finals and formula

Bertrand model: pricing competition, have different demand and reaction curves, and may have separate MC 1. reaction curve of each: a. set up TR differntly: TR= note: Q1 and MC will be given leave P1 as P1 2. find derivative in respect to:_____________ 3. set derivative = to __________ * BECAUSE ALREADY USED MC and polve for p1/p2 4. solve for quantity by: 5. profit:

(P1- MC)Q1, P1 or P2, 0, plugging p's into original funiction, (P-MC)Q1 (or Q2)

(b) Drew Fudenberg and Jean Tirole developed a taxonomy of commitment strategies based on two important dimensions. What are the two important dimensions?

(i) Whether commitments are tough or soft (ii) Whether the tactical variables (i.e. quantity and price) are strategic substitutes or complements

_________ is harder to detect when demand conditions are volatile and the firm _____________ Factors that make pricing cooperation more difficult: - the misread problem - lumpiness of orders - information about the sale transaction - volatility of demand conditions

Price cutting can observe only its own volume of sales

A7. What type of pricing involves a firm quoting a single delivered price for all buyers with the firm absorbing any freight charges itself? (a) Uniform delivered pricing (b) Uniform FOB pricing (c) Uniform customer pricing (d) Uniform competitive pricing

a

cournot duopoly solving 1. REACTION FUNCTION a. solve for p if needed, and set up firm 1's______________ ex: dont forget*: b. take the ___________ which is ________ c. set ______________ and solve for ___________ 2. with both reaction functions solve for quantity, price, revenue a. to find quantity: ___________ b. price: c. profit for each firm= note: same MC means same price profit and quantity for both Q1 and Q2

a. total revenue equation TR=P(Q1) in price equation Q= Q1+Q2 b. derivative of TR in terms of Q1 MR c. MR=MC Q1 a. plug reaction functions into one another and solve for Q1 b. plug Q into price equation c. profit= (P-MC)Q1 <or Q2>

A4. In the Bertrand model _______. (a) one firm plays a leadership role and its competitors willingly follow (b) each firm takes the prices charged by its competitors as given (c) prices are higher and quantities are slightly less than we would see if the firms colluded to achieve the monopoly outcome (d) each firm takes the quantities produced by its competitors as given

b

A8. Which of the following statements is true about how the volatility of demand conditions affects the sustainability of cooperative pricing? (a) Price cutting is easier to detect when demand conditions are volatile (b) Demand volatility is an especially serious problem when the production involves substantial fixed costs (c) Pricing coordination becomes easier in a volatile demand condition because firms are chasing a moving target (d) Price cutting is harder to detect when demand conditions are stable

b

A3. If the reaction curve for firm 2 turns out to be Q2 = 30 - 0.5Q1, then the Cournot equilibrium output will have each firm producing ________. (a) 10 (b) 30 (c) 20 (d) 40

c

A5. Which of the following is not an exit barrier for firms in an industry? (a) Sunk costs (b) Labour agreements or commitments to purchase raw materials (c) Excess capacity (d) Government restrictions

c

A9. Which of the following conditions does not tend to heat up price competition? (a) Many sellers in the market (b) Some firms have excess capacity (c) Products are differentiated/buyers have high switching costs (d) Some firms have cost advantage over others

c

A10. What term describes the process of using market prices of unfinished and semifinished goods to estimate the incremental value-created by distinctive parts of the value chain? (a) Consonance analysis (b) Value creation analysis (c) Value-added analysis (d) Benefit leadership analysis _____________ : looks at a firm's PROSPECTS for continuing to create value _____________: looks at every step a business goes through, from raw materials to the eventual end-user. The goal is to deliver maximum value for the least possible total cost

c, Consonance analysis, Value-chain analysis

A2. If a firm sells its output on a market that is characterised by many sellers and buyers, a differentiated product, free entry and exit, and some control over price, then the firm is ______. (a) a monopolist (b) an oligopolist (c) a perfect competitor (d) a monopolistic competitor

d

A6. What situation occurs when a large incumbent sets a low price to drive smaller rivals from the market? (a) Limit pricing (b) Price leading (c) Capacity expansion (d) Predatory pricing

d (Predatory pricing is directed at entrants who have already entered while limit pricing is directed at potential entrants)

