ECON 212 Final Exam Review

Product Differenciation increases _______

Bargaining Power

Marginal Revenue lies ______ the demand curve

Below

Vertical Integration

Companies along a product chain combine to form a single company

Collusion

Competitors get together and agree that everyone will charge a high price

When new firms enter a market your market power and demand ______

Decrease

Supply-side Strategies

Develop unique cost advantages

Expect other firms to enter the market if:

Economic Profit is being earned

Oligopy

Few large firms; must consider strategic interactions; Some Market Power; Downsloping Firm Demand Curve

Demand-side Strategies

Find ways to create customer lock-in

Average Cost

Firms total costs / Quantity produced

Average Revenue

Firms total revenue / Quantity supplied

Checkmark Method

If you put a check next to each player's best response, an outcome with a check from each player is a Nash equilibrium

Search Goods use ________ Advertising

Informative

Informative Advertising

Informs potential customers about product

Relationship-Specific Investment

Investment that is more valuable if the current business relationship continues

The better your Next Best Alternative the ______ Bargaining Power you have

More

Barriers to Entry

Obstacles that make it difficult for new firms to enter a market

Hurdle Method

Offer lower prices only to buyers that are willing to overcome some hurdle

Hold-up Problem

Once you have made a relationship-specific investment, the other side may try to renegotiate to get a better deal

Monopoly

One seller; only substitute is other goods; Maximum Market Power; Firm Demand Curve is Market Demand Curve

Supply and Demand diagrams assume ______

Perfect Competition

Persuasive Advertising

Persuade or manipulate potential customers into thinking they would enjoy the product

Experience Goods use _______ Advertising

Persuasive

Five Forces

Reveal underlying sources of profitability; Show potential threats of profitability

Deterrence Strategies

Scare away potential entrants with credible threats

Output Effect

Sell one more unit, revenue increases by the price of the additional item sold

Price Discrimination

Selling the same product at different prices to different people

How to chose Price with Market Power

Set the highest price at which you can sell; Look UP to the demand curve

Firm's Demand Curve

Summarizes the quantity demand from your firm as price changes

Marginal Revenue

THe additional revenue gained from selling one more unit

Market Power

The ability to alter the market price of a good or service without losing sales to competitors

Nash Equilibrium

The choice that each person makes is the best responce to what others' are choosing

Variable Cost

The cost of inputs that can be adjusted in the short run

Fixed Cost

The costs of inputs that cant be adjusted in the short run

Price and Quantity Short Run

The horizon over which the production capacity and the number of the type of competitors you face DO NOT change

Price and Quantity Long Run

The horizon over which you and your rivals may expand or contract your production capacity, and new rivals may enter the market along with existing firms exiting

Game Theory

The study of strategic interactions

Discount Effect

To sell one more unit, you have to lower the price on all units sold

Accounting Profits

Total revenue - out of pocket costs

Economic Profits

Total revenue - total opportunity cost

Determinants of Long-term Profitability

Type and intensity of competitive forces; Decisions made in responce to these forces

Average Costs on a graph are often ______ shaped

U

Price Discrimination fixes ______

Underproduction

The Bertrand Paradox

With no product differentiation, even one competitor can force your economic profits to zero

Bargaining Power

Your ability to negotiate a good deal

Strategic Interaction

Your best choice depends on what other chose, and their best choice depends on what you chose

Next Best Alternative

value of the best option outside of the deal

What are the Five Forces

1. Potential Entrants 2. Suppliers 3. Customers 4. Potential Substitutes 5. Current Competitors

Experience Good

A good which you have to use or consume in order to evaluate

Search Good

A good you can evaluate before buying

Perfect Competition

A market structure in which a large number of firms all produce the same product; No Market Power; Flat Demand Curve

Payoff Table

A table that lists your choices in each row, and the others' choices in each column

Constant Returns

All firms have similar cost curves in the long run

Regulation

Mobilize the government to prevent entry

If Ecomic Profit = 0, then Price = _____

Average Costs

How to chose Quantity with Market Power

Keep producing until Marginal Revenue = Marginal Cost; Look DOWN to see quantity

Free Entry eliminates positive economic profit in the _______

Long Run

Decreasing Returns

Long run cost curves sloe upward

Market Structure determines ______

Long-term Profitability

Monopolistic Competition

Many firms with differenciated products; Some Market Power; Downsloping Firm Demand Curve