EC1P1 - 6) Competition in the Global Age || A+ Verified Solutions.
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EC1P1 - 6) Competition in the Global Age
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EC1P1 - 6) Competition In The Global Age
What is the formula for a markup? correct answers (e/e-1)R
How do we change the utility functon to show preferences? correct answers SN
What is the formula for sum of demand? correct answers SS
How does the price charged depend on the type of competition? correct answers Pc = R
Pm = (form...
EC1P1 - 6) Competition in the Global Age || A+ Verified
Solutions.
What is the formula for a markup? correct answers (e/e-1)R
How do we change the utility functon to show preferences? correct answers SN
What is the formula for sum of demand? correct answers SS
How does the price charged depend on the type of competition? correct answers Pc = R
Pm = (formula for markup)
What is the Lerner index? correct answers Profit per unit sold
Pm - R / Pm = 1/epsilon
price - cost / price is the inverse of PED
What do firms get from selling (monopoly and perfect comp) and what do consumers get from
buying? correct answers Perfect comp - profit = 0
Monopoly - Profit from last week
Consumer - Social benefit of innovation formula (Higher with a lower P - so higher benefit with
Pc instead of Pm)
How frequently do monopolies occur? correct answers Monopolies are everywhere, based on
location, convenience etc.
How could firms gain monopoly power? Why do they want this even with a cost? correct
answers By differentiating your product - don't necessarily need new innovation.
Every firm wants to be a monopolist to charge a mark up on price since competing on price in
perfect competition is difficult.
Firms want to be a monopolist even at a cost F>0, since even if costs rise from differentiation,
they can increase prices.
How does monopoly price get implemented? correct answers Firm offers Pm in a take-it-or-
leave-it deal. Since each consumer has some positive consumer surplus from buying good, they
will take it. It is either that or zero. So, get monopoly outcome.
monopolist makes offer -> consumer decides to accept or not -> transaction takes place
What are alternatives to this way that prices get implemented? correct answers Price
discrimination :
Bilateral Negotiation - Offer higher price to those with higher Bi. Again take it or leave it, but
now to each individually, different prices. They are willing pay more. In the limit, can extract all
the surplus, captures everything. Leads to higher profits
When a monopolist considers raising their prices, they realise they will lose some customers and
will sell less, but make more profit per sale. Monopolist profit is where optimally consider this
trade-off.
, Alternative - Consumers get together and make an offer to the monopolist of R + tiny amount -
which monopolists will accept so they don't make 0 profit.
Why is the alternative not viable? correct answers As they have committed to a price. Alternative
occurs in UK for medicine
What are important factors to take into consideration when monopolies are setting prices? correct
answers (1) Rules of the game matter- who can enter, who moves first, who makes offer- how is
offer written, as a price or quantity
(2) Number of firms tells you close to nothing
- counting firms is not indicative of who has "market power"
- and even if it is a monopolist firm, it may be that they have no pure profits if there is a fixed
entry cost F.
Who are the players, what are the actions and what information do the sellers have under perfect
competition / monopoly? correct answers PC :
- Infinite buyers and sellers
- Choose quantity
- Know the price
Monopoly :
- One seller, many buyers
- Choose price
- Know the demand cure
When 2 firms set a price simultaneously for homogenous goods, without communication, what
are the possible profit for each firm? correct answers My price is higher - I get all profits
Same price - we split profits
Lower price - I get 0 profits
How will one firm set prices, if they know how the other firm has acted and the price they have
set? correct answers Our price - A your price - B
If B is greater than monopoly price, we set price at monopoly and earn monopoly profits
If Pb less than monopoly price but higher than our R, then Pa = Pb minus tiny amount.
If Pb = R then we choose Pc - earn no profits.
What is a Nash equilibrium? correct answers Nash equilibrium: the outcome that results from
both players being at their best responses.
What is the equilibrium price with 2 agents? correct answers Only intersection point is where
price of both agents = Pc
This is the Bertrand Model
Any price above it would imply one firm can enter and undercut the existing firm
What information do players in a Bertrand game have? correct answers They know the demand
curve
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