Econ 101 Final

Competitive mergers

Bad for rivals but good for consumers

Beat

Bama

Supply side ultimately

Be far from competitor. Increase market power and prices. Increase profit margin

For bank accounts and Implicit

Calculate the interest but don't use money invested

Make benefits and costs

Can remove middle man. But lose benefits like vertical integration and blunt incentives

perfect price discrimination

Charging exactly the reservation price to charge highest price and make every sale

Best response in game theory is

Choice that yields highest payoff riven other players choices

Moral hazard

Choices you make when you returns actions aren't fully observable

Simultaneous game

Choose without knowing other players choice

Non price competition

Compete to win costumers by differentiating your product and positioning it differently

Price competition

Compete to win customers via lower prices

Multiple equilibrium can occur jn

Coordination and anti coord games

Demand side strategies to battle entry

Create customer lock in

focal point

Cue from outside game that helps you coordinate. Like lunch ar noon example

Relationship specific investments are more valuable when

Current business relationship continues

Set your price via what curve

Demand curve. Look up for price and down for quantity

Competition yields production when

Demand equals marginal cost

Supply side strategies to combat entry

Develop cost advantages

If price competition is intense you should

Differentiate your product

Adverse selection of sellers

Due to difficulty selling high quality goods, more likely to see low quality goods sold when quality can't be observed

What 2 things are true in nash

Each players choice is best response to expected choice of other and each players expectation is correct

Anti collusion laws

Ensure businesses agree to not compete

imperfect competition

Facing some competitors and or selling products thst differ a little from those competitors

First vs second

First you can be aggressive. Second you can be flexible

Fixed costs and variable costs over time

Fixed spread out and eventually decrease while variable increase over time

What's used to best represent sequential games

Game tree

Example of bargaining power of buyers

Gm buying parts from suppliers

Anti competitive merger

Good for rivals bad for consumers

Conditions for price disc

Have market power, can prevent resale, and can target right prices to right customers

Market with price discrimination quantity and price

Higher quanitty and lower price

Look forward

In games that play out over time you should look forward to anticipate consequences of choices

When isn't cooperation an eq

In one shot or finitely repeated

Product dif reduces

Incentive for rival to undercut you with prices

Hold up problem

One side in a relationship specfiicc investment tries to renegotiate to give other a worse deal

Nash Equilibrium

Outcome where choice each player makes is best response to choices others are playing

Marginal revenue is ultimately

Output minus discount

Principal agent problem

Person is hired to do something on someone's behalf but their actions aren't fully monitornwke

Demand side considerations for positioning

Position good to be attractive to as many customers as possible. Aka be close to your rival

Supply side considerations

Position to be as different from competitors as possible

Short run economic profit

Production capacity and number of competitors can't change

Price competition is easier when

Products are extremely similar, prices are easily observed, and switching costs are low

Market power allows you to

Pursue independent pricing strategies

In the long run, free entry

Pushes economic profits down to 0

If price competition is subdued

Put yourself as close to rival as possible

Backward induction solution

Reason backward to solve sequential games and find eq

Ways to beat hold up

Reputation and repeated interactions. Vertical integration

Five forces framework

Reveals sources of profitibility and threats to it

Output effect

Revenue increase from selling one more unit

Discount effect

Revenue loss from cutting price on all units sold

Accounting profit

Revenue minus explicit costs

Long run profit

Rivals can increase or decrease production and leave or enter

Assyemtric info and sellers

Sellers of high quality goods don't sell but low do

Solutions to adverse selection of buyers

Sellers use info related to costs, offer different contracts and govt

Segment your marekt

Separate market into groups whose demand differs then target those groups differently

Key to price discrimination

Set prices close to and just below someone's marginal benefit

Why does marginal revenue curve more sharply than firm demand

Since you lose money the more you sell via discount effect

Substitutes are a big threat when

Switching costs are low

Examples of demand side to keep customers locked in

Switching costs, reputation and loyal costumers, and network effects

Anti corod

Take different but complimentary action for best response

Economic profit

Total revenue minus both explicit and implicit costs

Hold up problem leads to

Underinvestment. As it lowers your desire to do things that would lower your bargaining power and leads rk investments that improve your next best alt instead

Selective discounts help solve

Underproduction problem

Ways to solve coordination problems

Use communication, focal points as well as culture and norms, and laws

Search goods

Use informative advertising and can be easily evaluated before buying

Solutions to adverse selection of sellers

Use third part verifiers, allow sellers to signal quality via things like reviews, and government can force info to be revealed

Strategic plan

Used for indefinitely repeated. List of instructions thst describes how to respond ro any possible situation

Prune the tree

Used to solve game trees. Find beer responses for rival then remove choices they wouldn't make

Strategic interactions

When your best choice may depend on what others choose and when their best choices may depend on what you choose

How should you solve finitely repeated games

Work backward

When advertising, make sure

You increase your firm demand, not market

Grim trigger

start with cooperation; if opponent ever defects, you defect every time thereafter

Bargaining power

Ability to negotiate a new deal. Determined by next best alternative

Failure to cooperate

Agreements to cooperate aren't always credible, eq isn't always best outcome, and temptation to undercut dominates

In a monopoly the market demand curve is

Also the firm demand curve

Perfect competition

Market where everyone sells an identical good with many buyers and sellers. No market power

Natural monopoly

Market where irs cheapest for a single businesses to service the market

Supply side to get special advantages

Mass produce better, research and develop advantages, and have good access to inputs via suppliers to lower average cost and make more profit

Reservation price

Max price someone would pay for a product

Adverse selection of buyers

Mix of buyers is skewed toward high cost buyers making some oeoooe not able to buy products rhey want

Reason backward

Analyze last period of take to find consequences of first action

Profit margin

Average revenue minus average cost

Market power and quantity

Leads to inefficiently smaller quantity

Payoff table

Lists all choices to show possible outcomes

Self selection via hurdle method

Low marginal benefit customers leap hurdle and pay low price while high don't care

Ways to solve moral hazard

Make hidden actions observable via monitoring, provide complements, and use pay for performance

Successful advertising and elasticity

Makes your curve less elastic

monopolistic competition

Many small businesses compete each selling differentiated products. Some market power via differentiated product