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Flashcards in Term 2 Deck (70)
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1

What is the SSNIP Test?

Small and Significant non-Transistory increase in prices
Tests for market
Does a monopoly result in a profitable 5-10% increase in prices
Yes: No subs
No: Repeat with new larger market

2

What are the limitations of the SSNIP?

High PED prevents price rise
Market may already be a monopoly
Just because A is art of B does not mean B includes A

3

What is the SCP scheme

Basic Market Conditions
Market Structure
Conduct of Firm
Market Performance

4

What are some basic market conditions?

Supply:
Tech, Raw materials, Regulations

Demand
PED, YED, Seasonality

5

What are the market structures?

Perfect Competition
Monopolistic Competition
Oligopoly
Monopoly

6

How do we identify the market

Number oof Firms
Barriers to Entry
Product Differentiation
Market Knowledge

7

What are the key areas of conduct?

Price/Output decisions
Product differentiation
Entry detterence
Advertising
R&D

8

What are the key points of performance?

Profits
Productive and allocative efficiency
Technological progress
Equity
Product Quality

9

What are the limitations of the SCP paradigm?

Focuses on a snapshot of market performance
How do you distinguish between S C and P
What is meant by performance, how do we measure it?

10

What is the Chicago school?

Uses theoretical analysis, assumes PC is the long term
Dislikes Gov intervention

11

What is teh Austrain School?

Competition is driven by innovation
Profits are part of the competitive process

12

What is Tobins Q?

q=Market Value / Replacement rate of capital
Q>1 means the firm has to invest in more capital

13

What is the Lerner Index?

L=P-MC / P

14

What is the differential collusion hypothesis?

The positive correlation between concentration and profitability is caused by:
The more concentrated an industry, the more likley collusion, thus prices are higher

15

What is the differential efficiency hypothesis?

The positive correlation between concentration and profitability is caused by:
Long lived efficency differences, which when relevant, cause concentration to be high

16

What factors effect firm survival?

Individual - Human capital
Firm Level - Size, age, R and D
Industry Level - R & D, Barriers to entry
Other Factors - Business Cycle

17

What is the effect of size and age on surivial?

Older and Bigger firms are more likley to exist
Due to learning by doing

18

What is the effect of innovation on surivial?

If entry is possible, current firms innovate
If firm is small, entry is very important

19

What are the incentives to innovate?

Profit
Strategic - alter structure

20

What are the profit incentives to innovate in a PC market?

If only one firm can innovate, the price can drop from C0 to C1
He can thus serve the whole market

21

What makes a PC innoation drastic?

IF the monopoly optimal price is below the old price, the innovation is drastic

22

What occurs if a monopoly innovates?

Profits will increase

23

Whuch firm has a bigger incentive to innovate?

A PC firm, as it will create a profitable opportunity

24

Discuss incentives in an oligopoly

Follow an inverse U shape as profits decrease an firms increase but the benefit of innovating increases

25

When licenscing to a duopoly, what is the optimal structure?

Sell one patent if innovation is drastic
Sell 2 if innoviation is non-drastic

26

Discuss RnD with homogenous products?

The monopolist will not benefit from innovation, but will pay to prevent entry
Entrant will pay new profit
Incumbent will pay difference

27

What is teh replacement effect?

Innovation is more benefical for an entrant than a monopoly

28

What is the efficency effect

A monopoly threatened by entry will pay more to remain a monopoly
Thus low profit incentive but high strategic incentives

29

In a differentiated products, what is the optimal ?

X=Pe-PI/2t +0.5
P=P2+t+c / 2

30

What is strategic RnD

A one stage race to be the first to innovate
If one firm does not innovate, the other will not
If one firm does, the other does