FILE:
251N09.HTML
CLASS
NOTES FOR ECONOMICS 251
DR.
WILLIAM SHINGLETON
FALL
2005
THESE NOTES ARE FOR: CHAPTERS
25&26
FINISH MONOPOLY FROM
LAST WEEK USING 4 CASES
OTHER PRICE SETTING
FIRMS CH 25-26
OLIGOPOLY
SMALL
NUMBERS OF SUPPLIERS...HOW TO MEASURE SMALL?
INTERDEPENDENCE
OF DECISIONS
MAY OR
MAY NOT HAVE SOME PRODUCT DIFFERENTIATION
BARRIERS
TO ENTRY
OFTEN
LARGE CAPITAL INVESTMENT REQUIRED
OPERATING RULES
KINKED DEMAND CURVE
RIVALS
MAY NOT MATCH PRICE INCREASES
JOINT
PROFIT MAXIMIZATION
DIVIDING
THE SPOILS
CHEATING
RETALIATION VS PRICE CUTS
GREAT
ELECTRICAL CONSPIRACY
OCEAN
SHIPPING
NOT
COVERED BY ANTI-TRUST LEGISLATION(WSJ 7OCT97:A1)
TRANSPORTATION
= 5 TO 10 PCT OF COST OF MOST GOODS
CSX
ONLY BIG AMERICAN SHIPPER
=> BENEFITS GO TO FN SHIPPERS
1993
AGRICULTURE REPORT
CARTEL ADDS 18 PCT TO SHIPPING COSTS
1995
FEDERAL TRADE COMMISSION
CARTEL
ADDS 19 PCT TO COSTS
THEORY
MC = MR
SHOW PROFIT/LOSS AREA
COMPARE PRICE TO COMPETITIVE MARKET
INEFFICIENCY AND OLIGOPOLY
PRICE
NEVER = MIN ATC
OUTPUT
RESOURCES
MU
> MC
NON-PARETO
OUTCOME
MARKET
FAILURE
WRITE OUT AN EXPLANATION TO ONE OF THE
CASES ON THE EFFECTS
CHANGED
DEMAND
CHANGED
COST
MONOPOLISTIC COMPETITION
RELATIVELY
FREE ENTRY AND EXIT
LARGE
NUMBERS OF POTENTIAL SUPPLIERS
SOME
PRODUCT DIFFERENTIATION
BRAND
IDENTIFICATION
CONTINUOUS
PRODUCT DEVELOPMENT
ADVERTISING
AS A FIXED COST
=>
HIGHER VOLUME MEANS LOWER ATC
LONG
RUN EQUILIBRIUM
EXAMPLE:
EFFECT OF DEMAND CHANGE
SHORT
RUN EQUILIBRIUM
SHOW
PROFIT/LOSS AREA
LONG
RUN EQUILIBRIUM
COMPARE
PRICE TO COMPETITIVE MARKET
ADVERTISING AND PRODUCT
DIFFERENTIATION
PURPOSE
: TO INCREASE DEMAND
PURPOSE
: TO REDUCE THE ELASTICITY OF DEMAND.
SIMULTANEOUS ENTRY/EXIT EXPLANATIONS
INFORMATION
PROBLEM
NEW
FIRMS COME IN BECAUSE THEY EXPECT PROFIT
OLD
FIRMS LEAVE BECAUSE THEY CAN'T DELIVER PROFIT
INDIVISIBILITY
PROBLEM
INEFFICIENCY AND MONOPOLISTIC
COMPETITION
PRICE
NEVER = MIN ATC
OUTPUT
RESOURCES
MU
> MC
NON-PARETO
OUTCOME
MARKET
FAILURE
WRITE OUT AN EXPLANATION TO ONE OF THE
CASES ON THE EFFECTS
CHANGED
DEMAND
CHANGED
COST
PRICE LEADERSHIP MODELS/TACIT COLLUSION
PRICE
NEGOTIATIONS THROUGH THE MEDIA
PREDATORY
PRICING
LIMIT
PRICING
LIMIT PRICING USED TO DETER ENTRY
GAME
THEORY
USING
EXCESS CAPACITY FOR INTIMIDATION
PRICE DISCRIMINATION
MARKET
DIVISION
BUYING
MEDICINE IN CANADA
BARRIERS
TO RESALE
RESPONSE
PARTIAL PRICE DISCRIMINATION
MR
= MC, AGAIN
MR
ON PRICE DISCRIMINATION
EXAMPLE..
AIR FARES (SEE FIGURE, NEXT PAGE,
USE
SHIFT-F7-6 TO VIEW)
EXAMPLE:
INTERNATIONAL MARKETS/MULTIPLE MARKETS
DUMPING:
SELLING AT A LOWER PRICE IN FOREIGN MARKETS
W.T.O.
WORLD TRADE ORGANIZATION...REPLACED G.A.A.T.
ENFORCES
TRADE RULES
PRICE
DISCRIMINATION/AIRLINE PRICING
|
|
THE BOTTOM LINE: PROFIT MAXIMIZATTION REQUIRES
1. ALL MARGINAL COSTS TO BE EQUAL
ACROSS ALL MARKETS
2. ALL MARGINAL REVENUES (NOT PRICES)
TO BE EQUAL OVER ALL MARKETS
3. ALL MC = ALL MR
MARKET FOR INFORMATION
ADVERTISING AND PRODUCT
DIFFERENTIATION
PURPOSE
: TO INCREASE DEMAND
PURPOSE
: TO REDUCE THE ELASTICITY OF DEMAND.
GAME THEORY
THE
ECONOMIC THEORY OF ADVERTISING
WHAT
IS THE IDEAL LEVEL OF EXAGGERATION?
EXAGGERATE
CRITICISM THE QUALITY OF COMPETING
PRODUCTS.
BUT
NOT SO MUCH THAT CONSUMERS DISCOVER THE TRUTH
SUCCESS
IMPLIES THEY NEVER FIND OUT
LIMIT
EXAGGERATION ABOUT THE QUALITY ITS OWN
PRODUCT.
EXAMPLE:
NEGATIVE CAMPAIGN ADVERTISING
WHY
NEGATIVE ADVERTISING?
EXAGGERAGE
OPPONENT'S FLAWS TO A LARGE EXTENT
DON'T
CLAIM TOO MUCH FOR YOURSELF
PUBLIC
DISCOUNTS THE SOURCE OF INFORMATION
LACK
OF ETHICAL CONSIDERATION