MicroEcon Tri #2

Barriers to Enter a Monopoly

(1): Economies of Scale (2): Network Effects (3): Gov grants: patents, licensing (4): Exclusive ownership of Inputs (ex: Natural Resources)

Moral Hazard Solutions

(1): Signaling (2): Screening - sort people by characteristics rental cars based on age FICO credit score for loans background check for employment

1914 Federal Trade Commission (FTC)

- birthed FTC - regulate advertising - "the referee" of all business practices

Food & Drug Administration (FDA)

1906: regulates food and drugs... (everything consumed except supplements and vitamins)

FTC

1914: began regulating advertising, now regulate everything; "REFEREE"

Equal Employment Opportunity Commission (EEOC)

1965: developed the interview process & prevents systematic BIAS

OSHA

1970: WORKER SAFETY - window space, ladder safeties, pregnancy rules, providing drinking water, etc.

Environmental Protection Agency (EPA)

1970: regulates POLLUTION - oil spills, fires, etc.

Consumer Product Safety Comission (CPSC)

1972: ensures consumer safety when purchasing products -toys, little parts, RECALLS, lawnmowers

Disadvantages of Advertising

1: Persuasion / Exaggeration; fantasy 2: Ad expenses are relatively unproductive 3: Negative Externalities (we buy more because of ads) 4: Ads don't help the public, they're just for market share 5: Can be a barrier to enter (ads are expensive)

Advantages of Advertising

1: Provides useful information 2: Supports the media (allows free services to exist) 3: Stimulates new product development 4: Can contribute to economies of scale 5: Promotes competition

Robinson-Patman Act (1936)

Law on price discrimination, high standard, most firms are found not guilty - no lower costs & harm to competition = guilty

Cartel

a combination of firms that operate as one; a shared monopoly; illegal in the US

Public Good

a nonexclusive good, no one can be excluded

Dominant Strategy

a preferred strategy regardless of opponents choices

Herfindahl Index

adding the squared value of all the individual market shares - 1500 or less: allow merge - 1500-2000: yellow light - over 2000: NO, red light

Moral Hazard Problem

arises when people don't bear the negative consequences of their actions

Price Discriminate

charge different prices to different people/groups ex: Senior, student, military discount

Sequential Game

decisions are made one after another; one player 'responds'

Externalities

effects of a decision on a 3rd party, not taken into account by the decision maker

Clayton Act (1914)

expands & clarifies Sherman, banned tying contracts (unless truly needed), banned serving as a director for two companies in the same industry

Price Taker & Why?

firm or individual takes the market price as given Why? (1) undifferentiated product (2) relatively easy to enter/exit the market

X-inefficiency

firms operating far less effective than they could; expected in monopolies

Lazy Monopolists

firms that do not push for efficiency; comfortable in their current position

Game Theory

formal economic reasoning applied to interdependent decisions (OLIGOPOLIES)

Maximin

lowest, worst-case scenario if you make a certain decision; what keeps managers employed

Implicit Collusion

multiple firms make the same pricing decisions even though they have NOT consulted w each other / colluded

Adverse Selection Problem

occurs when buyers and sellers have different amounts of information about the good for sale

Pure Monopoly

often a government program, USPS or DMV

Simultaneous Game

players make their decisions at the same time; can't change your answer

Technological Lock-In

prior use of technology makes adapting new technologies more difficult

Sherman Act (1890)

prohibits monopolizing trade, exclusive dealings, and predatory pricing (setting low to eliminate comp, then raise; illegal)

Natural Monopoly

single firm can operate more efficiently/cheaper than 2 or more; heavily regulated to uphold quality

Strategic Decision Making

taking explicit account of a rivals expected response to your decisions; characteristic of OLIGOPOLIES

Concentration Ratio

value of sales by the top firms of an industry stated as a percentage of the total industry sales; - oligopoly usually above 75% - monopolistic competition: low %

Shutdown Point

when the firm would be better off to temporarily shut down than continue operations; ** when AVC > MR **

Nash Equilibrium

where no player can improve payoffs by unilaterally changing their strategy

Contestable Market Model

where the barriers to enter/exit determine a firms price & output decisions