Terms in this set (68)
Define Exclusive Dealing
Contract provision which stipulates that the buyer doesn't sell any products that would compete with the upstream firm's profits. There is an efficiency based explanation (to align incentives to engage in promotion/ads) and an anti-competition explanation
Entry is blockaded if:
the incumbent competes as if the entry is no threat
Entry is deterred if:
incumbents modify their behavior so that potential entrants do not enter
Entry is accomodated if:
incumbents behavior allows entrants to profitably enter
Describe the Areeda Turner test (predatory pricing)
Predatory pricing exists if the price is below marginal cost. Idea behind the test is that a profit-maximizing firm chooses to price above marginal cost. The test presumes that if the firm is pricing below MC, it must be doing so for anti-competitive reasons. Applied to Northeaster Telephone Co vs AT&T
provides information about the existence of a product, its prices, or attributes
alters consumers tastes (consumer wants) for the advertised product
How did Ackerberg identify whether advertising was primarily informative or persuasive?
Informative ads can only work on consumers why are inexperienced; persuasive ads will affect demand of both experienced and inexperienced consumers. So Ackerberg compares the effectiveness of ads separately for consumers that have tried the new brand of yogurt vs consumers who haven't tried the new yogurt
Describe the winner's curse
Arose in common value auctions, in which bidders were bidding over some good. All bidders had the same value for the good, but each only sees a signal about the value of the good. The act of winning gives the winning party some indication that it was perhaps too optimistic in its evaluation (received a signal higher than the true value) of the good being sold
Define Vertical Mergers
owning multiple stages of production/marketing, joint ownership of upstream and downstream production
Define Horizontal Mergers
control over productive units that performed the same tasks
Reasons for vertical integration
Circumventing transaction costs, elimination of double monopoly markup, price discrimination, extending monopoly power
Define transaction costs
Costs of negotiating and writing contigent contracts, costs of monitoring, enforcing contractual performance, costs associated with breaches of contractual performance
Explain what happens in double marginalization in words
monopolist upstream firm produces at marginal cost (w), sell y units to downstream firm at price (c), who sells these y units to a final consumer. When the firms are separate, the actions are strategic complements. If either firm increases prices, the other firm will have a greater incentive to raise prices as well. If firms decide to reduce markups separately, neither fully internalize its own increase in prices on the reduction in consumers demand.
Price discrimination is not allowed for legal reasons. What happens if the upstream monopolist mergest with the elastic demand of a downstream firm?
it can sell to the high (a) firm at a high price, leading to a higher retail price that is paid on the market. Also it provides the input to its own downstream producer at a low price, which allows the upstream monopolist to effectively engage in price discrim.
Why is vertical integration beneficial?
Reduces the possibility for hold-up (allowing for efficient levels of investment) between input suppliers and users; also eliminates double marginalization
Why is vertical integration damaging?
foreclosure (extension of monopoly power from the upsream to the downstream market); also enables price discrimination by the upstream firm
Examples of vertical restrictions:
franchise fee, resale price maintenance, exclusive territory, exclusive dealing
Define franchise fee in economic terms
A fixed fee, F, that the buyer of the input pays in addition to the payment that is dependent on the amount purchased p*x
Define price maintenance
contract provision stipulating that the buyer of the input sell the good at a price p
Define Exclusive territory
contract provision which stipulates the markets the buyer of the input can eventually sell to
Define exclusive dealing
contract provision which stipulates that the downstream firm doesn't sell any products that would compete with the upstream firm's products
Solutions to the double marginalization problem
Double marginalization entails of conflicts of incentives along the production/distribution chain. Vertical mergers reduce all decision-makers to a single party. Other solutions inclue franchise fee (upsream monopolist charges c=w per unit of input and a franchise fee) or resale price maintenance agreement (sell the good at price P = (1+w)/2 and impose that the reseller not charge more than that)
How does resale price maintenance (RPM) shift retailers incentives?
