Proulx Exam 3 - Econ 101
Entry Deterrence
A strategy by which an incumbent firm invests in excess capacity to discourage entry by new firms. - flood market - price war -war chest - create reputation for competing hard against new entrants
Worker Characteristics
- Education and Experience - Knowledge, skills, and abilities - Certification/Licensure - Economic Superstar - Signaling
Regulations and Government Policy
- Patents: creates monopoly, no company can create idea w/o your permission - Regulation: harder to start business, incumbent businesses ask for more regulation - Licensing: costly, can defer entry. liquor, childcare centers, etc - Lobbying - involves incumbent businesses - creates barriers to entry. ie taxi companies and uber regulation
Demand Side Strategies
- switching costs lock your customers in. ie. iPhone apps, camera lenses, frequent flyer miles. Makes it costly to switch - reputation and g keep your customers loyal -Network effects: customers only use popular products. Becomes useful when everyone uses it. insta, ebay, etc
Human capital
accumulated knowledge and skills that make worker productive
Signaling
achieving a goal (college, hs, etc). Signals that you are tenacious and hardworker
Monopolistic competition
an industry in which many firms offer products or services that are similar (but not perfect) substitutes. Example: you are the only seller of a precise style of jeans
permanent income
average lifetime income
Strategic interactions
each actor's strategy depends on the anticipated strategy of others. Efforts are often made in silence or cooperation
Free exit
ensures industries wont remain unprofitable in the long run. Continues until there is incentive for firms to enter.
Monopsony power
firm using its power as a major buyer of labor to pay lower wages
Average cost
firms total cost divide by quantity produced. Total cost/total quantity = fixed cost per unit + variable cost per unit = AFC+AVC
Search good
good which you can evaluate before buying
When will existing rivals exit your market?
if MC>MB. IF EP <0 or becoming negative. Implicit opportunity costs > accounting profits --> invest elsewhere
economic superstars
individuals who not necessarily make better decisions, but rather a superstar who brings attention to the company
relation-specific investment
investment that is more valuable if the current business relationship continues
precipitating factors
job loss, divorce, deaths, childbirth
perfect competition outcome
keep producing until price = marginal cost (end of the curve?)
Rational Rule for Sellers w/ market power
keep seeling until MC=MR, look up and see at highest price possible
personal advertising
manipulating customers into believing theyll enjoy it
Competition
many sellers of similar product as yours --> compete in price and product attributes
hold-up problem
once you have made a relationship-specific investment, the other side may try to renegotiate to get a better deal.
monopoly
only one seller. Raises prices and won't lose customers - huge market power.
poverty reoccurs
over half people who escape poverty return within 5 years
What happens in the long run if price > average cost
price = average cost because EP>0 and new firms enter
What happens when price< average cost
price = average cost because firms exit until price rises
experience goods
products that cannot easily be evaluated until after purchase and use
alternative poverty line
public opinion of salary needed
Implicit Bias
relying on unconscious associations instead of complete analysis
price competition
repeated rounds of price cuts that undercut your profits
output effect
sell one more unit, the total revenue increases by the price of the additional item sold
Idea for Price Discrimination
set price at each persons marginal benefit. Richer people have higher wtp and thus pay more. Poor people get same product for less money and have lower wtp
market power outcome
set quantity by producing until marginal revenue = marginal cost
firm demand
summarizes the quantity of buyers demanded from your firm as price changes
market power
the ability to charge higher prices without losing many sales to competing businesses
absolute poverty
the adequacy of resources relative to an unchanging standard
relative poverty
the adequacy of your resources relative to others in society
intergenerational mobility
the extent to which the economic status of parents determine outcomes for children
adverse selection
the greater the likelihood of something happening, the more likely someone is to buy insurance
market demand
the quantity of a good or service that all the consumers in a market are willing and able to buy at different market prices
accounting profit
the total revenue your firm receives, minus your explicit financial costs
discount effect
to sell one more unit, you have to lower the price on all units sold.
