Microeconomics Chapter 13

Clayton Act (1914)

Law targeting corporate behaviors that reduce competition.

Antitrust Laws

Laws that attempt to prevent collusion.

Game Theory

A branch of mathematics that economists use to analyze the strategic behavior of decision-makers.

Oligopoly

A form of market structure that exists when a small number of firms sell a differentiated product in a market with high barriers to entry.

Cartel

A group of two or more firms that act in unison.

Tit-for-tat

A long run strategy that promotes cooperation among participants by mimicking the opponent's most recent decision with repayment in kind.

Mutual Interdependence

A market situation where the actions of one firm have an impact on the price and output of its competitors.

Concentration Ratio

A measure of the oligopoly power present.

Prisoner's Dilemma

A situation in which decision-makers face incentives that make it difficult to achieve mutually beneficial outcomes.

Collusion

An agreement amongst rival firms that specifies the price each firm charges and the quantity it produces.

Duopoly

An industry consisting of only two firms.

Network Externality

Condition occurring when the number of customers who purchase or use a good influences the quantity demanded.

Some towns limit the number of hours that liquor stores can sell alcohol on Sundays. This restriction could actually help liquor stores by...

Decreasing sales, increasing price

Decision Tree

Diagram that illustrates all the possible outcomes in a sequential game.

Backward Induction

In game theory, the process of deducing backward from the end of a scenario to infer a sequence of optimal actions.

Price Effect

How a change in price affects the firm's revenue.

Output Effect

How a change in price affects the number of customers in a market.

Dominant Strategy

In game theory, a strategy that a player will always prefer, regardless of what his opponent chooses.

After teaching a class on game theory, your instructor announces that if every student skips the last question on the next exam, everyone will receive full credit for that question. However, if one or more students answer the last question, all responses will be graded and anyone who skips the last question on the next exam will get a zero. Assume that there is no chance for you and your classmates to discuss the situation before taking the exam. Will the entire class skip the last question?

No, because the dominant strategy of the best-prepared students is to answer the last question.

Nash Equilibrium

Phenomenon occurring when all economic decision-makers opt to keep the status quo.

Switching Costs

The costs incurred when a consumer changes form one supplier to another.

Sherman Antitrust Act (1890)

The first federal law limiting cartels and monopolies.

Predatory Pricing

The practice of a firm deliberately setting its prices below average variable costs with the intent of driving rivals out of the market.

Suppose that McDonalds and Yum Brands are the sole producers of a quadruple-decker chicken and hamburger sandwich. The two firms currently charge the same price for their products. If neither firm reduces the price of its quadruple-decker chicken and hamburger sandwich, each firm earns $30 million in profit. If both firms reduce their prices, then each firm will earn $8 million in profit. If one firm reduces its price and the other does not, then the firm that reduces price will earn a profit of $60 million while the other firm will earn a profit of $2 million. Assuming that collusion is not a possibility, the Nash equilibrium occurs when...

both firms will reduce their price.

Suppose there are two breakfast restaurants in your college town, Waffle Kingdom and Flip's Flapjacks, and they decide to operate collusively as a cartel. If both restaurants abide by the cartel's agreement, then each will earn $100,000 in profit. If both restaurants cheat on the cartel's agreement, then both will earn $25,000 in profit. If one restaurant cheats and the other abides by the agreement, then the cheater will earn a profit of $150,000 while the firm that abides by the agreement will have a loss of $12,500. The most profitable outcome for the two restaurants would be _________________.

for both restaurants to abide by the cartel's agreement