Econ 1014 exam 3 notes.docx

Econ 1014 exam 3 notes.docx - 1 Chapter 14 Price...

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1 Chapter 14 Price Discrimination Price discrimination is setting different prices for the same product or good. Inelastic demand curve- 3 rd degree price discrimination Perfect price discrimination is different price for every customer 1. No dwl 2. Efficient 3. No surplus - College tuition usually does max willingness to pay to its students - Car dealerships usually know a lot about a buyer if one buys a car, they see what the max willingness to pay would be for someone Is price discrimination bad? No If prices increase output, total surplus will increase Makes it easier for firms to cover their fixed costs Regulate natural monopoly to maintain profits at an efficient level of output Other types of price discrimination Tying- Tying is an often-illegal arrangement where, in order to buy one product, the consumer must purchase another product that exists in a separate market. Ex: printer, HP cartridges, cell phones Consumption of 1 good requires the consumption of a second good purchased by the same firm Bundling- requires that a good be bought along with other goods Monopolies can increase profit by charging different prices in different markets. Less elastic, higher price More elastic, lower price Chapter 15 Oligopoly and game theory Decision strategic theory models we will look at are cartels and oligopolies 1. Barriers to entry 2. Firms can enter but it’s hard 3. Complicated not just 1 firm Strategic behavior In a cartel, restrict output which raises prices to a monopoly level and maximizes profits Everyone argues but people cheat which brings us to game theory
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2 Game theory- when people want to cheat this creates a payoff matrix. (usually involves 2 firms or people) Tells us how each firm cooperates and cheats There is a graph that entails more All players break the rules, so this creates a prisoner’s dilemma Prisoners dilemma - each strategy is to confess to have better outcomes Every player will usually have a dominant strategy of Nash equilibrium Price matching- bad, it usually breaks Nash equilibrium Cartels fail when… 1. Entry is hard 2. Cheats 3. Limited geographic options for entry Some cartels have success when…. 1. Oil 2. DeBeer’s- diamonds theory (talk up diamond’s and make them seem so luxurious when there are things more luxurious than regular diamonds now a days) Price fixing - firms trying to act like a cartel, like a cartel also fails because cartels are illegal - But not illegal to be a monopoly Government supported cartels- Milk industry Agriculture Government supported cartels are the most successful cartels 1. Rules 2. Entry 3. Output - Government has limits for cartels Oligopoly - competition along the few Small # of firms High barriers to entry Firms may not form cartels, but prices tend to be above competitive level (p>mc) Prices tend to be sticky, do not change too much in an oligopoly Positive side of oligopoly= innovative Help fund new innovations Firms compete by having different features
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