Proulx Exam 3 - Econ 101

Entry Deterrence

A strategy by which an incumbent firm invests in excess capacity to discourage entry by new firms. - flood market - price war -war chest - create reputation for competing hard against new entrants

Worker Characteristics

- Education and Experience - Knowledge, skills, and abilities - Certification/Licensure - Economic Superstar - Signaling

Regulations and Government Policy

- Patents: creates monopoly, no company can create idea w/o your permission - Regulation: harder to start business, incumbent businesses ask for more regulation - Licensing: costly, can defer entry. liquor, childcare centers, etc - Lobbying - involves incumbent businesses - creates barriers to entry. ie taxi companies and uber regulation

Demand Side Strategies

- switching costs lock your customers in. ie. iPhone apps, camera lenses, frequent flyer miles. Makes it costly to switch - reputation and g keep your customers loyal -Network effects: customers only use popular products. Becomes useful when everyone uses it. insta, ebay, etc

Human capital

accumulated knowledge and skills that make worker productive

Signaling

achieving a goal (college, hs, etc). Signals that you are tenacious and hardworker

Monopolistic competition

an industry in which many firms offer products or services that are similar (but not perfect) substitutes. Example: you are the only seller of a precise style of jeans

permanent income

average lifetime income

Strategic interactions

each actor's strategy depends on the anticipated strategy of others. Efforts are often made in silence or cooperation

Free exit

ensures industries wont remain unprofitable in the long run. Continues until there is incentive for firms to enter.

Monopsony power

firm using its power as a major buyer of labor to pay lower wages

Average cost

firms total cost divide by quantity produced. Total cost/total quantity = fixed cost per unit + variable cost per unit = AFC+AVC

Search good

good which you can evaluate before buying

When will existing rivals exit your market?

if MC>MB. IF EP <0 or becoming negative. Implicit opportunity costs > accounting profits --> invest elsewhere

economic superstars

individuals who not necessarily make better decisions, but rather a superstar who brings attention to the company

relation-specific investment

investment that is more valuable if the current business relationship continues

precipitating factors

job loss, divorce, deaths, childbirth

perfect competition outcome

keep producing until price = marginal cost (end of the curve?)

Rational Rule for Sellers w/ market power

keep seeling until MC=MR, look up and see at highest price possible

personal advertising

manipulating customers into believing theyll enjoy it

Competition

many sellers of similar product as yours --> compete in price and product attributes

hold-up problem

once you have made a relationship-specific investment, the other side may try to renegotiate to get a better deal.

monopoly

only one seller. Raises prices and won't lose customers - huge market power.

poverty reoccurs

over half people who escape poverty return within 5 years

What happens in the long run if price > average cost

price = average cost because EP>0 and new firms enter

What happens when price< average cost

price = average cost because firms exit until price rises

experience goods

products that cannot easily be evaluated until after purchase and use

alternative poverty line

public opinion of salary needed

Implicit Bias

relying on unconscious associations instead of complete analysis

price competition

repeated rounds of price cuts that undercut your profits

output effect

sell one more unit, the total revenue increases by the price of the additional item sold

Idea for Price Discrimination

set price at each persons marginal benefit. Richer people have higher wtp and thus pay more. Poor people get same product for less money and have lower wtp

market power outcome

set quantity by producing until marginal revenue = marginal cost

firm demand

summarizes the quantity of buyers demanded from your firm as price changes

market power

the ability to charge higher prices without losing many sales to competing businesses

absolute poverty

the adequacy of resources relative to an unchanging standard

relative poverty

the adequacy of your resources relative to others in society

intergenerational mobility

the extent to which the economic status of parents determine outcomes for children

adverse selection

the greater the likelihood of something happening, the more likely someone is to buy insurance

market demand

the quantity of a good or service that all the consumers in a market are willing and able to buy at different market prices

accounting profit

the total revenue your firm receives, minus your explicit financial costs

discount effect

to sell one more unit, you have to lower the price on all units sold.

