micro exam 2

reasons why wages differ across jobs

compensating wage differential: differences in wages paid that are created by the forces of supply and demand when workers view some jobs as intrinsically more attractive than others -night shift vs a regular shift -location: some parts of country that are not as attractive as others--bigger cities/more culture/more social life; firms might have to offer you more money bc living prices are a lot higher. differences in human capital investment--the process by which people argument their earning capacity; better college education--getting training and knowledge and skill that will help you as a trained professional differences in workers ability

if products are identical

degree of substitution ability is perfect

bertrand in airline pricing

-American and US air offer nonstop service and charges the same price -if american introduces a discounted fare, US air isn't going to deal with that and then will react by reducing their fares as well -this leads to a price war and therefore their prices both go down and they both make normal profits

profit maximizing output of a monopoly

-MR=MC -if MR>MC then profits will increase if output is increased -if MR<MC then profits will increase if output is decreased -marginal revenue is always less than price bc there are no competitors

4 profit positions a firm can be in in the short run

-P> ATC =excess profits -P= ATC = normal profits -ATC>P>AVC = its a loss, but you should stay in business - P <ATC= shut down

monopolies and production

-P>MR -MR=MC-profit maximizing run -must conclude that in a monopoly setting, price is greater than MC--this means that monopolies mark up their prices--they do this bc there are no competitors -P>MC -if monopolies can markup their prices, what determines the size of their markup--consider how elastic demand is for that product--if more elastic then can't change price as much; if demand is inelastic then the markup will be greater

monopoly in shutdown condition

-average cost is greater than demand for that product

why do airlines over book their flights

-bank on the fact that some people don't show up--trying to maximize profits -typical resolution: give some people a voucher

price leadership

-common in oligopolies (auto and airline industries have experienced this in the past) -occurs when a price leader sets their prices, and then all other competitors feel compelled to lower their prices to match -price leadership is a form of collusion, it is -if companies had history of dealing with each other, then there is usually a dominant firm who sets the tone for the other firms to follow in terms of pricing -even though you aren't getting on the phone to actually agree to this, you kind of just look at what dominant firms do -GM: when they set prices on 2019 cars, the expectation is that all car companies set prices at same range or else there will be a price war and everyone will be at normal profits -a fine line exists between collusion (which is illegal) predatory pricing (also illegal) and price leadership--especially if the price changes are not related to operating costs **-price leadership is usually challenging for the fringe firms, bc they are in the position of either 1. defending their higher prices or 2. reacting to the strategies of another company -in many cases, smaller competitors do not have the same economies of scale as the price leaders and therefor can't survive constant price declines

monopolies

-created entry barriers, so restrict competition, this mark prices up bc your product is unique, so you get excess profits in the long run

perfect competition

-dont expect to make a lot of money bc entry barriers are low, so prices are being driven down and at the end of the day you

united airlines fiasco

-dont let someone board the plane then take their seat away, and if you do you have to offer more money -another tip, dont make the offer public--if some people dont do it others won't wanna do it -make it private by making better use of technology and start with a big offer keep things more discrete and youamteo better solution

oligopoly

-few firms -products can be homogeneous or differentiated (steel) -entry barriers are significant

what is a cartel

-group of firms that act collusively--usually restrict production levels to keep prices high

refractive eye surgery application

-how do you differentiate your service -through advertising/celebrity endorsers to create better visibility

supply elasticity

-if prices rise and you can produce more of that product then supply is elastic -change in supply/change in price--if greater change in price but no change in supply then very inelastic

esports

-is both monopolistic competitive (anyone can create this) and an oligopoly (only a couple firms who are the big players)

oligopolies examples

-national mass media and news outlets: 90% of media outlets owned by 6 corporations: Disney, time warner, CBS, Viacom, NBC universal -operarint systems for smartphones and computers -autoindustry: ford, GMC, Chrysler -cell phone service providers: verizon sprint at and t tmonlie -music entertainment industry: universal music group, sony

most competitive market type

-perfect competition; many buyers and sellers ; no control over their woes prices--price takers; product is identical--homogeneous; demand curve is perfectly elastic (bc all products are homogenous--no one can justify changing the price)--if there is a subtle change in price, then consumers choice will be very different; no entry barriers

simultaneous games

-players choose he actio other consus at l the same time -constulting : parents receive an RFP (request for proposal) on some project; people will reach out to 5 or so consultants so they can compare what they are offering--the other co tnsultants dotants an't know what -each player must antitic

chart of PC in slides

-profit = pi -profit per unit = pi/p -if MC < MR then keep producing -but at some point your marginal costs escalate and at some point they become higher than your revenue and your prices start to fall--profit starts to fall -deal target is to try to find the level of production where MR=MC--this is where profits are maximized

profit maximization rules PC

-set MR=MC as long as P>AVC -but in PC we can modify this to say P=MC

what has made brand awareness easier

-social media

job market signaling

-there are some assymetiries -thought the job you took would be a lot different from what it actually ended up being like -reduce assymetries by talking to someone who has already worked there -assymetiries of college decision: -when you are an employer you have to portray a certain image -washu has good brand equity which may open up doors, but is it actually better education? or is it just a branding effect?: regardless we benefit from brand equity that we have as an institution -employers and employés dont have full info about each other so signaling is a way to overcome these informational assymetires -ex: getting an MBA requires both monetary and implicit costs, but it may signal to employers that you are motivated to make improvements in your own productivity levels -

why does firm spend money on advertising

-trying to get new customers -trying to keep your same products

nash equilibriumbrium

-you have a nash equilibrium can't improve their position given what they believe the other side will do

