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ECO405 Quiz 3
Quiz 3
| Term | Definition |
|---|---|
| Dinamic Rivalry | Firms make choices on variables over time. Can be modeled using repeated games |
| Finite | Known end period (cooperative equilibrium) |
| Infinite | Unknown end period (monopoly output, price, profits) |
| Factors Impacting Possibility (Cooperative Equilibrium) | Able recognize occurence (signals), time length (finite versus infinite), discount rate, gain (cooperative long-term) vs gain (short-term cheat) |
| Cheating Punishment Strategies: Tit-for-tat | Firm A cooperates as long as Firm B cooperates. If Firm B cheats then Firm A cheats. Firm A returns to cooperate after Firm B stops cheating |
| Cheating Punishment Strategies: Grim | Firm A cooperates as long as Firm B cooperates. If Firm B cheats then Firm A cheats forever, regardless of whether Firm B cheats or stops cheating |
| Coordination easier when... | Identical products, standard price determination mechanism, firm moves easy to follow |
| Price cutting more profitable when... | Infrequent big sales orders, information about sales transaction secret, different product cost, high price sensitive buyers, slow time to detect price cutting, less concentrated market (larger pool potential new customers, small rev. destruction effect) |
| Practices to Help Facilitate Cooperative Pricing | 1) Advance announcement of price changes 2) Price Leadership 3) Most favored customer clause 4) Uniform delivered pricing |
| Price Leadership | One firm sets price (can also change), rivals match price (match change) |
| Most favored customer clause | Contract provision where buyer receives lowest price. In contemporaneous policy receive while contract is active. In retroactive policy receive (for time period) even if contract has expired |
| Uniform delivered pricing | Same delivery charge to all customers regardless of location |
| Basing Point Pricing | All goods shipped from given basis point charged has same delivery charge. Single basing point (all sellers use same point of origin), or multiple basing point (more than one location is point of origin), customer quoted charge using closest basing point |
| .What does Basing Point Pricing Eliminate? | Delivery point differences that can occur when sellers pursue independent pricing policies |
| Differences in Market Structure due to: | 1) Minimum efficient scale relative to market demand 2) Endogenous sunk cost: Sunk cost of establishing brand name (market leaders influence investment level rivals need to be competitive) |
| Barriers to entry | Factors preventing firms from entering the market (patents, control scarce resources) |
| Blockaded Entry | Structural barriers where incumbent does not have to do anything to deter entry (large capital requirement) |
| Deterred Entry | Incumbent keeps entrant out using strategy (limit pricing, predatory pricing). Incumbent profits rise |
| Accomodated Entry | Allow entry. Would do so when 1) Entrydeter strategy is ineffective, 2) Low structural entry barriers 3) Cost deter entry > Benefits from keeping firms out |
| Structural Entry Barriers | 1) Control essential resources 2) Patents 3) Copyright 4) Economies of scale/scope 5) Marketing Advantage of Incumbent |
| Structural Entry Barriers: Marketing Advantage of Incumbent | Selling different products under the same brand name, scope economies in advertising. Would reduce uncertainty (quality wise) in new product . There is lower sunk cost for incumbent (than entrant) to introduce new product |
| Exit Barriers | Obligations (labor agreement, input purchase commitments) yielding sunk cost that make it difficult to exit market. Government restrictions can make entry/exit difficult |
| Price Skimming | Select monopoly price (accomodate entry), sets high prices, lowers them once entrants enter the market |
| Entry Deterring Strategies by Incumbent | 1) Limit pricing, 2) Predatory pricing, 3) Capacity expansion These are worthwhile if either 1) incumbent earns higher profits as monopolist than duopolist or (2) strategy changes entrant expectations about post entry competition |
| Entry Deterring Strategies by Incumbent: Limit Pricing | Set price below entrant production cost, limit pricing can impact decision if entrant is unclear about either (1) incumbent cost or, 2) product demand level (thus uncertain about post entry price) |
| Entry Deterring Strategies by Incumbent: Predatory Pricing | Set price below own production cost |
| Entry Deterring Strategies by Incumbent: Capacity Expansion | Builds extra capacity to allow for expansion. Holding excess capacity can help deter entry if A) Incumbent has sustained cost advantage B) Slow growth in market demand C) Capacity investment sunk before entry |
| Economies of scale | Percent change output > Percent change in all inputs, LRAC falls as output rises |
| Economies of scale sources | 1) Input productivity rises (specialization) 2) Spread fixed cost over more output 3) Trade-off among different technologies (use more costly technologies as output rises) |
| Economies of Scope | Less expensive 1 firm produce multiple products than individual firms each producing one product |
| Economies of scope sources | Common production cost of producing multiple products |
| Special sources economies of scale/economies of scope | 1)Purchasing inputs- discount 2)Lower per unit cost writing contracts- FC component 3)Density (lower per unit transportation cost) 4)R&D- Spread fixed cost, multiple use of inputs 5)Inventory cost- low if high sales 6)advertising/spread fixed cost |
| Special sources economies of scale/economies of scope: Advertising/spread fixed cost, multiple products, advertising umbrella: | Umbrella advertising = Firm's advertisement for one product encourages consumers to consideranoter product from same firm |
| Learning Curve | Producing more output contributes to more efficient production (more productive inputs) thus per unit cost fall over time |
| Diseconomies of scale | Percent change output < percent change in all inputs. LRAC rises as output rises |
| Sources | 1) Coordination problems as firm size rises- monitoring workers, incentive problems 2)Paying higher wages (benefits) for employees- union membership, transportation cost 3) Spreading specialized resources too thin (less productive in too many processes) |
| Types of Mergers: Horizontal | Between direct competitors in same market (shoe companies in same area) (horizontal integration) |
| Types of Mergers: Vertical | Between companies in different stages of production- distribution process (soft drink producer buying bottling company) (vertical integration) |
| Types of Mergers: Conglomerate Market Extension | Firms produce same product in different geographic markets (gas stations in different cities) |
| Types of Mergers: Conglomerate Product Extension | Firms produce different but related products (bleach, detergent firms merge) |
| Types of Mergers: Pure Conglomerate | Firms with nothing in common (grocery store and furniture store) |
| Celler-Kefayver Amendment (1950) | Outlaws mergers in any commerce line, section of country where impact of aquisition may substantially lessen competition, or tend to create a monopoly |
| Reasons to diversify: Spread Risk | Lower chance incur large loss from 1 firm falling (small percent revenue from 1 business line): pure conglomerate merge benefit |
| Reasons to diversify: Investment funds available | 1 firm's excess funds can be invested in projects that another firm has limited investment funds (external financing) internal financing (cost wise), hard obtaining loan: pure conglomerate merger benefit |
| Reasons to diversify: Efficiency Gain | Scale economies (horizontal merger, conglomerate market extension), scope economies (conglomerate product extension), lower transaction cost (relationship specific assets, each merger type) helps firm operate more efficiently |
| Costs of diversifying | 1) Higher monitoring costs to ensure division managers or employees have company interest at heart 2) higher influence cost (cost of activities aimed at influencing distribution of benefits/resources in firm) |
Created by:
lorenzofranciosi
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