Module 10
VERY IMPORTANT Free entry will continue in an imperfect market until the price equals the
average cost of the marginal supplier
The firm's demand curve is also the
average revenue curve. This is because your average revenue/ unit is the price
Price discrimination ______ the price depending on what people are willing to pay
changes
perfect price discrimination
charge everyone exact willingness to pay
Group pricing (price discrimination)
charging different groups different prices BECAUSE their demand differs. They target based on verifiable, difficult to change characteristics.
The monopoly price is higher than the
competitive price
Reservation price
exact willingness to pay
The more market power the _____ competitors and the (less or more) unique products
fewer; less
Bundling (group discrimination)
goods that are bought together in a package. Creates a hurdle to get to the 2nd good at a ↓ price. ex: fast food meal combo
The barrier to enter a market that includes *patents & copyrights* (grants firm the exclusive rights to a product). A great example of this is medicine or vaccines. *Licensing* keeps competitors out.
government regulation
When setting prices for different groups of customers, a manager should charge lower prices to groups that
have a more elastic demand.
Most businesses have _______ competition
imperfect
Market power ______ producer surpus
increases
Price discrimination ____ the price and _______ consumer surplus by an equal amount
increases; decreases
The bargaining power of buyers can affect competition because
it can influence suppliers to lower their prices
The monopoly quantity is ____________ than the competitive quantity
less than
The competitive forces in a market largely determine the _____ of the companies in the market.
long-term profitability
Firms with market power can set the price greater than the
marginal cost
Dead weight loss is created by
market power
Product differentiation gives seller the _________ because it makes products distinct.
market power
People with a low opportunity cost of time are
more willing to pay full price. Rich people won't jump the hurdle.
When economies of scale are so LARGE that one firm can supply the entire market more cheaply than multiple firms.... this occurs
natural monopoly
When a *monopoly* decides to sell one more item it faces the ___________ and ____________ effects
output/quantity effect discount or price effect
If a firm has the market power they can raise the _______ without losing many sales
price
Market power allows firms to be price (maker or taker)
price MAKER
Firms with market power have some control over ______
prices
Non-price competition occurs when businesses compete with __________________
product differentiation
In a monopoly: when *marginal revenue = marginal cost*
profit is maximized
Pro-business
protecting specific businesses from competition
Market power ___________ consumer surplus
reduces
Price competition (when there is multiple rounds of firms lowering prices to win) occurs when
rivals sell similar products, prices are easily observed, and switching costs are low
What solves the underproduction problem?
selective discounts. This is because you are inducing new customers to buy your product.
Price discrimination
selling the same good for different prices
Tying (price discrimination)
sells you a product that can only be used with their product. They do this by ↓elastic price of good and ↑inelastic good price. ex: printer ink with printer.
government policies create barriers to entry through
shaping the rules for entry -parents -shape regulations -impulsing compulsory licenses -lobbying politicians
Perfect price discrimination leads to a _____________ ___________ market output
socially efficient
In the long run, the number of sellers and the level of profit in a market are both affected heavily by the _____ in the market.
strength of the barriers to entry
The bargaining power of suppliers can affect competition because
suppliers can raise the price
Controlling the *key resources* is a __________ factor that barriers a firm from entering the market. Cost advantages as well.
supply side
Potential substitutes threaten competition because of
technology, innovation
In a *monopoly* the demand curve is
the market demand curve (and is downward sloping)
Pro-market
trying to get a more competitive market to increase market efficiency
When calculating a firm's profit under *perfect price discrimination*
use the triangle formula because there is no deadweight loss!!!!
Hurdling (price discrimination)
Customers sort themselves w/ higher or lower reservation prices. Offer ↓P to customers who are willing to jump the hurdle. examples: time, hassle costs, quantity discounts, haggling, coupons, bad customer service
Demand side barriers to entry create
*customer lock-in* through -switching costs -earning goodwill and building your reputation -generating network effects
Supply-side barriers to entry are done by
*developing unique cost advantages* -learn by doing -exploiting benefits of mass production -investing in research and development -creating relationships w suppliers -limiting access to key inputs
How to segment groups
- segment where the demand differs - target group discounts based on verifiable characteristics (FAFSA) - base group discounts on difficult to change characteristics
Know how to find the dead weight loss
...
New competitors will enter a market until the last competitor that enters (marginal supplier) expects an economic profit of ____
0
Market power leads businesses to
1. charge a higher price 2. seller a smaller quantity 3. earn larger profits 4. survive w inefficiently high costs
Oligopoly
1. few competitors 2. products can be same or differentiated 3. some barriers to entry ex: smart phone competitors
Barriers to enter a market
1. gov regulation 2. supply-side factors 3. demand side 4. natural monopoly
How do companies segment (price discriminate)?
1. group pricing 2. hurdles 3. tying 4. bundling
Monopolistic competition
1. many competitors 2. differentiated products 3. low barriers ex: restaurants
Perfect competition
1. many competitors 2. identical products 3. no barriers NO MARKET PWR
A firm can only price discriminate if they have the
1. market power 2. no resale 3. segment the market and target prices to people
Monopoly
1. no competitors 2. unique product 3. barriers to entry LOTS OF MARKET POWER
The output/quantity effect
If you want to ↑quantity sold ↓price
The discount/price effect
If you want to ↓price the ↑discount must be
How can a company's research and development expenditures create a barrier to entry into its market?
It can result in new production technologies that reduce the cost of production.
Why does market power create market failure?
It causes a smaller quantity to be produced.
In a *monopoly* the marginal revenue curve has what behavior?
It diminishes 2x faster than the demand curve
What kind of firm uses product differ & why?
Oligopolies. This is because there are only a few competitors so you are constantly considering what the other firms are doing.
Customers would be less loyal and more price sensitive in which of the following situations?
The switching costs are low.
Why offer selective discounts?
You get more customers who can now buy the product. ↑q sold ↑profit
Deterrence creates barriers to entry by
convincing rivals you will crush them -building excess capacity -keeping cash on hand -building your brand -earning a reputation as a fierce competitor
Perfect price discrimination eliminates _________
dead weight loss This excess now goes to the producer which *↑total surplus*
Set the demand curve = MB curve. If this occurs, *set the price just below the*
demand curve
*Network effects* (Snapchat), *switching costs*, and *brand loyalty/reputation* (Android to iPhone) are all examples of what barrier to enter a market?
demand side
In *imperfect competition* the firm's demand curve is
downward sloping
In *perfect competition* the firm's demand curve is
elastic, horizontal
