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Business Competition > Term 1 > Flashcards

Term 1 Flashcards

1
Q

What is Cournot competition?

A

Competing in the same period on Quantity

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2
Q

How do you calculate a reaction function?

A

Differentiate profit and solve for Q1

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3
Q

What is revenue destruction?

A

Where small firms expand output, lowering the market price

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4
Q

How would you calculate EOD and Market Share

A

P-MC/P=-qI/pdp/dq=Si/n

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5
Q

What happens if all firms have the same MC?

A

Share becomes 1/n

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6
Q

What is the Herfindahl Hirschamn Index

A

A measure of market concentration

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7
Q

What is the Bertrand Price Paradox

A

It is hard to believe that industries with a few firms will never manipulate market price
Can be fixed through brand loyalty

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8
Q

What four conditions will deter price above MC?

A

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

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9
Q

If the above conditions are met, what occurs?

A

The monopoly is perfectly contestable

Hit and run competition

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10
Q

What are the two types of barriers to entry?

A

Structural - Legal / Cost Advantage

Strategic - Raising sunk entry costs or lowering post entry profit

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11
Q

What strategies are available for deterring entry?

A

Limit Pricing
Sunk Costs
Blockaded Entry
Predatory Pricing

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12
Q

What is limit pricing?

A

Using the entrants residual demand, the incumbent sets a quantity that prevents entry

This harms the incumbent

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13
Q

What is the sunk cost entry decision tree?

A

Working Backwards:
Incumbent chooses whether to share or fight
Entrant chooses whether to enter
Incumbent chooses whether to invest

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14
Q

What is blockaded entry?

A

The industry is a natural monopoly therefore the incumbent does not need to act

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15
Q

What is predatory pricing?

A

Waging a price war to drive other competitors out of the market

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16
Q

What is Selten’s Chain store Paradox?

A

If all players have complete information, predatory pricing fails

As no payoff after final period, no predatory pricing, collapses backward

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17
Q

What characteristics should a strategic decision have to be effective?

A

Visible
Understandable
Credible

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18
Q

What is first mover advantage?

A

As firm 1 moves first, it can produce a higher quantity and gain more profit

Will always earn atleast cournot equilbrium

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19
Q

What methods of collusion are available?

A

Explicit
Tacit
Both are illegal and thus unenforcable

Merger

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20
Q

Why is collusion likely to fail?

A

Both firms have an incentive to cheat

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21
Q

What factors effect the sucsess of tacit collusion

A

Number of firms
Similarity of firms for determing share
The ability to detect and punish cheating

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22
Q

What practices help collusion occur?

A

Price leadership
Public announcment of price changes
Most-Favoured Nation - Promising to pay lowest price

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23
Q

What are the two types of product differentiation?

A

Vertical: Quality - All consumers agree on ranking but not WTP
Horrizontal - Taste

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24
Q

What is Hotellngs Spatial Model of Competition?

A

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

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25
Q

How do you calculate the point of indifference in Hotellngs Spatial Model of Competition?

A

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

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26
Q

In Hotellings Model of Spartial Competition, what happens as T approaches 0?

A

Bertrand price setting arises, as travel costs become irrelevant

Equilibrium = P1=MC+T

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27
Q

What else should be discussed in an exam?

A

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

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28
Q

What are the three types of price discrimination?

A

First: Highest WTP
Second: Depends on Q purchased
Third: Observable Characteristics

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29
Q

What conditions are necessary for effective Price Discrimination?

A

Market power
Segment-able Market
Prevent Secondary Trade (Customers Re-selling)

30
Q

How can secondary trade be prevented?

A

Legally - Electricity
Product Characteristics - Transport Costs
Verification by Cons Type - Travel Pass

31
Q

How would you calculate a non-uniform pricing schedule?

A

Calcualte the profit for each price and quantiy
Choose the best price for each quantity
Check there is no possibility for cheating

32
Q

What are the types of second degree price discrimination?

A

Block Tariff - Staircase
Two Part Tariff - Licence fee and uniform price - Flat then slanted
Multi-part Tariff

Trade off between complexity and profitability

33
Q

How do you calculate societys welfare?

A

CS + Profit

34
Q

What is Posner’s theory on rent seeking?

A

If there is competition to becoming a monopolist, there is gains to being one

35
Q

What are the costs of X-Inneficency?

A

Lack of competition causes laziness

Wastes Resources

36
Q

What are the barriers to entry?

A

Government Grant of Monopoly - Raise Revenue
Patents to Reward Innovation - Promote Dynamic Efficency
Control of Inputs
Brand Loyalty
Economies of Scale

37
Q

What are the benefits of market power?