(b) Despite there being other potential effective strategies, why would we necessarily expect firms to adopt a tit-for-tat strategy? (Why is tit-for-tat strategy so compelling?) 1. Tit-for-tat is ___________________________ (ii) Tit-for-tat strategy combines: the properties of

easy to describe and easy to understand strategy, niceness, provocability and forgiveness.

(b) Mention three properties of the Hirfindahl Index (i) Unlike the N-concentration ratio, __________ (ii) The value of the Herfindahl index ranges from (iii) The more _________________ the value of Herfindahl index will be

large firms are given more weight in the index, 1/N to 1, where N is the number of firms in the market, concentrated a market is, the larger

perf comp. demand curve is horizontal line because: Each perfectly competitive firm is so small relative to the size of the market that it has ___________. In other words, it can sell any __________ it wants at the going market price (i.e. the individual firm is _______). This translates into a horizontal or perfectly elastic demand curve at _________

no market control and no ability to control the price, quantity of output, a price taker, market price

monopoly solving Key factor: 1. set up TR ___________ 2. take derivative ________ to get ________ 3. set ____________ and solve for ________ 4. solve for price- plug in Q note: if colluding two firms Q for each is 1/2 5. profit for each= (P-MC) Q1

no reaction functions just one firm, TR=P(Q), in terms of Q, MR, MC=MR, Q

StackelBerg Model 1. solve for leader/ follower _________ (same as cournot) 2. plug firm 2's reaction function into _________ should look like P= 100 - (Q1+(Q2 reaction function)) this will get you _____________ 3. solve for __________ using P (calc. in terns of Q1) and Q1 TR= P(Q1) .... TR= (55-.5Q1)(Q1) 4. take ________, set _____________, solve for _________ 5. solve for Q1 and Q2 by: _________(this will be reaction function calculated in begging same as cournot) 6. price = 100- Q * dont forget this is Q1 + Q2 and both firms will ____________ 7. profit of each: (P-MC)Q1

reaction functions, demand function, price in terms of Q1, TR firm 1, derivative in terms of Q1, equal to MC, Q1, plug Q1 into Q2 reaction function, have the same price

(a) Even if firms coordinate using tit-for-tat pricing, harmony may not ensue. There are many impediments to implementing a successful tit-for-tat strategy. What are the main impediments? (4)

the misread problem, lumpiness of orders, information about the sale transaction, volatility of demand conditions

List the drawbacks of the Cournot model. (i) The Cournot classic duopoly model assumes that the two players set _______________. This is unlikely to be the case in a practical sense (ii) The model's critics question how often oligopolies ____________________________ (iii) ________________ with no differentiating factors

their quantity strategy independently of eachother, compete on quantity rather than price, assumes product homogeneity

_______________: the seller quotes a price for pickup at the seller's loading dock and the buyer absorbs the fright charges for shipping from the seller's plant to the buyer's plan ___________: the firm quotes a single delivery price for all buyers and absorbs any fright charges itself

uniform FOB pricing, uniform delivery pricing

(a) Describe the difference between vertical differentiation and horizontal differentiation. A product is _____________when it __________ better or worse than competing products (unambiguously different in quality) goods are different and all consumers would prefer one to the other if they ____________. Goods are of different ______. Example: products that differ in terms of effectiveness or efficiency A product is _______________ when only some consumers prefer it to competing products (holding price constant) : goods are different ______________ but at the same price some consumers will buy one and some will buy other, it really depends on their __________. Example: Pepsi and Coca Cola

vertically differentiated unambiguously were sold at the same price qualities horizontally differentiate, in characteristics, preferences