Microeconomics for Life | CH. 10
Prisoners' dilemna
A game with two players who must each make a strategic choice, where results depend on the other players' choice.
Game theory
A mathematical tool for understanding how players make decisions, taking into account what they expect rivals to do.
Natural monopoly
Arises when conditions create an economy of scale that allows only a single seller to achieve lowest average total cost. With natural monopoly, policymakers face the challenge of avoiding the inefficiencies of monopoly's restricted output and higher price.
Cartel
Association of suppliers formed to maintain high prices and restrict competition. There is high temptation for businesses to form cartels because the payoffs are high.
Collusion
Conspiracy to cheat or deceive others. In economics, they are agreements to fix prices in a conspiracy against consumers.
Recipe for profits
Estimate marginal revenues and marginal costs, and then set the highest price that still allows your business to sell the highest quantity for which marginal revenue is greater than marginal cost.
Capture view
Government regulation benefits the regulated businesses, not the public interest. Concentrated benefits to businesses make regulations worth lobbying for, while small costs to individual consumers do not create political pressure for regulators to serve public interest.
Public-interest view
Government regulation eliminates waste, achieves efficiency, and promotes the public interest
Government policy challenge in economies of scale
How do you gain the low-cost efficiencies of economies of scale, but avoid the inefficiencies of monopoly's restricted output and higher price?
Civil offences under the Competition Act
Less serious than criminal offences. Include mergers, abusing a business's dominant market position, and taking actions to lessen competition. Penalties include fines and legal prohibition of mergers and anti-competitive business practices.
Anti-trust laws
Make it illegal for businesses to combine to form monopolies. They drive price-fixing agreements underground, making it more difficult for colluding businesses to communicate, trust each other, and enforce their collusion.
Competition Act
Modern Canada's anti-combines (anti-trust) law, passed in 1986, to promote competition. Includes criminal offences and civil offences.
Nash equilibrium
Outcome of a game in which each player makes their own best choice given the choice of the other.
Criminal offences under the Competition Act
Price fixing, bid rigging, and false or misleading advertising. Penalties include prison and fines.
Government responses to economies of scale
Public ownership (crown corporations) or regulated private monopoly
Crown corporations
Publicly owned businesses in Canada created by the government, which owns 100% of the corporation's assets.
Rate of return regulation
Sets a price allowing the regulated monopoly to just cover average total costs, including normal profits.
Caveat emptor
"let the buyer beware" - the buyer alone is responsible for checking the quality of products before buying
Desirable competitive behaviour . . .
. . . is difficult to distinguish from undesirable collusive behaviour.
Government failure
When government regulations fail to serve public interest.
Market failure
When markets produce outcomes that are inefficient or inequitable.
Key insight of game theory
With the complication of trust, there are two smart choices. (Players who can't trust each other confess, players who trust each other deny)