reduce import taxes/regulations, better trade agreements w/other countries)

hold-up problem

relationship-specific investments (investments more valuable if the relationship continues) - by you give the other side more leverage in negotiating

group pricing examples

restaurants: senior discounts, "early bird" specials home depot: military discounts children's tickets movies: matince apple/dell: student/education discounts

perfect price discrimination

sell product to each customer at exactly their reservation price (charges highest price possible to each customer and make every customer and make every sale to customers up to where reservation price = marginal cost

goal of pricing discrimination

sell product to each customer at their maximum willingness to pay ("reservation price")

marginal cost

the cost of producing one more unit of a good

hold-up problem may lead to under investments. solutions?

1. long-term contracts 2. reputation + repeated interactions 3. vertical integration

A business that price discriminates will likely produce at what output level?

Quantity 3

price discrimination

Selling the same product at different prices. (charge different prices to different customers to increase profit)

vertical consolidation

mergers between firms in the supply

how to maximize profits, choosing price + quantity

need to consider firm's demand (quantity demanded of the firm's product at different prices) curve, marginal revenue curve (change in total revenue from selling one more unit of a good), + marginal cost curve (change in the total cost from selling one more unit of a good)

Bargaining power is a buyer's of seller's ability to

negotiate a deal to its own benefit.

regulations to limit mkt power

- set price ceiling to keep price near at marginal cost - restrict price to some % above marginal cost (can reduce incentive to produce (link price to cost) high quality goods can increase incentive to inflate costs

examples of hold up problems

-locating near biggest customer - integrating systems w/important supplier - investing in special equipment for one customer - training workers in job-specific skills

attract "sticky" customer (more inelastic demand) w/ differentiation along

-quality/performance/reliability - service -design/style -location/convenience -advertising/marketing

how to segment groups

1. Segment your market into groups whose demand differs. 2. Target your group discounts based on verifiable characteristics. 3. Base group discounts based on difficult-to-change characteristics.w/ different demand curves - base group prices/discounts on easily identifiable + verifiable characteristics that are difficult to change

conditions required for price discrimination

1. mkt power 2. difficult for the products to be resold 3. must know customers' demand curve

Using the information in the table below, to maximize profit the firm should choose to produce _____ units of output and a price of ______.

2; $450

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.

product positioning/ differentiation tradeoff

demand side: capture as many customers as possible- be similar to competitors supply side: create your own market/niche, fewer customers but sell at higher mark up, more inelastic demand (be different from competitors)

product differentiation

differences in product characteristics to compete between firms reduce the incentive/ability for a competitors to undercut you (increase mkt power, profitability)

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

The threat of entry includes

expansion of existing businesses into the market, the addition of new distribution channels by existing businesses, and new entrants.

tradeoff

firms offer more variety of products tailored to consumers preferences/tastes

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

example of product identical

gas station prices on a street

potential threats to entry of new competitors

if a market is profitable, firms will want to enter to make $ -entrepreneurs > new startups -expansion of existing firms new entrants- increase supply, decrease price, profitability

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.

quantity discounts

lower per unit price for buying in bulk ex) 6 pack beer vs 36 pack BJs, sams club, Costco

Negative outcomes of market power include all of the following EXCEPT

lower prices

persuasive advertising

make customers believe they will enjoy the product (Tries to persuade or manipulate you into believe you'll enjoy a particular product)

make vs, buy

make if benefits > costs making eliminates exploitation from suppliers- no hold-up problem - no negotiation/ transaction costs cost: no vertical integration or ability to use own bargaining power

monopolistic competition

many sellers of differentiated products (similar, but different) most consumer goods + service - firms can have little or a lot of mkt power

A seller's demand curve summarizes its _____, and its marginal revenue curve measures its ______.

market power; incentive to increase production

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.

horizontal consolidation

mergers between firms in the same market/ industry

natural monopoly

most efficient/cheapest/optimal for one firm to produce for the entire market due to huge fixed costs - firms would be unprofitable if pricing at marginal

threats from potential substitutes

new innovation result in substitutes that provide better performance/quality and/or cheaper - more of a threat when customers can easily switch between sellers BUT complements can increase profitability and mkt power

products identical

no differentiation only compete on price price gets driven down to marginal cost

Imperfect competition stems from _____ and whether the product is ______.

the number of sellers; differentiated

search good

A good that you can easily evaluate before buying.

bargaining power of buyers

- buyers w/more power can dictate lower prices

perfect competition

- firms produce identical products - many buyers + sellers such that no one buyer/seller can affect the price - firms take the market price as given, only deciding how much to produce

advertising/marketing

- helpful to position product - increase demand, loyalty (demand more inelastic)

existing competition

- more firms- more competitive

example of bargaining power of buyers

Walmart: buy lots of product but require a low price

Oligopoly

a few firms w/mkt power or most of the mkt share may collude (work together) to operate as a monopolist

The market power of a firm is its

ability to raise its price without losing many of its customers to competing businesses.

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

when firms have mkt power, they charge above marginal cost + produce less than in perfect competition

bad for consumers

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.

examples of informative advertising

cars

group pricing

charge different prices to different group of customers 1. identifiable + verifiable characteristic (age, sex, gender, race/ethnicity, location, time, etc (students, veteran/military,etc) 2. different demand curve

If a company engages in perfect price discrimination, it is attempting to

charge each customer their reservation price.

Price discrimination is when a company

charges different prices to different customers who are are buying the same product.

Product Characteristics

compete for customers by differentiating product, more difficult for competitors to compete on price (likely that firms use a balance of both strategies)

examples of hurdle method

coupons, sales/timing, haggling, discounts for app users

perfect competitive market graph has a

curved marginal cost line

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.

Early bird specials at many restaurants are an example of using ______ to create ______.

timing; a hurdle

informative advertising

to tell about the features (Informs potential customers about a product.)

natural monopoly example

utilities (water/sewer,electric, natural gas, etc)

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 can lead to

worse outcomes that may need regulation firms look to exploit + gain mkt power

threat from entrants depends on barriers to entry in the market

- how costly to enter - will there be heavy competition if entering do laws/regulations limit entrance? natural monopoly (huge fixed costs to enter

the need to balance these two consideration (demand side, supply side)

- if price competition is high you could differentiate your product - if price competition is low, appeal to more customers

price competition

easier when products are very similar, prices are readily available, and its easy for buyers to switch between sellers

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