2 types of collusion

1. cartel--an oligopoly industry can be said to be a cartel when all the individual firms are running on the basis of the agreements. so each firm can earn monopoly profits by cooperating with other firms in the agreement. it may be either international or domestic cartel. OPEC is an example of this -cartels are firms that collude 2. price leadership: once firm is considered the leader, and after they set prices it is expected that other firms will follow suit -more implicit collusion--

static vs dynamic view

static: snapshot in time--usually negative dynamic: over time--usually shows the benefits

lemons mondel

*low quality products driving out high quality products--has to be a way for the market to adjust for this to prevent this from happening -ex: used car market -if we lived in a world that was fully informed--if we knew which used cars were good and bad then there would be two different markets--people who want the bad cars and people who want the good cars (no misinformation) -but reality is that there is misinformation, so there is only one market price that arises--the expected price is $9,000 -but if some people who have good used cars that are worth 12,000 they don't wanna sell for 9,000; the people who have bad used cars are worth 6,000 but want to sell at 9,000 -so what happens is that the sellers of the good used cars are less likely to sell while the sellers of the bad used cars will try to sell -then the expected value of cars will be drive down to 7, 500--makes the problem worse cos if someone has a car actually worth 9,000 they won't want to sell at only 7,500

avoiding price wars through brand stratification: kodak

-1990s kodak had discounted Funtime Film and the Kodak disposable camera -they had alternatives -had an upscale Kodak Royal Gold film, which provided exceptional picture resolution in many different lighting conditions -Kodak research found that many of its customers would pay premium for this product -heavy advertising and event marketing further established this product for the premium value tiers

features of oligopoly

-2-10 firms -*****mutually interdependent behavior--very aware of what ur competitors are doing--whehter it is product design, R/D, design, innovation etc non-price competition: -firms are in a position to influence the prices but then try to avoid price competition for the fear of price war--so they try to differentiate themselves in ways not related to price -thus, they follow the policy of price rigidity, and firms use other methods like advertising better services to customers, etc. to compete with each other**** -significant entry barriers: all the ones we talked about in monopolies

avoiding price wars through innovation: interlink surgical steel

-90s: interlink sold replacement hypodermic syringes by the thousands to hospitals at 10 cents per syringe--each time a catheter was changed, a new syringe would be inserted into patients vein -a japanese company entered the market with an identical product for 3 cents each (hurt profit margins of interlink)--interlink responded by introducing a replacement device that only needs insertion one time--this new process reduced the risk of patient infection and hazards to the nursing staff from exposure to infected blood -***due to innovation, Interlink dominated the market again, and at higher prices

american airlines, price leadership and what happens when you don't follow the leader

-AA has high proportion of business passengers out of its dallas hub. -they announced that 3 day advance purchase fares were no longer available on many nonstop routes--aka their prices were going up; the expectation is that all the other firms will follow suit since AA is the dominant firm -United was the only one that actually responded; delta instead went the other direction and promoted a discounted 200$ round trip fare--PRICE WAR -within days of this AA reinstates their 3 day promotion and announced a week of 200$ fares on 10 nonstop routes from Delta's atlantas hub and 10 nonstop routes from US airs pittsdbug hub; they did not offer such discounts at United Contientels Houston Hub -they really showed that they would only punish the people who didn't follow suit -if price leader sets the tone we expect you to follow suite, and if you don't they will retaliate!! "tit-for-tat

avoiding prices through innovation: gillette

-Gillette responded to a 4 bladed new product introduction of Quattro by Schick with their own batter powered vibrating razor (Mach3Power) -if you stratify your product and use your existing brand equity and proliferate to other markets and try to be innovative respond to consumers tastes and preferences, you will have an edge

profit maximization for perfect competition

-MR=MC is profit maximizing rule -as long as price is greater than AVC -when P < AVC companies shut down bc they are not able to pay their fixed cost or their variable costs -in perfect condition price = MR and bc of that fact we can replace MR with P so we can say the P=MC for profit maximizing rule--we can only say this for perfect competition though -that means that there is no markup of prices (bc there is a lot of competition) if P=MC

march madness monopoly

-NIT vs NCAA -NCAA wanted all of the market share so they forced people to come to their tournament -as NCAA gained more power they began restricting schools from NIT tournament -some people think NBA acts as a monoposnoy bc single buyer of inputs--and in a monopsony the wages of these athletes get restricted since NBA has total control over this

most known cartel

-OPEC--sets each country with a quota with how much oil to produce to try to keep prices hard -OPEC is not as powerful today bc there are more non opec countries that are supplying oil--hurt their ability to control oil supplies -this is the same thing that happened to debeers--the cartel was not as intact anymore bc other countries started using their own diamond mines

when does the competitive model apply

-PC is hard to manufacture in the real world--highly unrealistic -you have to have perfectly identical products--how it is made, how it is marketed, etc -useful lessons: if you are in a competitive environment, prices fall; firms have to produce as efficiently as possible (lower their costs) -despite the oligopolistic nature of airline industry, there can be extreme price competition--if there are multiple airlines flying out of st. louis, prices will go down

PC total rev and cost

-TR never changes -TC= cost initially rises at a declining rate, then it increases as diminishing marginal utility kicks in. -gap between revenue and costs are greates= profit maximizing point -sweet spot between q0 and q3--peaks out at q1

monopoly analysis

-a monopoly does not necessarily make positive economic profit -monopolys demand curve is elastic where marginal revenue is positive -a profit maximizing monopolist will always sell at a price where demand is elastic (look at graphs)

monopolies entry barriers

-absolute cost advantage: incumbent firm have more knowledge/better technology--production costs are lower than their rival firms; their LAC curve is below the LAC curve of the new firm (their costs structure is worse at all points bc they have not experienced learning by doing) -economies of scale: existing firm is further along their average cost curve than a new firm (assume that both firms have the same LAC curve); the existing firm has a set client base, while the new firm does not have a good client base--they can't produce at the same level as the incumbent firm; the incumbent firm can charge at any price below the new firm and make money -exclusive rights/ownership of unique resource: debeers at one time had significant dominance in the diamond world bc they owned the diamond mines in south africa; also famous people--they have unique resources "talents" so they try to monetize that -legally established and or regulated barriers: patents, copyrights, franchise, liscences

optimal ad intensity at kellogg and general mills

-ad intensity is very high -these companies have found that advertising elasticities are high but the demand is somewhat inelastic atlas in mid 90s when cereal was more popular -RTE (ready to eat) cereal industry spends 55% of its sales revenue on marketing and promotion--bc customers are very ad sensitive -kellogs and general mills -wouldnt call cereal industry monopolistic competitive--not a lot of firms, so it is an oligopoly but the reason you see high margins is bc it was an oligopoly--making a lot of money; firms had brand loyalty and brand equity -prior to the mid 90s, the RTE industry concluded that price discounting would be ruinous, so they avoided price wars, but 1996 20% of price cuts swept through the industry in part to the private-label cereals that grabbed 10% of the market -had industry that was an oligopoly but once someone else entered the market that causes a disruptance