removes the incentives to engage in price competition among retailers; allows for the provision of advertising
Define exclusive territories
contract provision which stipulates the markets the buyer of the input can eventually sell to
Define exclusive dealing
contract provision which stipulates that the buyer doesn't sell any products that would compete with the upstream firm's products
Efficiency-based explanations for exclusive dealing
Align incentives to engage in promotions/ads; upsream firms have an easier time assuring quality in their distributors
Anti-competitive explanations for exclusive dealing
Dampens competition between upstream firms; prevents potential entrants if scale economies are important (exclusive dealing)
Anti-competitive explanations for exclusive territories
dampens competition between retailers
Beer Distribution Story (Exclusive Dealing)
Brewers=>distributors=>retailers. Exclusive dealing and exclusive territories in brewer=>distributor contracts (exclusive dealing is 10% more likely in states that allow outdoor ads)
Why would there be a relationship between exclusive dealing arrangements and prohibitions on outdoor ads?
brewers want advertisors to sell on my behalf and not the behalf of their competitiors, so they enter into exclusive dealing
What would happen if there wasn't exclusive dealing in beer story?
distributors buy beer from multiple breweries; have less of an incentive to advertise, spend effort in maintaining attractive displays, for any one brewery
Dr. Miles Medical Co vs John D Park & Sons (1911) explain the case
Dr. Miles manufactures drugs produced by secret formulas, Park is a wholesaler of drugs. Miles sells drugs to whosesalers and retailers under contract which required minimum prices at which they could resell the drugs. Park refused to go along with RPM agreement and sold at lower prices, causing other resellers to violate the contract. Main issue: validity of those agreements
Dr Miles Vs Park: plaintiff argument (Miles)
Manufacturers have the right to set the terms of sale for their products. If they don't want to sell to someone, they are free to do so. Standardized retail prices are needed to avoid confusion and damage from undercutting
Dr Miles vs Park: defendant argument (Park)
Manufacturers are free to set the terms of their sale of products but not the terms of the resale of their products. The effect of the agreement is the same as if all retailers and wholesalers of the drug had formed a cartel and fixed the retail price. RULING FAVORS DEFENDANT
US v Colgate (1919) explain the case
Colgate is a manufacturer of soap and toilet articles; sold its products to wholesale and retail dealers under the condition that if they sold below some minium price, Colgate would cut off the future supply
US v Colgate: plaintiffs argument (US)
Colgate's actions effected an unlawful combination (i.e. cartel) just as in Dr. Miles case
US v Colgate: defendants argument (Colgate)
There was no contract requiring dealers to adhere to the minimum prices. The retailer after buying could sell the good at any price he sees fit, or not sell at all. Retailer was free to exercise its rights of resale and the manufacturer was free to exercise its right not to sell. RULE IN FAVOR OF DEFENDANT
Other related cases past Colgate
US v Park: right to free exercise only exists in relationships in which the purchaser is a retailer. Kiefer-Stewart v Seagram: illegal to fix MAXIMUM resale prices
Define predatory pricing
exists if a firm intentionally reduces prices below costs in order to reduce competition in a market in which it operates; illegal under the Sherman Act bc it is monopolizing behavior
Northeastern Telephone Co v AT&T (1981) Background
AT&T manufactured telephone equipment; Northeastern is an entrant in the market; its revenues at 5% of that of AT&T; Northeastern charges that AT&T prices for telephones are predatorily low; Northeaster never provided the evidence about relationship between AVC and price
Define Areeda-Turner Test
Predatory pricing exist if the price is below MC; MC is difficult to observe, so use AVC instead
Which accounts for more advertsing expenditures - media or nonmedia?
Media accounts for 3/5 of total expenditures (TV, radio, newspaper, magazine, yellow pages, Internet); non-media is direct mailings, promotions, coupons, catalogs, business publications, sponsorship of special events
Define informative advertising
Advertising that provides info about the existence of a product, its prices, or attributes (characteristics, locaton of sale); pro-competitive b/c when consumers are aware of close substitutes, firms cannot charge high prices. It also reduces product differentiation due to lack of info (lowers search costs)
Define persuasive advertising
Advertising that alters consumer tastes (creates wants) for the advertised product
Why might there be too little advertising?
More ads lead to more informed consumers; its costly for firms to advertise, who may not be able to fully reap benefits
Why might there by too much advertising?