Benefits of redistribution

utilitarian lifestyle. Promote the greatest happiness for the greatest numbers diminish marginal benefit: each additional dollar is less beneficial than the previous Implication: poor people value dollar more than the rich, redistribute from the rich

Positioning trade-off Demand Side

want to be close to your competitors. Increase share of potential customers and increase in quantity

Betrand Paradox

with no product differentiation, even one competitor can force economic profits to zero .. cuz incentive to price cut e/o

Statistical discrimination

workers use stereotypes for observable traits to infer qualities they cant observe

economic profit

your firms total revenue, minus explicit financial and implicit opportunity costs

What 3 factors explain difference in wages

1. Demand 2. Supply 3. Institutions

Four Strategies for Creating Barriers to Entry

1. Demand Strategies: Find ways to create customer lock-in 2. Supply-side strategies: develop unique cost advantages 3. Regulation: mobilize gov to prevent entry 4. Deterrence Strategies: scare any potential entrants w/ credible threats

Underproduction Problem

-Higher prices under market power are a problem for consumers, but an off-setting benefit to producer - results in redistribution, not loss in economic surplus - not socially optimal - perfect competition achieves this

What does advertising do

-It increases demand for your product (Shifts to right) -Makes customers more loyal, giving a firm more market power (Flattens demand curve)

How does competition yield lower prices and higher quantity?

1. Competitive price is lower than market power price and competitive quantity is greater. (firms will undercut each other to increase revenue) 2. A firm w/ market power earns greatest profits and can result in high costs 3. Because of profits, inefficient firms can survive

What are the 5 forces that determine firm profitability?

1. Current Competitors 2. Potential competitors: threat of entry 3. Competitors of other markets: Threat of Substitutes 4. Suppliers: Seller bargaining power 5. Customers: Buyer Bargaining power

Costs of Redistribution

1. Administrative Costs 2. Taxes reduce incentive to work 3. Mean tested programs raise effective marginal tax rates: more taxes fewer benefits? 4. Insured people make riskier choices: unprotected sex, drop out, unhealthy behaviors, spin the block 5. Tax avoidance, evasion, fraud

effects of new entrants in market

1. Decreased Demand: lose existing customers to new firm, shifts demand curve left 2. Reduces your market power --> customers have more options, demand curve becomes flatter

effect of exit of existing firms for incumbents

1. Increased demand : gain customers from the exiting firm. Shift demand curve right 2. Increases your market power: Customers have fewer choices. Demand curve becomes steeper

Supply-side and Cost Advantages

1. Learning by doing. Experience means incumbents have advantages 2. economies of scale. Mass production is very efficient> small quantity. Difficult for newcomers to establish mass production 3. research and development. Make existing products cheaper, develop more effective management techniques 4. relationships with suppliers access to inputs and distribution. Access to key inputs can freeze your competitors out. Average cost can be higher for new firms meaning new firms wont enter

What are the Different product attributes that yield market power?

1. Quality 2. Customer service 3. Reputation 4. Location

What three factors explain differences in wages

1. demand: worker characteristics, human capital, signaling, economic superstars 2. Supply: Job Characteristics, compensating differentials 3. Institutions: minimum wages, unions and bargaining power, occupational licensing, monopsony power, discrimination

Marginal Revenue Curve vs Firm Demand Curve

1. your firms demand curve is downward sloping - reflects market power 2. Marginal Revenue lies below the demand curve - reflecting the discount effect 3. Marginal Revenue is steeper declining more rapidly - discount effect is bigger, the larger quantity you sell

How to maximize market power

Differentiate your products and minimize threat from competitors (find good markets to enter).

When will new rivals enter your market

If economic profit is being earned, new rivals will enter your market. MB>MC. if accounting profits>implicit opportunity costs

non-price competition

Firms compete through product differentiation and positioning

Free entry

Free entry eliminates positive economic profit in the long run. Continues until there is no incentive for new firms to enter. Equilibrium: economic profit = 0

perfect price discrimination

Occurs when a firm charges the maximum amount that buyers are willing to pay for each unit. MC = mB

Hurdle method

Offer lower prices only to buyers who are willing to overcome some hurdle. Example: releasing cheaper tesla with less mileage for cheaper, making products worse, taking time to release cheaper product, etc

Examples of non-price competition

Product characteristics, Location, Customer Service, Advertising, Warranties, Package deals

Positioning trade-off Supply Side

Want to be far from your competitors, Increase marginal profit and prices, results in increases profit margin

occupational licensing

a credential that is required to obtain an occupation. AMA for doctors, bar exam, etc

prejudice

a dislike for one group that results in lower wage and employment

Oligopoly

a few large sellers dominate the market. products may be similar or somewhat different. If price raised --> some customers stay, others leave

Average revenue

a firms total revenue divided by quantity supplied. If you charge all customers the same price, average revenue = price

social insurance

a government payoff that occurs when bad things happen to people

Compensating differential

a wage premium that compensates workers for adverse attributes of a job. Ex: trash collection, funeral directors, etc

Substitutes as a threat

buying second hand, making your own, firms in other industries. Low substitution cost bad for firms