additional entry barriers

-adveritsing: one way to kill off competition is to use our resources and suppress them by really putting your brand out there and deter another companies actions -product proliferation: once you have the market share you can change some products up a little since you have this first mover advantage; lululemon: they originally targeted women but the product proliferated by targeting men and also making more normal clothes--they know that they have a good brand but just want to expand that and deter other competition (they already have this brand equity) -limit pricing: both firms are producing the same amount, but incumbent breaks even at a lower price than new firm. incumbent firm charges just below the other firms break even point (limit)-pushing other firms to their limit of profitibalilty--their products is cheaper than the new firm. you can do this only if LAC curve for incumbent is below the new firm so if you want to eradicate competition.... -Predatory pricing: incumbent will charge price below their own LAC curve to try to get ride of new firm right away; take a big loss, but it gets rid of other firms and once they go away they will hike up the price again

current airline market share

-american is just ahead of southwest -then you have delta -then united

moral hazard

-as a result of having some type of insurance or protection, an individual becomes more likely to engage in risky behavior ex: -people with car insurance may be more careless about not locking their cars -if ones insurance policy covers all hospital costs, doctors may prescribe more expense tests and sophisticated treatments, but this has the effect of driving up future hospitalization costs and insurance premiums -sales people: don't pay people a base salary--people won't be motived bc they have guarantees. by telling people that they will get more money if they sell more then they will be more incentivized -ex: seat belts: if you wear seat belt more lily to engage in risky behavior

dominant firm model in pharmaceuticals; application 13.2

-at a given point in time you may have some pharmaceutical companies that have dominance -phiezer: during the window of 17 years with the patent they can charge high prices bc they are the only people making that drug -elasticity of demand for brand name drugs are highly ineslatic while those drugs are inpatient -elasticiyt of demand for those same brand names become more elastic the longer the drug is off patient bc--elasticity of supply becomes greater the more time elapse since the brand name drug is off patent (bc other firms have the ability to make this drug); and there is simply greater competition over time after the patent expires

dominant strategies in baseball and war

-baseball: bases are loaded with 2 outs and there are 2 strikes ad 3 balls--no matter what happens there is no penaltyies to running--just RUN -war: cooperation in war; both sides have unspoken agreed upon times where they don't fight so they can sleep and eat. gentlemen agreement that certain times of the day you wouldn't go after one another

bertrand

-bertrand duopoly model examines price competition among firms that produce differentiated but highly substitutable products -each firms quantity demanded is a function of not only the price it charges but also the price charges by its rival -bertrand paradox: despite being an oligopoly, firms may have a tough time making morey if the degree of price competition is extremely intense (if there are price wars going on everyone is just gonna break even); price which firms end up driving is driven close to their MC--drives prices down enough that you are only making normal profits -oligopies should be making money tho bc of barriers to entry -cocoacola and pepsi and airlines engage in bertrand behavior

what is difference between moral hazard and adverse selction

-blood vs cab driver examples: know this

avoiding price wars: brand stratification at marriot

-brand stratification: product proliferation -adhering to/expaning market to different niches -luxury, upper scale, and premium, select, long stay levels of marmot hotels -30 different marriots that exist -kinf od like gap, old navy, and banana--trying to adhere to different consumers -marriot has responded to fierce price competition in their industry by offering upscale-high-quality, middle range, and down market product lines tot target different customers without engaging in ruinous price discounting -with hotels, length of stay, proximity to city center, and room type are characteristics which effectively segment marriots customer base

ologopolisitc industries

-cable tv servies -entertainment industries (music and film) -airline industry -mass media -pharmaceuticals -computer and software industry -cellular phone service -smart phones and computer operating systems -aluminum and steel -oil and gas -auto industry

profit max in monopoly compeition

-can have any of the 4 profit points: bc of entry and exit -similar to monopoly -set MR=MC -short run profits are possible, but in the long run you will end up with normal profits: bc no entry barriers!!!! -in the long run the demand curve is tangent to the AC curve -monopolistic competitors are allocatievly innefficient and productively inefficient--the only industry that has these EFFECIEINCIES is perfect competition -not allocative efficient bc Price in the long run is greater than MC -not productive efficient bc not producing at the lowest point on average cost curve

advertising in cig industry

-cant advertise on tv anymore bc of health problems -you would think this would hurt their profitsility , but cooperate could also mean keep advertising low, so this actually boosted their profits bc it forced them to save money on ad campaign -in a world without that restriction, different tobacco companies would be in a war for more ad exposure, but since no one can have any ads at all, then they are all (cooperating) benefitting -tobacco companies would be better off without advertising but only if all companies can do it (cooperation)--only takes one company to break this -exhiits prisoners dilemma: if they had agreed to both not advertise then they would bothe be better off but they get into this advertising war and the profits come down

age eariingins profile

-color shows level of education -as you get older in age earnings go down--you value your leisure time more--income effect taking over and your motivation level is not as high

under armor

-competing in an industry that is monopolist competitive -product differentiation -under armor is now the second largest seller in the US behind Nike-imporessive cos they haven't been around for a long time -under armor is drawing mixed reviews for efforts to rejuvenate sales through a resturcuting, which has caused layoffs -UA has struggled since end of 2016 bc of intense competition, closure of key retailers and changing consumer tastes in sports apparel -the modest growth that analysts expect to see come from accessories and connected fitness, not key shoe and apparel categories --comign from these smaller product lines but not their major components--concerning -concerned that the lack of fresh products (NOT BEING INNOVATIVE) along with heavy discounting may be eroding the brands appeal (BRAND EQUITY--this devalues the perception of the brand) -have not seen any promising products being launched and little excitement around the products (niche products are the only thing being profitable--not enough) -predicts that profit margins will be hurt due to discounted sales as Under armor works to sell off excess inventory -bloated inventory and few compelling new products make it harder to reach sales and earning goals -under armor is up against nike and addidas -also UA has had trouble with their retail customers: dicks sporting goods--its products are losing shelf space

corn

-corn is an increasing cost industry -increase in demand for corn: 1. bc of population growth; 2. increase in the price of crude oil--which spurred greater reliance on ethanol (which is made from corn) -demand from the food and biofuels industries pushed the prices of grain bushels a lot higher in a very short period of time -normally, we expect zero profits in the highly competitive corn industryy bc it is agriculture, but the original owners of inputs actually had an increase in profits -so increasing cost industry

deadweight loss of monopoly (look at graph)