Duplication; ads are costly; it may be inefficient to have both firms pay the cost if only one is going to reap the benefits
Define signaling in advertising
high advertising; if (you) the consumer comes to (me) the firm, the firm will deliver a high quality/ low cost product
What does this equation mean: b(Ph,Ah)=1
If a consumer sees a firm with prices and advertising levels given by Ph and Ah, consumers would form the belief that the firm is an "h" firm - or a high quality firm
What does the phrase "low quality firm finds it more profitable to not try to mimic what a high-quality firm would do" mean?
Even though it could make consumers believe it was high quality by choosing Ph and Ah, an "L" (lower quality) firm would not choose to do so.
How does Ackerberg empirically distinguish informative and prestige effects of advertising?
Informative ads only work on consumers who have not already tried the product; experienced consumers will know the product's attributes and price (except for sales); persuasive ads will affect the demand of both experienced and inexperienced customers
For Yoplait yogurt, it advertising informative or persuasive?
Mostly informative, affects inexperienced consumers more
Background of Mexican Privatized Social Security
Mexican SS was gov't administered until 1992; then the gov't creates private accounts administered by private firms. Tight regulations on what can be purchased (gov't bonds); 17 total firms; lots of variation in fees on the outset of the program (fees based on assets under management up to 4.8% and fee based on load up to 26.2%)
What happened with Mexican privatized social security?
Mexican regulators expected that the market for account administration would be competitive given the large number of firms; firms compete (not on prices as expected) but by advertising; lack of information softens competition;
Reform in 2008 so that gov't only allows private firms to charge balance fees, making it easier for consumers to compare fees
Define discrete random variables
countable variables (like the value from one of a spin of a roulette wheel or number of people who share a birthday)
define continous random variables
Define English Auction
All bidders start in the auction with a price of zero; the price rises continuously, and bidders may drop out at any point in time. Dropping out is an irreversible decision. The auction ends when only one bidder is left; the bidder pays the price at which the second-to-last bidder dropped out. Dominant strategy is to bid your valuation, just as in the sealed-bid second price auction
Define Dutch Auction
Price starts at a very high level and drops continuously; at any point in time, a bidder can stop the auction and pay the current price, then the auction ends. There are N bidders, each with valuation v.
Revenue Equivalence Theorem
All auctions (for a single god) with risk-neutral bidders, where the good goes to the bidder with the highest value, and bidders with the lowest valuation have an expected payoff of 0 have the same expected revenue for the seller. THE CHANGE IN BEHAVIOR EXACTLY OFFSETS THE EFFECT OF RECEIVING THE THE HIGHEST VS THE SECOND-HIGHEST BID
First price auction
bidders share their bid (bid less aggressively), seller gets highest bid
Second price auction
Bidders bid their true value (more aggressively); seller gets the second highest bid
Common value auctions
When common values may come about, item being sold has some underlying value but its difficult to gauge (right to drill oil in a particular field; jar of pennies). Bidders must account that winning or conveys information about the info of other bidders
The act of winning gives the winning party some indication that it was perhaps too optimistic in its evaluation of the good being sold. As the number of bidders gets larger, each individual bidder must shade their bid more intensely to avoid the winner's curse.
Solutions to the winner's curse
If bidder's know about the existence of the winner's curse, they will shade their bids
How can you mitigate bid-shading
restricting the number of bids; sell fewer shares than are demanded by IPO price
Collusion and Cartels
Except the winner, there is no relationship between bidders valuations and their bids. Losers in the cartel can bid just below the bid of the winner, or very weakly, without affecting the behavior of the winner.
Why is highway construction susceptible to collusion?
the set of participating firms in the auctions was stable => long-term benefits of maintaining a collusive agreement are high. Gov't publishes bids in all auctions => hard to defect on a collusive agreement. Construction firms belong to a trade union => easy for managers to talk/coordinate activity
How do we detect bid rigging in procurement auctions?
compare firms costs to their bidding behavior; whether firms are close to their capacity (whether they have a backlog of roders) is their measure of cost. Main result: non-cartel firms bid more aggressively when they have low costs; cartel firms that are close to winning bid more aggressively when they have low costs. Not so for cartel firms that are far from winning