Benefits of redistribution
utilitarian lifestyle. Promote the greatest happiness for the greatest numbers diminish marginal benefit: each additional dollar is less beneficial than the previous Implication: poor people value dollar more than the rich, redistribute from the rich
Positioning trade-off Demand Side
want to be close to your competitors. Increase share of potential customers and increase in quantity
Betrand Paradox
with no product differentiation, even one competitor can force economic profits to zero .. cuz incentive to price cut e/o
Statistical discrimination
workers use stereotypes for observable traits to infer qualities they cant observe
economic profit
your firms total revenue, minus explicit financial and implicit opportunity costs
What 3 factors explain difference in wages
1. Demand 2. Supply 3. Institutions
Four Strategies for Creating Barriers to Entry
1. Demand Strategies: Find ways to create customer lock-in 2. Supply-side strategies: develop unique cost advantages 3. Regulation: mobilize gov to prevent entry 4. Deterrence Strategies: scare any potential entrants w/ credible threats
Underproduction Problem
-Higher prices under market power are a problem for consumers, but an off-setting benefit to producer - results in redistribution, not loss in economic surplus - not socially optimal - perfect competition achieves this
What does advertising do
-It increases demand for your product (Shifts to right) -Makes customers more loyal, giving a firm more market power (Flattens demand curve)
How does competition yield lower prices and higher quantity?
1. Competitive price is lower than market power price and competitive quantity is greater. (firms will undercut each other to increase revenue) 2. A firm w/ market power earns greatest profits and can result in high costs 3. Because of profits, inefficient firms can survive
What are the 5 forces that determine firm profitability?
1. Current Competitors 2. Potential competitors: threat of entry 3. Competitors of other markets: Threat of Substitutes 4. Suppliers: Seller bargaining power 5. Customers: Buyer Bargaining power
Costs of Redistribution
1. Administrative Costs 2. Taxes reduce incentive to work 3. Mean tested programs raise effective marginal tax rates: more taxes fewer benefits? 4. Insured people make riskier choices: unprotected sex, drop out, unhealthy behaviors, spin the block 5. Tax avoidance, evasion, fraud
effects of new entrants in market
1. Decreased Demand: lose existing customers to new firm, shifts demand curve left 2. Reduces your market power --> customers have more options, demand curve becomes flatter
effect of exit of existing firms for incumbents
1. Increased demand : gain customers from the exiting firm. Shift demand curve right 2. Increases your market power: Customers have fewer choices. Demand curve becomes steeper
Supply-side and Cost Advantages
1. Learning by doing. Experience means incumbents have advantages 2. economies of scale. Mass production is very efficient> small quantity. Difficult for newcomers to establish mass production 3. research and development. Make existing products cheaper, develop more effective management techniques 4. relationships with suppliers access to inputs and distribution. Access to key inputs can freeze your competitors out. Average cost can be higher for new firms meaning new firms wont enter
What are the Different product attributes that yield market power?
1. Quality 2. Customer service 3. Reputation 4. Location
What three factors explain differences in wages
1. demand: worker characteristics, human capital, signaling, economic superstars 2. Supply: Job Characteristics, compensating differentials 3. Institutions: minimum wages, unions and bargaining power, occupational licensing, monopsony power, discrimination
Marginal Revenue Curve vs Firm Demand Curve
1. your firms demand curve is downward sloping - reflects market power 2. Marginal Revenue lies below the demand curve - reflecting the discount effect 3. Marginal Revenue is steeper declining more rapidly - discount effect is bigger, the larger quantity you sell
How to maximize market power
Differentiate your products and minimize threat from competitors (find good markets to enter).
When will new rivals enter your market
If economic profit is being earned, new rivals will enter your market. MB>MC. if accounting profits>implicit opportunity costs
non-price competition
Firms compete through product differentiation and positioning
Free entry
Free entry eliminates positive economic profit in the long run. Continues until there is no incentive for new firms to enter. Equilibrium: economic profit = 0
perfect price discrimination
Occurs when a firm charges the maximum amount that buyers are willing to pay for each unit. MC = mB
Hurdle method
Offer lower prices only to buyers who are willing to overcome some hurdle. Example: releasing cheaper tesla with less mileage for cheaper, making products worse, taking time to release cheaper product, etc
Examples of non-price competition
Product characteristics, Location, Customer Service, Advertising, Warranties, Package deals
Positioning trade-off Supply Side
Want to be far from your competitors, Increase marginal profit and prices, results in increases profit margin
occupational licensing
a credential that is required to obtain an occupation. AMA for doctors, bar exam, etc
prejudice
a dislike for one group that results in lower wage and employment
Oligopoly
a few large sellers dominate the market. products may be similar or somewhat different. If price raised --> some customers stay, others leave
Average revenue
a firms total revenue divided by quantity supplied. If you charge all customers the same price, average revenue = price
social insurance
a government payoff that occurs when bad things happen to people
Compensating differential
a wage premium that compensates workers for adverse attributes of a job. Ex: trash collection, funeral directors, etc
Substitutes as a threat
buying second hand, making your own, firms in other industries. Low substitution cost bad for firms