-demnad curve is downward sloping=industry demand curve -compare 2 outcomes which gives you deadweight loss: perfect completion and monopoly -PC: look only at demand curve (not MR) -Monopol: have to look at demand curve and marginal revenue PC: profit maximization: is where demand and marginal cost meet: point C--equilibirum outcome--making normal profits/breaking even -consumer surplus for PC is a lot greater than surplus for monopoly, bc goal of monopoly is to capture consumer surplus Monopoly: outcome is where Marginal Revenue = MC--then go up to the demand curve to find you maximizing price -TR= 15x5 -AC=11X5 -so 75-55= 20 which is the monopoly profit -consumer surplus is a lot smaller -whole consumer surplus area in the middle has been taken away from monopoly -the other portion that is not consumer or monopoly profit is deadweight loss--this money is not going to anyone -there is damage done by becoming less competitive (monopoly)

in long run what will the industry supply curve look like

-depends on HOW INPUT PRICES CHANGE as the industry expands 1. constant cost industry: LR industry supply cure is horizontal..input prices don't change as the industry expands -coffee is an example bc growing more trees is not a resource that you are exploiting--not taxing a natural resource. cost isn't increasing as you sell more coffee 2. increasing cost industry: LR industry supply curve is upward sloping. oil industry--when you find land that has oil and refine that, you can't renew that oil (not as easy as coffee). it is a non renewable resource, and if you try to extract more the industry price will just go up 3. decreasing cost industry: LR industry supply curve is downward sloping. auto industry: a lot of big manufacturers outsource their brake systems and other parts of the car and by expanding production of cars you see a decrease in cost bc things are sold in bundles

factors that affect the market power of a firm

-elasticity of demand--how price sensitive are consumers: more sensitive, less power of firms -# of firms in industry--more firms less power -elasticity of supply of other firms--more supply of goods, less power -product homogeneity: same products, less power -nature of competition between firms: is competition competitive or friendly? if competitive then lose power; if friendly you can maintain power -possibility of entry by new firms

firms seeking to fatten cattle

-factors that happen in industry that impact companies profits -why do companies that sell cattle don't make as much money?: changes in consumers tastes and preferences so not as much beef consumption -there was a drought, which reduces supply of farming land and raises costs of doing business -there were also higher corn prices--rise in input costs bc you have to feed corn to your cattle, so overall cost is going up -revenue falling cos less people are eating beef and prices are falling-->leads to profits going down

long run adjustment for perfect compeition with negative profits

-firms will leave, supply will go down, price will increase, meaning market share will increase, and overall industry production will decrease -do this until you don't have negative profits anymore and it gets to 0

in the long run for PC

-for perfect competition you can only be getting normal profits in the long run!!!! -if a firm is making excess profits in the short run, firms are going to want to enter, therefore prices will fall, and this will then eat into your profit margin sooooo you go down to normal profits in the long run

examples of perfect competiton

-foregin exchange markets: we have data on exchange rates, currency is all homogeneous. traders will have access to many different buyers and seller. there is good info about relative prices -agriculture: milk. there are several farmers selling identical products to the market, and many buyers. it is easy to compare prices -internet related industries: access to info is more available--more perfect information. people may become more competitive in selling goods. the internet has made barriers to entry lower. easy to compare prices on different website and buy from the cheapest--this has enabled many goods to have a lower prices bc everyone wants to maximize what they can sell, so they are making normal profits

commercial blood 14.5 application

-get paid to give blood -adverse selection problem: people who are giving blood probably are living at a disadvantaged back ground, the blood is more likey to be contained (drugs, etc).

increasing cost industry

-getting an MBA -demand for getting an MBA is greater now than previously--bc job market is more competitive and people want to distinguish themselves -key input in creating MBA education: people and money -begs a question: especially at the top school there is a competitive bidding process for professors--you are competing with other schools to get the best professors so you have to pay them well -the increasing cost is US (professors)--as our salaries go up a byproduct of that is that tuitions will go up -industry expands (more people are getting MBAs), costs of getting MBAs go up (increasing cost industry)***

gillette

-gillette dominates the razor industry -when you are the dominant firm you can get away with charging higher prices bc you have brand equity, but the one risk you run is that you won't get these younger consumers who want to buy cheaper things -once followed a strategy of adding new features and raising prices , but they are no focusing on slating prices and putting a new focus on its cheaper products -this is bc there are other online startups that sell very cheap razors -bc of this gillette saw loss in market share (70% in 2010; 59% in 2016) -they didn't change all of their razors bc of the customers who are inelastic will buy the expensive ones--still keep their value of the brand -the company realized the drawbacks of its singular focus on creating SOPHISITICATED razors with higher and higher prices--need to do better job at adhering to more customers -they will still offer and develop high end products but will also put more resources into marketing and expanding lower priced product lines

what motivates you when you are offered a higher wage

-going to work more cos you don't have family or kids yet--there is nothing stopping you from doing that -but the older you get, you have to take into account other factors--your kids and spouse

mickey mouse monopoly

-had a monopoly but other theme parks entered the area -these rivals are compliments of each other--people that come to visit are going to visit all of these amusement parks -disney gets more revenue generation through their hotel

collusion

-happens in oligopolies -not likely to happen in monopolisitc competitive firms--why? bc there are too many firms and it is hard to agree on something with lots of firms -companies are working together and collude with respect to pricing (trying to avoid to price wars by agreeing to a certain price)

monopoly supply curve

-has no supply curve -their supply curve is their own marginal cost curve -monopoly doesn't have an industry supply curve since they are the only firm

optimal advertising decisions

-how much should a firm spend on advertising to maximize profits?: compare marginal benefits to marginal costs marginal costs include: -costs of resources needed to increase the level of advertising -fees paid for additional ad space -hirign people to come up with the content -opportunity cost of the human resources needed to put together the ad campaign marginal revenue: -the extra revenue the firm gets as a result of the ad campaign

getting paid for 12 hours of work for just 10 mins work 14.7

-hundreds of jumpers (blow boys) are higher by public utilities to fix steel pipes and aging powerpoints -only work 10 mins at a time and get paid for 12 hours -the only catch is that the pipes are located in nuclear poweplants and there is huge amounts of radioactivity in there -get paid so much because its so dangerous

inverse elasticity pricing rule

-identify whether customers are elastic or inelastic (if inelastic you can charge higher prices) -we know price and production levels should be chosen so MR=MC -how companies identify profit maximizing price using only marginal cost and elasticity of demand -The less price sensitive the consumers are, the greater the profit maximizing price; however, the value of this rule is that it gives us the ability to precisely pinpoint the size of our markups -the higher the elasticity of demand, the lower price you should charge--so if you see high elasticity the number you will get to reduce price will probably be larger -this is a good lead in to price discrimination

