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ECN 121B Study Guide - Spring 2019, Comprehensive Final Exam Notes - Market Power, Scientific Management, Supply Chain


Department
Economics
Course Code
ECN 121B
Professor
Erich Muehlegger
Study Guide
Final

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ECN 121B

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Lecture 1 Notes
Perfectly competitive market
o Many, small firms
No corporations
o Same/similar products
o Ability to freely enter and exit market
Monopoly
o One firm
This firm can set the prices of goods or input
o No price discrimination
Monopolist can’ charge different people different amounts
o Difficult entry
In the long-run profits must be sustainable for one firm
Market Power
o The ability of a firm to raise prices over marginal cost
o Only powerful firms can do this
o So in a perfectly competitive market, there is no market power
o However, if there are monopolies, they should have a lot of market power
Nash Equilibrium
o Outcome in which no one can do better by changing his or her actions
unilaterally
o Markets often deviate from the Nash Equilibrium
Markets are much more complex
o Game theory helps provide intuition about when the deviations occur
Two types of competition
o Bertrand Competition
Competition in prices with the same products
Firms can determine what price they want to sell at
Firms can produce as many or as little as they want
All firms need to do is meet demand
o Cournot Competition
Competition in quantities with the same products
If firms choose lower quantities, the market price will start rising a
little bit
Each firm in Cournot competition strategically changes its methods
based on other firms
Differentiated Product Bertrand
o Price competition with different products
o Products can differ based on geography and/or by their attributes
Repeated Competition
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o Good for firms
o Allows for firms to act strategically
o Allows firms to implement many ideas to outsell other firms
o Repetition also allows firms to implement ideas that don’t work when
interacting with a competitor once
o Repetition gives firms incentive to cooperate
Intuition
o Future periods can be used to reward cooperation and punish aggressive
competition
Net Present Value
o Aka NPV
o NPV of future profits is the sum of the discounted stream of profits
Future Profits
o Firms should value profits now more than future profits
o This is because firms are supposed to create as much cash as they can in
the present than in the future
this is because you never know what the future may bring
o this is why sports contracts always involve paying players the least in the
first season and more and more in the subsequent seasons
o a dollar earned today can be invested to earn more than a dollar in the
future
o Also, a dollar earned today may be needed to stay in business in the first
place
Tacit Collusion
o This happens when two firms agree to play certain strategies without
letting anyone else know
o Firms undergo actions that are likely to minimize the response from other
firms to get an upper hand on other firms
E.g. they minimize response to avoid the opportunity to price cut
the opposition
Cartel
o Competitors coordinate prices
Avoids conflict
o There is an explicit agreement among firms in an industry to restrict
competition
o This allows for high prices to be sustained
o This is why drugs are always extremely expensive (and mostly illegal), no
matter who sells them
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