A

Technological Efficiency - Low concentration raises costs due to lack of economies of scale
Allocative Efficency - Price discrimination can allow market segmentation, resulting in better coverage of market

38
Q

How is a market defined?

A

XPED - High XPED means same market

PES - Similar means same

39
Q

How can a losses of DWL be defined?

A

DWL = 1/2DPDQ
Harberger = ED/2P*Q^r^2
r is ROR on sales
He assumed DWL = 1

40
Q

What are the two areas legislation can be targeted at?

A

Structural - Enhance Comp Forces

Conduct - Tackle actions by players

41
Q

What is US legislation like?

A

All collusion and attempts to monopolise are illegal

Price Discrimination, Exclusiviyy Contracts and Acquisitions are also illegal if they harm competition
Must prove they occured

42
Q

What is EU legislation like?

A

Same as US, but with exeptions for Technical and Dynamic efficency

43
Q

What is UK Legislation like?

A

Same as US and EU, only do not need to prove an agreement

44
Q

How do you calculate the Lerner Index?

A

P-MC/P

45
Q

What effect does rising MC have?

A

Reduces market power

46
Q

What is competitive fringe analysis?

A

One monopolist and many small firms

Monopolist receives whatever demand is left

47
Q

Discuss US v Du Pont

A

A celophane company was considered to be in the packing materials market, as consumers can switch between products

48
Q

Discuss Brown Shoe v US

A

A shoe company market was split into 3, judge ruled against merger

This is as company could easily switch between different genders

49
Q

Discuss United Brands v Commission

A

Should a market be determined by those with the highest WTP?

Elderly need Banannas therefore yes

50
Q

Discuss Hugin v Commission

A

Market defined as Hugin spare parts despite other registers available

51
Q

What are the issues with detecting barriers to entry?

A

If barriers are good, nobody will enter and complain

Is actually better for consumer in SR

In PC, low prices are result whilst in Mono, low prices are cause

52
Q

Discuss Texas International and National Air

A

Merger was allowed on the grounds of potential, rather than actual, competition

53
Q

Discuss Du Ponte

A

Courts allowed non-licensing to benefit the innovators

54
Q

What reduces the likelihood of collisions success

A

Large no of firms
Large penalties
Threat of potential competition
Cost Asymetries

55
Q

What are the four tests of EU and UK exemptions for collusion

A

Must improve efficency
Consumers are given a share
No restrictions
Does not weaken competition

56
Q

What is the 5 point screening process for US mergers?

A 
Define Market
Calculate Change in concentration
Entry conditions
Look at collusion
Efficency Gains
57
Q

In what way is the EU different to the US?

A

No efficency expemption

58
Q

Discuss US v Trans Missouri Freight

A

Illegal price setting despite the defence it was reasonable

59
Q

Discuss US v Socony Vacuum Oil

A

Firms illegally colluded to buy oil of competitiors to maintain price

60
Q

Discuss Chicargo Board of Trade v US

A

Choosing not to trade when market closed is ok

61
Q

What are the 3 conditions necessary for effectivce price discrimination?

A

Market Power
Varying WTP
Secondary trade not possible

62
Q

Who is harmed through price discrimination?

A

Firms paying higher prices

Consumers paying hgher prices

63
Q

How does price discrimination and linear demand curves effect welfare?

A

Linear: Overall welfare is higher with uniform pricing

Non-Linear: If lower output, welfare falls

Non-Linear: If higher output, unclear

64
Q

What are some key cases on US price Discrimination Policy

A

FTC v Anheuser-Busch: Any price difference is discrimination

FTC v Borden Company: Differing prices can be allowed if costs differ

FTC v Morton Salt: If reasonable policy of competition being effected, illegal

65
Q

What is EU policy on price discrimination

A

United Brands v EU comission

66
Q

What is the UK policy on price discrimination?

A

Second degree allowed, as long as it relates to differences in costs or large purchases

67
Q

What is the test for predatory pricing?

A

Areeda v Turner:

P

68
Q

What is the US policy on predatory pricing?

A

Must prove:
Anticompetetive Behaviour
Intent
Serious prob of sucsess

69
Q

What are the key cases on US preadatory pricing?

A

Utah Pie: Suit was sucessful despite no harm

Matsusha v Zenith: Two Conditions for PP, Geographical and Intertemporal

70
Q

What is the UK policy on predatory pricing?

A

Did market conditions make it feasable

Was P

Business Competition (2 decks)

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