technological advances shift long run supply curve

-if technology improves, cost curves will shift to the right (less costs bc more knowledge)`

why would you raise price in oligopoly

-if you can show your product is a lot better then there is no problem increasing prices -but firms are often reluctant bc lots of people are price sensitive and therefore the losses will be greater than the gains

problems with monopolies

-if you have monopoly power and it is protected, you may not be as efficient -allocative inefficiency: price > MC; in a competitive market the price would be lower and more consumers would benefit. a monopoly results in dead weight welfare loss -productive inefficiency: output does not occur on the lowest point on the AC curve--they do not minimize average costs -x-inefficieny: monopoly has less incentive to cut costs bc they don't face competition from other firms. therefore the LAC curve is higher than it should be -higher prices to suppliers: a monopoly may use its power and pay lower prices to suppliers since they are the only firm -diseconomies of scale: if a monopoly gets too big it may experience higher average costs bc it gets too big -lack of incentives: monopoly faces a lack of competition and therefore may have less incentive to work at product innovation and develop better products

impacts instability to succeed of cartels

-if you have more supply--more firms coming in -opec is not as powerful today bc there are more firms

copper

-increasing cost industry - home prices were unstable bc of the low interest rates, but also there was cost side pressure from spiking commodity prices; a 2100 sq ft home incorporated 440 points of copper plumbing, heating and wiring -between 2003 and 2007 copper rose in price by 400% -input prices go up as industry expands and more homes are being bought and built

why do engineers make the most

-it is hard and specialized -engineers make stuff build stuff and create stuff that most of us need -adheres to demand--high demand for what engineers do!!! and limited supply for engineers bc it is very difficult -whenever there is high demand but low supply they will make lots of money -kindegarden teachers make less bc it is not as difficult to be certified for that and the supply isn't limited

debeers

-late 80s had 90% of diamond industry -but now they have less than 40%--what happened? -you would think prices are going to go down bc of this, but the graph shows price of diamonds is stable -there was initially a reduction in price, but the increase in demand has outstripped the increase in supply of diamonds which is why prices rise--this is not typically what you see with dominant firms that lose power 2 reasons why they lost power: 1. debeers did not maintain the world supply of diamonds--now russia australia and canada had some power; russia initially agreed to sell production to De Beers in order to keep cartel intact, but this was weekend when anti-apartheid legislation restrained the soviet union from dealing with a south African company. also the dissolution of the soviet union. 2. anti trust legislation--several law suits were files in US courts alleging that de beers unlawfully monopolized the supply of diamonds, conspired to fix, raise and control diamond prices and issues false and misleading advertising -Debeers liquidated their stock pile from 200-2004, resulting in a decline in diamond prices as the liquidation supply more than offset new demand, but by 2005 the demand outweighed the supply causing an increase in prices **Key points: had exclusive ownership of diamond mines in south africa, but as other countries discovered mines, they realized greater supply creates pressure on the dominant firms and anti-trust laws furthered that process

how to prevent lemons problem

-learn from personal experience -get feedback from peers or professional consumer reports -seller-offered guaratnees/warantees

question: draw a graph perfect competitor in the short run, either making money, losing money, breaking even, and shutting down

-make sure cost curves are correct--marginal, average total, average variable -then figure out where you draw your demand curve -stay in business: demand curve goes between AVC and ATC -firm shutting down: demand curve below ATC and AVC -breaking even: demand curve would be at the minimum point of ATC! -try drawing this out with the axes and everything

if price is greater than ATC

-making excess profits -the gap between ATC and Price is the profit per unit and multiply the profit per unit by the number of units to get total excess profits

restaurant industry

-monopolistic competition -many restaurants and relatively easy to get into and out of the market -but product differentiation is KEY*** -product differentiation is key to monopolistic competition

least competitive market type

-monopoly; one firm; famous people--hire managers to monopolize their talents; product is unique--no one else makes it; lots of entry barriers bc no one else can compete against you;

nonprecuniary (non monetary aspects of having a degree)

-more likely to have various benefits -if you don't have a college degree you ae more likely to have a blue collard job--physically demanding jobs; that is what is good about have a college degree -network you established with people who are also more education -network is more professional and strong -work conditions tend to be more positive--even though thee is no monetary value, there are still a lot of benefits

perf comp assumptions

-no entry barriers -homogenoeus products -perfect information--firms know everything about the other firms--industry is more competitive bc of this; having prices online could also make this less competitive bc of collusion--if you play follow the leader and play nice with each other you can see what your competitors are charging and work off of that; basically the internet can make things more or less competitive -many buyers and sellers

airline and auto industry

-oligopoly -2-10 firms--significant entry barriers -products can be differentiated or homogeneous

assymetic behavior

-one party has more info than the other -smoking example: if you are a smoker you won't want your insurance to know that or else you will have to pay more since you are a higher risk patient -causes an issue bc if everyone is hiding that they smoke, this will drive up rates overall and nonsmokers will be mad--adverse pool of insured people -

why are oligopolies interdependent

-only a couple firms so you have to be very aware of what they are doing

monopoly assumption

-only one firm -price makers (jack in the box application) -unique products -significant entry barriers (state listening for massage therapists)

dynamic view of monopoly

-over time there are some benefits from monopoly - in the graph it shows that if there is a monopolist that thought their product would be innovative and drive their own cost down, they may be able to make a profit

real world article on cereal

-people don't really eat cereal for breakfast that much anymore -consumers are reaching more for granola bars, yogurt, etc -cerela industry has been declining bc of change in tastes and preferences --trying to be more healthy -brekafast market is growing, taking away market share of cereal -also, birthrate is declining and children are their main source of revenue!!! and other ethnicities don't eat breakfast foods -millenials are more often to be snacking than eating 3 meals a day so they don't even have a breakfast -new fast food breakfast options have put dents in cereal sales -at General Mills the company yogurt brands have eaten away at sales of its cereals -kellogs has tried to add more protein to cereal, but still haven't seen a significant increase in sales

