April 21Any firm- not just a monopoly- that faces downward has some market powerPrice gouging for gasolineSome states are illegal to price gouge’Market powerGovt intervention is not justified in every case that involves market powerAbuse of market powerUndue market powerExorbitant market powerMergers…Horizontal merger2 firms in the same market or industryvertical merger2 firms in different stages of production of the goodwho looks at mergersdepartment of justicefederal trade commissionin some cases other government entitiesfederal communications commissionfederal energy regulatory commissionstate public service commissionsis this merger in the public interest?Mergers create efficiencies- lower costsFixed costs spread over larger output produces economies of scaleElimination of duplicate functions (overhead functions)Will these efficiencies be passed onto customersPage 505 for profit graphMerger guidelinesDoes/would the merger significantly harm or reduce competitionMeasures of industry concentrationFour firm concentration ratioPrevent of the market accounted by the top 4 firmsUsually measured in dollars or salesHerfindahl indexMeasures market concentrationEach firms market share is squaredThen all firms are added togetherIf it is less than 1500 then it is considered unconcentratedIf it larger than 2500 then it is highly concentrated, and the merger is looked at closely and possibly deniedThe mismatchGenerally accepted that greater industry concentration equals less competition but this is not trueWhich is a better measure?Herfindahl indexHerfindahl index and merger guidelinesIndices used to determine whether the government will approve mergersIf the merger increases HH index by >100 points merger it may be challengedIt will be challenged if it goes up by 200Page 506Anti trustEntire field of law and economics looking atAre firms operating as monopolies and are consumers being harmed by this?And now we move on…OligopolyA small number of firms2-122 firms is a duopilydifficult to enter the market as a sellersatellite tvdelivery servicehigh degree of interdependence among firms…why so few firmsagain barriers of entrieseconomies of scalelegalities…oligopoly—interdependencefirms base their decisions on what they believe other firms will do… pricing/ production/ market entryapril 28th april 23 was on paper**oligopolyno one single modelBertrand model: one firm reacts to the price that another firm is chargingCournot model: one firm reacts to the quantity of output that another firm is producingDominant firm model: a single firm sets the price in a market and the competitive “fringe” must match itCartel model: a group of firms that acts like one single firm (a monopoly) regarding decisions on output and procing…Price collusionAgreement among firms to set the price at a certain levelImplicit… multiple firms making the same pricing decision even though they have not consulted with each otherExplicit… price fixing (or quantity fixing)ADM: the informantAmerican airlinesCartelsCollusion: agreementCartel us the group to collude by agreeing to restrict output to increase pricesOPECPage 469Collusion is a gameCartels and collusionIncentive to cheat is strongPossible to model repeated games in which a cheater in one period is punished in subsequent periodsTit-for-tat strategy…Hubbard chapter 16: price strategyLaw of one priceIdentical products should sell for the same price everywhereWhat if it didn’t hold…Sells 100 in LawrenceSells 140 in OPBut in LawrenceDrive to OP and sell for profitLaw of one priceOnly true if transaction costs are zeroTransaction costs? Costs associated with the act of buying or sellingRun to grocery store to buy frozen pizzaGasTimeEnergyPrice discriminationCharging 2 different people 2 different prices for the same service or productIf there are costs differences or quality difference, that is not price discriminationThree necessary conditions to price discriminateFirm must have some market powerConsumers must have different willingness to pay and firm must know thisFirm must be able to segregate customers into groups and prevent reselling across groupsThree forms of price discriminationFirst degree (perfect price discrimination)Each customer is charged exactly the price that they are will to pay (auction on ebay)Second degreeThe price you pay per unit varies depending on the amount of units you are buying (phone minutes)Third degreeCustomers are split into groups and each group is charged a different price based on their elasticity’s (in state and out of state tuition)Senior versus regular price at Denny’sDifferent groups have different elasticitiesMaximizing profits using 3rd degree price discriminationA single firm is serving 2 marketsFirms costs are the same regardless of what market it is selling toThree decisionsRight quantity to produce overallRight quantity to sell in each marketRight price to change in each market4-30other pricing strategiescost plus pricing—5321. Take the average cost at some level of production2. Add a “mark up” to that…3. One way to spread the fixed costs over multiple products…4. And…5. …an incredibly bad ideacost plus pricingparker hannifanpunchlineplace the mark up on the product with the more inelastic demandrevenues are less affected benefitting the firmconsumer surplus is affected benefitting customerseven if the mark up is 2 times as high2 part tariffcustomer pays one price (initial charge) for the right to buy as much of a related good at another priceadmission to amusement park and tickets to individual ridesannual fee for country club and fee for each round of golfand now we move onchapter 17 the labor marketdemand for labor is derived demandif there is no demand for the thing the labor produces… no demand for the labor itself…demand for laborwe assume demand for labor is downward slopingWage rate- y axisQ of labor demanded- x axisMarginal revenue productthe change in total revenue divided by the change in the quantity of labororthe change in the total revenue as a result of hiring one more workerMRP curve is the demand curve for labormay 5thyour final: may 15th at 10:30 am½ the exam : new stuff (chapters 14, 16, 17, and part of 18½ the exam is comprehensivemarginal product= (change in output) / (change in inputs)marginal revenue= (change in total revenue) / (change in quantity of outputmarginal revenue product= (change in total revenue) / (change in input)marginal utility= (change