Term 1 Flashcards
What is Cournot competition?
Competing in the same period on Quantity
How do you calculate a reaction function?
Differentiate profit and solve for Q1
What is revenue destruction?
Where small firms expand output, lowering the market price
How would you calculate EOD and Market Share
P-MC/P=-qI/pdp/dq=Si/n
What happens if all firms have the same MC?
Share becomes 1/n
What is the Herfindahl Hirschamn Index
A measure of market concentration
What is the Bertrand Price Paradox
It is hard to believe that industries with a few firms will never manipulate market price
Can be fixed through brand loyalty
What four conditions will deter price above MC?
All potential entrants can access the same technology - no cost advantage
No sunk costs
Consumers respond instantly to price changes
Incumbents cannot instantly change prices
If the above conditions are met, what occurs?
The monopoly is perfectly contestable
Hit and run competition
What are the two types of barriers to entry?
Structural - Legal / Cost Advantage
Strategic - Raising sunk entry costs or lowering post entry profit
What strategies are available for deterring entry?
Limit Pricing
Sunk Costs
Blockaded Entry
Predatory Pricing
What is limit pricing?
Using the entrants residual demand, the incumbent sets a quantity that prevents entry
This harms the incumbent
What is the sunk cost entry decision tree?
Working Backwards:
Incumbent chooses whether to share or fight
Entrant chooses whether to enter
Incumbent chooses whether to invest
What is blockaded entry?
The industry is a natural monopoly therefore the incumbent does not need to act
What is predatory pricing?
Waging a price war to drive other competitors out of the market
What is Selten’s Chain store Paradox?
If all players have complete information, predatory pricing fails
As no payoff after final period, no predatory pricing, collapses backward
What characteristics should a strategic decision have to be effective?
Visible
Understandable
Credible
What is first mover advantage?
As firm 1 moves first, it can produce a higher quantity and gain more profit
Will always earn atleast cournot equilbrium
What methods of collusion are available?
Explicit
Tacit
Both are illegal and thus unenforcable
Merger
Why is collusion likely to fail?
Both firms have an incentive to cheat
What factors effect the sucsess of tacit collusion
Number of firms
Similarity of firms for determing share
The ability to detect and punish cheating
What practices help collusion occur?
Price leadership
Public announcment of price changes
Most-Favoured Nation - Promising to pay lowest price
What are the two types of product differentiation?
Vertical: Quality - All consumers agree on ranking but not WTP
Horrizontal - Taste
What is Hotellngs Spatial Model of Competition?
Linear city, with a shop at either end
Value to costumers at position X is:
V−p1−tx
V−p2−t(1−x)
There is therefore a point of indifference
How do you calculate the point of indifference in Hotellngs Spatial Model of Competition?
Equate the values to consumers, and solve for xbar
For Demand, multiply by N, shope one is thus:
X<=N[(p2-p1/2t)+1/2]
T is importance of travel costs, is T=Large, each shop gets half the share, prices irrelevant
In Hotellings Model of Spartial Competition, what happens as T approaches 0?
Bertrand price setting arises, as travel costs become irrelevant
Equilibrium = P1=MC+T
What else should be discussed in an exam?
The location effect:
Quadratic Transportation costs:
Direct Effect - Both firms move towards centre
Strategic Effect: Direct = less differentiation, firms move apart
Strategic effect dominates therefore maximum diferentiation
What are the three types of price discrimination?
First: Highest WTP
Second: Depends on Q purchased
Third: Observable Characteristics