price wars at general mills and post

-price cut by Post cereals triggered a price war in the RTE cereal industry, with a 20% discount -at the time post had 13% of market share--3rd after Kellogg and General Mills -Post believed they could better compete if they could force them to spend less on advertising, which they thought they could reduce through price reduction (which they hoped would reduce cash flow of larger firms) -bertrand behavior: leading to a price war/competiton -why would lower prices lead to decrease advertising?: lower prices of small firms would lower the big firms profit margin so the big firm couldn't spend more on advertising -eventually GM and Kellogg matches the price reduction of Post and bc of this the larger firms had to scale back their add campaigns -Post gained market share bc of this -Post created brand awareness (only lasted 2 years tho) -in first 2 months of price cuts, Kellogg loss 3 share points and Post gained 2 share points, bc of this Kellogg had to slash prices 19%

why is P=MC in perfect compeition

-price is equal to marginal revenue bc they are price takers meaning that demand curve for the firm is horizontal--aka perfectly elastic meaning perfect degree of substitutability (meaning that if someone changes prices, consumers actions will change considerably); the reason for this being perfectly elastic is bc the products are homogeneous

sony

-price is less than ATC but since price of screens are still greater than AVC they can still stay in business--they can atlas cover their fixed costs and pay a little of their variable costs

monopoly graphs

-price should be greater than marginal revenue; the marginal revenue curve will be twice as steep as the demand curve (MC) -different from PC where Price = MR

optimal advertising intensity example

-profit maximizing ad to sales ratio is: elasticity of advertising/ own price elasticity of demand may ask on exam: explain why the optimal ad to sales ratio is the ratio of elasticity of advertising divided by the own price elasticity of demand -Numerator: elasticity of advertising: % change in sales/% spent on advertising; if customers are more inclined to buy as there is more advertising, then naturally the firm will spend more on advertising (vice versa); if advertising elasticity is more elastic, then naturally you want to increase ad to sales ration bc people react to ads. more elastic=spend more on advertising -denominator: if own price elasticity increases (aka demand becomes more elastic) the ad to sales ratio decreases. if the consumers are more price sensitive why would you spend less money on ads?: if customers are price sensitive they won't care if firms spend more money on advertising--they will on ly react if there is a smaller price (so it is somewhat wasteful to spend on advertising). being aware of something won't make them buy the product if it is a more expensive product But if demand is inelastic, you now have a captive audience and price insensitive. the key for them to buy something is for them to be aware of ti--so they want to spend money on advertising to make these people aware.

does the internet promote competition or cartelizatoin?

-promotes competition bc it is really easy to compare prices; minimizes barriers to entry --better informed consumers -promotes cartelization: bc it is easier for firms to check what other firms are pricing

solving for profit profit max in monopolies

-set MR=MC to obtain max production -find MR by doubling the slope of the demand curve if it is P=...but if it is Q=...you have to change it so it looks like P= -MC will be obtained from the derivative of the TC curve

know how to solve for profit maximization in perfect copeition

-set P=MC -once you identify the equilibrium production level then you find the price and such -MR is obtained from derivative of the TC curve

more man than women in engineering

-since engineering is a high paying, this makes the gender wage gap bigger -are there other occupations that are low paying that are occupied by women: teaching at the k-8 level, social work -women who worked full time earn 79 cents to a dollar of what men get--part of this is a result to discrimination but we can reduce the gap significantly if we consider 4 variables: and control for them 1. education--in the past women didn't get as high of an education bc they had kids at a younger agenda had to take care of the family 2. children or not--someone has to cut back on hours of work 3. age--the older people will see bigger gaps between men and women; people near the older end don't work as much 4. marital status -if you control for those 4 factors women ear about 95 cents to a dollar for men--part could be from discrimination 1. correlation between earnings and education--engineering earns most money 2. every major is its own market place--has its own supply and demand 3.age-earnings profiles can be very insightful

Ability bias (overstate) in the estimation of the return to schooling occurs if:

-some people without college degrees are able to make a lot of money bc they are high motivated and intellignet--zuckerberg -what is the value of getting a college degree: is it a signal? or are you truly getting a benefit from it? -hypothetical earnings profile for people that had the motivationand intelligence (college potential) but didn't attend college--instaed of having returns to education being the big gap it is a smaller gap because you are more driven than the people who don't go to college at all and don't have any motivation

if you are at excess profits in PC

-supply goes up bc more people enter the firm, prices then go down, so individual firms hold less of the market share, but total output in market of that goes up -competition puts pressure on prices and profitability

defending the concept of profit maximization

-survivor principle: if you are charging prices that are too high, (aka if you do not profit maximize), you are going to go out of business -issues between managers and owners--can create problems if managers are not doing things in line with what the owners want. in those instances owners have to minimize those principle agent problems--by tying a portion of the managers pay to the success of the business, then they will prob behave properly

static vs dynamic view of monopoly the microsoft case

-they had 90% of all operating systems -they tied all their products -internet explorer were tied to most computers -argument of microsoft: this is a highly competitive industry and we need to be innovative with our products and that is good for customers. and if you punish us from being innovative it will discourage other firms from being innovative/competitive -they were ultimately fined significantly

case of opec (know this)

-tries to keep prices high by restricting supply to avoid getting into price wars with other firms -opec started in 1960--rose to power in the 70s -15 countries are in opec -most loyal reserves: saúdo arabia and venezuela -82% of oil reserves are opec -percentage was greater in the 70s -in 70s there was also fewer substitutes for oil--opec had more power in 70s 2 reasons for more power in 70s: 1. demand elasticity was less in 70s bc there were less substitutes for oil--demand was inelastic 2. on the supply elasticity from non opec countries was very inelastic bc they couldn't produce oil with the change in price over time demand and supply became more elastic as there were more firms -consumers responded to higher energy prices, by swiping to more energy efficient homes, applicanes, and cars -non-opec suppliers increased output capabilities--supply was more elastic

game theory applications: coke and pepsi; home depot and lowes

-trying to anticipate what your rivals are going to do -know the dominant strategies and the nash equilibrium -you have players (pepsi coke), choices (cooperate/defect--break your word and cut prices), and payoffs -if coke and pepsi corporate and keep prices high, they will both get 500 million -use a matrix to identify who has the dominant strategy: cokes dominannt strategy is to defect (and lower prices); no matter what pepsi does, cokes best move is to defect -pepsi has the same scenario--if coke cooperates then pepsi should defect; if coke defects, pepsi should also defect. what is the nash equilibrium (where neither side can improve their position)--defect-defect. there is a big incentive to cheat. so if they both defect they end up at lower prices, and there is no incentive to raise prices cos neither firm wants to be the only one to raise prices. but defect-defect does not maximize their joint well being--this is definition of prisoners dilemma: when the nash that is suboptimal--it is the nash bc neither side can do any better given what the other is going to do and it is prisoners dilemma bc the firms are not maximizing their joint well being--if they just had the integrity to stick with the normal agreement of cooperating they would be better off

