micro-chapter 14
patent
the exclusive right to a product for a period of 20 years from the date the patent is filed with the government. government uses patents to 1; encourage firms to carry out research 2;development of new and better products 3; better ways of producing existing products
games share three key characteristics
1,rules that determine what actions are allowable 2,strategies that players employ to attian their objectives in the game 3, payoffs that are the results of the ineractions among the players' strategies
flaws in concentration ratio
1: do not include the goods and services that foreign firms export to the USA 2: calculate for the national market is mainly local 3: competition sometimes exists between firms in different industries.
two factors for OPEC's occasional success at behaving as cartel
1; the members of OPEC are particpating in a repeated game 2; Saudi Arabia has far larger oil reserves than any other member of OPEC. Therefore, it has the most to gain from high oil prices and a greater incentive to cooperate
occupational licensing
Governments also restrict competition like doctors and dentists in every state need licenses to practice
sub-game perfect equilibrium
Nash equilibrium in which no player can make himself or herself better off by changing his or her decision at any decision node typically, in sequential games of this type, there is only one subgame-perfect equilibrium
Nash equilibrium
an equilibrium (a situation) in which each firm chooses the best strategy, given the strategies chosen by other firms. this suitation is an equilibrium because each firm is maimixing profit, given the price chosen by the other firm. In other words, neither firm can increase its profit by changing its price, given the price chosen by the other firm.
duopoly
an oliogopoly with two firms
barrier of entry
anything that keeps new firms from entering an industry in which firms are earning economic profits three important barriers to entry are: 1, economies of scale, 2,ownership of a key input, 3, government-imposed barriers.
a low price in business strategy
by deterring entry might lead to a large profit
competition from existing firms
competition among firms in an industry can lower prices and profits eg; SAT need to compete with ACT so the price for SAT is $51 but no one comoete with GRE so the price for GRE is $150 when there are only a few firms in a market, it is easier for them to implicitly collude and to charge a price close to the monopoly price Competition in the form of advertising, better customer service or longer warranties can also reduce profits by raising costs
conclusion
competition erodes economic profits Even in oligopoly, firms have difficulty earning economic profits in the long run. several ways for firm attempt to avoid the effects of competition in various ways 1; stake out a secure nichc in the market 1;engage in implicit collusion with competitiong firms 3;attempt to have the government impose barriers to entry.
competition from substitute goods or services
firms are always vulnerable to competitiors introducing a new product that fills a consumer need better than their current product does Eg encyclopedias; as long as compuer software company offering electronic encyclopedias, the printed encyclopedias are disappeared.
the threat from potential entrants
firms face competition from companies that currently are not in the market but might enter Business managers often take actions aimed at deterring entry. Some of these actions include 1;advertising to create product loyalty, introducing new products---such as slightly different cereals or toothpastes--to fill market niches, and 2;setting lower prices to keep profits at a level that makes entry less attractive.
Government-imposed Barriers
firms sometimes try to convince the government to impose barriers to entry examples of government-imposed barrie
tariffs and quota
governments also impose barriers to entering some industries by imposing tariffs and quotas on foreign competition
opec
group of firms that collude y agreeing to restrict output to increase prices and profits. This is a repeated game so this collude cannot last for very long time
The bargaining power of buyers
if buyers have enough bargaining power, they can insist on lower prices, higher Q products or additional services
the bargaining power of suppliers
if many firms can supply an input and the input is not specialized the suppliers are unlikely to have the bargaining power to limit a firm's profit. As wih other competitive forces, the bargaining power of suppliers can change over time
ownership of key input
if production of a good requires a particular input, then contorl of that input can be a barrier to entry
in oliogopoly market
it is difficult to know what an oligopolist's demand curve we also don't know marginal revenue curve so we can't calculate the profit maximizing level of output and the profit-maximizing price the way we do for competitive firms
a high price in business strategy
might lead to a large profit if other firms do not enter the market, but if a high price attracts entry from other firms, it might actually result in a smaller profit
advirtisment in game theory
offering to match competitors' prices might seem to benefit consumers but game theory shows that it actualy may hurt consumers by helping to keep prices high
sequence games
one firm will act first and then other firms will respond. 1；deterring entry 2；bargaining between firms can be anylyzed using sequential games.
concentration ratio
one measure of the extent of competition in an industry a four-firm concenrtration ratio greater than 40% indicates that an industury is an oligopoly
Game theory
the approach we use to analyze competition among oligopolists the study of how people make decisions in suitations in which attaining their goals depends on their interactions with others; in economics, the study of the decisions of firms in industries where the profits of a firm depend on its interactions with other firms. In oliogopolies, the interactions among firms are crucial in determining profitability because the firms are large relative to the market
five competition forces model
the number of competitors in an industry affects a firm's ability to charge a price above average cost and earn an economic profit these five competitive fores determine the overall level of competition in an industry 1,competition from Existing Firms 2, the threat from potential entrants 3,competition from substitute goods or services 4,the bargaining power of buyers 5,the bargaining power of suppliers
in business situation
the rules of the game include not just laws that a firm must obey but also other matters beyond a firm's control-at least in the short run-such as its production function. business strategy; actions that a firm takes to achieve a goal such as maximizing profits the payoffs are the profits a firm earns as a result of how its strategies interact with the strategies of other firms The decision regarding what price to charge is an example of a business strategy
economic of scale
the situation when a firm's long-run average costs fall as the firm increase output. the most important barrier to entry is economies of scale if economies of scale are relatively unimporant in the industry, the typical firm's long run average cost curve will reach a minimum at a level of output that is a small fraction of total industry sales. if economies of scale are significant, the typical firm will not reach the minimum point on its long-run average cost curve until it has produced a large fraction of industry sales. in that case, the industry willl have room for only a few firms and will be an oligopoly. getting a lower average costs is the key point to be oliogopoly in economic of scale
bargaining
the success of many firms depends on how well they bargain with other firms eg; firms often must bargain with their suppliers over the prices they pay for inputs
price leadership
a form of implicit collusion in which one firm in an oligopoly announces a price change and the other firms in the industry match the change
prisoner's dilemma
a game in which pursuing dominant strategies results in noncooperation that leaves everyone worse off.
cartel
a group of firms that collude by agreeing to restrict output to increase prices and profits
oligopoly
a market structure in which a small number of interdependent firms compete This market structure lies between competitive industries, which many firms and monopolies, which have only a single firm. barriers to entry prevent---or at least slow down entry, which allows firms to earn economiv profits over a longer period
dominant strategy
a strategy that is the best for a firm, no matter what strategies other firms use.
payoff matrix
a table that shows the payoffs that each firm earns from every combination of strategies by the firms
examples of government-imposed barrier to entry are
1;patent 2;licensing requirements 3;barriers to international trade
collusion
an agreement among firms to charge the same price or otherwise not to compete
cooperative equilibrium
an equilibrium in a game in which players cooperate to increase their mutual payoff
noncooperative equilibrium
an equilibrium in a game in which players do not cooperate but pursue their own self-interest