weight watchers

-trying to move away from this fad diet ideas--want to move towards "wellness"--healthy lifestyle, not just losing weight -they have rebranded bc of change in consumers tastes and preferences in wanting to have a healthier lifestyle -people are looking instead to eat cleaner and healthier foods -WW emphasizes a LIFESTYLE not just a diet--trying to differentiate themselves -company has overhauled its point system -company realized its app could not compete with others--realized dieting was out and wellness was in -TRYING TO CATER TO WELLNESS -shortened weight watchers name to: WW (wellness that works) -rebranding is veryyyyy expensive--bc they have to change everything--logo on everything has to be changed, but it is worth it bc it is fitting with their new philosophy -wellness wins: new program on app that tracks activity--not just trying to track calories anymore -company also added meditation to app `

game theory

-understanding of strategic interaction -describe the prisoners dilemma and its applicability to oligopoly -a method of analyzing situatin in which the outcomes of your choices depends on others' choice and vice versa--the study of rational behaviorr in interactive or interdependent situations elements to game theory***: -players-decision makers whose behavior we are trying to predict and or explain -strategies: the possible choices of the players -payoffs: the outcomes or consequences of the strategies chosen: how much money you will get why study?: -many economic and business questions involve strategic interaction -games are the best way to model strategic interaction among economic agents -game theory is not limited to economics

debeers

-used to have all of the market, but is losing some of that market share

shifts in input costs will impact production decision

-when input prices of corn goes up, the marginal cost of cattle also goes up -when input prices change, COST CURVES SHIFT -in the long run you will only have one profit position--NORMAL PROFITS bc everyone makes the same good and there are no entry barriers -if all those are in place, firms are being efficient

example of failing cartel: coffee cartel

-when the coffee bean harvest is larger than projected, the people that make coffee agree in principle to withhold millions of tons of coffee beans from market in order to keep prices high -however, Columbia and brazil (dominant firms) opposed a formal quota system that assigned production ceilings -by consequence the international coffee agreement (cartel) collapsed -if all these major coffee bean produces could rely upon each other to withhold production, they would all get excess profits--but they have to ALLA AGREE and this didn't happen -instead some cartel members maximize self interest by releasing excess supplies to the world market at prices below the official agreed upon prices -example of caving into pressure of prisoners dilemma

why do cartels fail?

-when you are acting in a cartel you restrict output to keep prices high, but there may be a company thinking that if they charge lower prices than the cartel they can capture market share -if you add more firms then there is a chance you won't agree -if you sell slightly different product -adding more cartel members is problematic--bc more firms you add the more likely costs schedules will differ and greater chance there will be less homogeneity 1. each firm has a strong incentive to cheat on the cartel agreement. 2. difficult of reaching agreements -members of the cartel will disagree over appropriate cartel policy regarding pricing, output, allowable market shares, and profit sharing. 3. profits attract entry and entry means more firms -profits of the cartel members will encourage entry into the industry. -illegality

dentists and general physicians

-who has a larger income effect?: dentists -income effect means more likely to cut back how much you work as income goes up -i 1988 dentist made 2,000, but things changed in 2010 average dentist earned 220,000 compared to 210,000 for physicians -dentsits work 40 hrs a week; physicians work 50 hrs a week -differnce in hours worked sets an example for backward bending supply curve -dentisits wages have been less impacted by 3rd parties to restrict payments -dentisits work fewer hors than counterparts -higher manage care costs for physicians --higher risk of being a physician than dentist application of income effect---higher for dentists fro physicians

long run adjustment for perfect compeition with excess profits

-you have new entry in market, meaning there is an increase in supply, meaning price will decrease, meaning market share would decrease (bc more competitors in the market), and therefore overall industry production increases -do this until profits = 0

current browser shares

1. chrome 2. firefors 3. internet explorer 4. safari

potential benefits (efficiencies) of monopolies

1. economies of scale: consumers can benefit--if monopolies have expanded a little bit they will have a lower average cost leading to lower price for consumers 2. research and development: monopolies make supernormal profit which can be invested in research and development. this is important for industries like medical drugs--think of the european vs US drugs application. europe has lower drug prices bc universal health system--but profits are lower there. US has higher profits and with this profits they will invest in R&D--bc our system is privatized there is more money to reinvest 3. a firm may gain monopoly power bc it is the most efficient--inoovative

questions bound to be asked: given a chart: 1. at what is the minimum price the firm could charge and still stay in business; 2. in the long run, what we be the equilibrium price

1. find where AVC reaches its minimum and charge 1 cent above that point. if you charge a price below that then your price would be below average variable cost. **look at AVC column and find the minimum; 2. if PC you know that in the LR you will end up at the minimum of ATC--so find the minimum of ATC bc that is the breaking even point/profit maximizing point

different types of oligopoly behavior

1. kinked demand curve (sneezy principle) -aka PRICE RIGIDITY--firms keep their prices the same -helps explain why firms compete through -competitors don't wanna lower price bc they don't wanna get involved in price war bc price wars usually lead to no excess profit but don't wanna raise price cus then there is a chance that no one will buy your product 2. oligopolies where the key decision variable is 'production levels: -2 key decisions when producing goods: how much to produce and pricing -focus on production levels (forget about pricing)--2 models: cournot model and stackleberg model -in stackelberg you have a dominant firm who sets the tome for the nature of competition within the industry--you are not too worried about what your competitors are doing bc you are more innovative and have greater brand equity. -cournot behavior: firms with smaller market share--more niche firms that cater to more specific people; cournot behavior is when they make production decisions based off of other dominant firms -the difference in a stackleberg is that the dominant firms will do as they normally would, but all those smaller firms will target their niche audience, so it will influence their production decisions an who they are trying to target, while nike enters all of these niches. cournot (fringe firms) has to be cognizant of what the stacklbergs are going to do when they are making production decisions but it is not vice versa. 3. oligopolies where the key decision variable is pricing -models with dominant and fringe firms -Bertrand: where there is no {"price leader} but there is intense price competition which yields highly competitive environment; delta, american, and southwest bc they all have roughly the same market share--no real leader. if they engage in price wars they violate the rule and can end up making normal profits. bertrand profits: despite the fact that there are entry barriers and this industry is an oligopoly and a firm should make money, there is pricing competition causing everyone to produce at normal profits--you end up producing normal profits if there is intense price competition price leadership: in auto industry GM has been the leader so when they come out with their prices, ford and others have to price the same--cus id not GM will undercut these smaller firms (follow the leader)--there is an expectation based on precedent that they set prices at the same level or else GM will retaliate 4. collusion -trying to coordinate behavior--restrict supply/output to keep prices high -more than 1 firm coordinated behavior in efforts to reduce costs of behavior and/or max joint profits **industires can exhibit any of these differences oligopolistic behaviors at different times depending on circumstances, and where they stand within their industry in terms of market share

optimal level of advertising

1. optimal level of advertising outlay occurs where the marginal profit contribution (P-MC)=MC of advertising--then you contribute to advertise (profit maximizing level of advertising); If profit contribution is greater than marginal cost, then you keep spending on advertising 2. the optimal advertising expenditure per dollar sales (optimal ad intensity) occurs where: -contribution margin * incremental increase in Demand attributable to an ad campaign excess the cost of the advertising message

4 TYPES OF product differentiation

1. physical product differentiation: where firms use size, design, color, shape, and performance, and features to make their products different; ex: think of consumer electronics 2. marketing differentiation: wehre firms try to differentiate products through distinctive packaging or promotions--use marketing and advertising to create that perceived difference even if the product is the same 3.human capital differentiation: where the firm creates differences through the skill of its employees, the level of training received, distinctive uniforms 4. differentiation through distribution: including distribution via mail order or through interest shopping, such as amazon which differentiates itself from traditional bookstores by selling online

more examples

Dominant single firms: -razors and blades: gillette 79% -microproesessers: intel 81% Duopoly: 2 dominant firms -appliances: sears 32%; lower 20% triopolys: 3 firms -us wireless: verizon 34%, att 32% sprint 19% air travel: -southwest 19% united 19% and delta 19% emerged as largest carriers -no dominant firm but some have dominance in local markets--American has 68% share in Dalla, delta has 84% share in minneapolis

monopolistic competition is identical to perfectly competitive; one key difference

SAME: -many firms -no entry or exit barriers DIFFERENT -monopolist competition has product differentiation--KEY FEATURES!!! not perfect competition

adverse selection

a situation when assymetic info causes: -higher risk customers to be more likely to purchase ((smokers) or a family buys home insurance, knowing they store flammables near electical wiring--trying not to reveal who they are -insurance company takes on more policies from the higher risk group, assuming that the insurance company has no way of deciphering who is high risk and who isnt -thats why there needs to be some questioning done or physical exams done (health insurance)--then you can detect if you have other issues -very common in life and medical health insurance since customers have a better idea of their "risk status" than do insurance companies -trying to minimize damange: set upper limits on potential losses--set prices high to account for the high risk people that are pretending that they are low risk -for health and life insurance policies, companies often require physical exams and a waiting period before the policy is in force -autoinsuracne: younger drivers have higher rates than adults -sellers will be more likely to supply lower quality goods (ex: lemons market for cars)--since people are taking advantage of this assymetic info

age earning profile

age earnings without college: -high school curve is bell curved--if you just have a high school degree your age earnings will be pretty flat--peak a little at late 40s but will eventually declining in 50s to retiree: bc these people without degrees usually do labor (blue collared) job which is more physically demanding and you can't do that as you get older -people with college degrees: will end up in white collared jobs eventually; at first you are making negative profits/debts when you are in college and there is an opportunity cost of being in college instead of working, but after you graduate you will end up with a salary that will far surpass what the high school graduates are earning; trajectory of college graduate is higher and continues for a longer time -if you get a graduate degree there is a little bit of a delay but you will end up getting higher salary in the long run

collusion

agreement between a few firms in an industry --group of firms standing as one; trying to be a monopoly -try to control production sdecisions to keep prices high why? -reduce the competition between themselves in order to increase profits -to create a collective monopoly, thereby creating a barrier for new firms which want to enter the industry

who works more--americans or europenas 17.2

americans--they value making money more, while europeans value their leisure time -also there are higher taxes in europe--this lowers your disposable pay; if wage take home pays goes down, then you don't wanna work and you will consume more leisure (substitution effect) application of substitution effect--greater substitution for americans--bringing more money home; opportunity cost of americans staying at home is higher than europeans cos thy are making less

monopolistic competition example

common in industries where differentiation is possible: -restaurnats--serve certain foods, have a particular service, fancy or not, take out, price, size etc -hotels and pubs--can get different servic, different management -general specialist retailing -consumer services like hairdressing --specialists in dye/cutting/etc.

implications of product differentiation

comparative advertising: -when a firm attempts to increase the demand for its brand by differentiating its products from other competing brands -want to market to children--want them to use the product when they are young and stay with it for the rest of their life--build lifetime customer value -ex: fast food restaurants, toothpaste, mouthwash, gasoline Brand equity -the additional value added to a product because of its brand -washu has brand equity but not good brand recognition -under armor undermines their own brand equity by discounting prices to get rid of their inventory** reasons that they have so much inventory is bc they are not being as innovative and producing popular goods Companies create product differentiation by targeting certain niches -marketing strategy where goods and services are tailored to meet the needs of a particular segment of the market

sources of monopoly power

factors that influence if any firm has monopoly power: -elasticity of the market demand curve: it is perfectly elastic then that will rob you of monopolistic power (thinks of perfect competition--their curves are perfectly elastic--price takers) -elasticity of supply by other firms: if there is more rivalry it will be easier for other firms to meet consumer demand

backward bending supply curve

has a positive slope, but at the top right it bends backward. At the backward-bending portion- if payment falls, quantity rises because of the shape of the curve. -subsitutino effect is greater from 20-25 (when upward sloping) bc you can work less hours with making the same amount. so you will work more -income effect is greater when it bends backward and you awoke less as your wage goes up - go back over this

moral hazard on streets of NYC

more careful if it is your motor vehicle -cab drivers that are the cars--llong term leasees had more accidents, more driving violations, and failing inspection -you feel like your behavior is hidden as other people are using the car as well bc many people used it within a day and you can't tell who caused damage