ECON3121 Managerial Economics (T1/2021)
Table of Contents
Week 1: Perfect Competition and Monopoly ... 4
Elements of a market ... 4
Demand/ consumer preferences: ... 4
Firm costs/ technology: ... 4
Conduct/ market structure: ... 4
1. Perfect competition ... 4
2. Monopoly ... 5
Surplus and efficiency ... 5 Market concentration ... Error! Bookmark not defined.
1. Concentration Ratio ("#$) ... Error! Bookmark not defined.
2. Herfiendahl-Hirschman Index (HHI) ... Error! Bookmark not defined.
3. Lerner Index (LI) ... Error! Bookmark not defined.
Summary ... Error! Bookmark not defined.
Week 2: Game Theory and the Cournot Model ... Error! Bookmark not defined.
Introduction to game theory ... Error! Bookmark not defined.
Strategies ... Error! Bookmark not defined.
Static games ... Error! Bookmark not defined.
Nash equilibrium ... Error! Bookmark not defined.
The Cournot model ... Error! Bookmark not defined.
Basic Cournot Model: two firms ... Error! Bookmark not defined.
Multiple identical firms (N firms) ... Error! Bookmark not defined.
Cost Heterogeneity: two firms with different marginal costs, &1 and &2 ... Error! Bookmark not defined.
Concentration and anti-trust ... Error! Bookmark not defined.
Lerner Index and Cournot ... Error! Bookmark not defined.
Summary ... Error! Bookmark not defined.
Week 3: The Bertrand Model and Price Competition ... Error! Bookmark not defined.
Pure Bertrand Duopoly ... Error! Bookmark not defined.
Capacity constraints ... Error! Bookmark not defined.
Discontinuous demand (Hotelling model) ... Error! Bookmark not defined.
Hotelling model ... Error! Bookmark not defined.
Summary ... Error! Bookmark not defined.
Week 4: Dynamic Games and the Stackelberg Model ... Error! Bookmark not defined.
Dynamic games ... Error! Bookmark not defined.
Stackelberg Model (Sequential Cournot Model) ... Error! Bookmark not defined.
Sequential Price Setting Model (Sequential Bertrand Model) ... Error! Bookmark not defined.
Sequential Hotelling Model ... Error! Bookmark not defined.
Low price guarantees ... Error! Bookmark not defined.
Summary ... Error! Bookmark not defined.
Week 5: Price Discrimination ... Error! Bookmark not defined.
Price discrimination ... Error! Bookmark not defined.
Feasibility: price discrimination and market power ... Error! Bookmark not defined.
Perfect price discrimination (first-degree) ... Error! Bookmark not defined.
Two-part tariffs (an example of first-degree PD) ... Error! Bookmark not defined.
Group pricing (third-degree) ... Error! Bookmark not defined.
Menu pricing (second degree) ... Error! Bookmark not defined.
Summary ... Error! Bookmark not defined.
Week 6: Product Variety and Product Quality ... Error! Bookmark not defined.
Introduction ... Error! Bookmark not defined.
Product variety ... Error! Bookmark not defined.
Types of differentiation ... Error! Bookmark not defined.
Horizontal differentiation ... Error! Bookmark not defined.
Single store monopolist’s situation ... Error! Bookmark not defined.
Single store situation (non-monopolist) ... Error! Bookmark not defined.
$ stores ... Error! Bookmark not defined.
Variety and welfare (socially optimal?) ... Error! Bookmark not defined.
Price discrimination ... Error! Bookmark not defined.
Vertical differentiation ... Error! Bookmark not defined.
Crimping ... Error! Bookmark not defined.
Summary ... Error! Bookmark not defined.
Week 7: Guided Reading of an Empirical Paper: Yelp and the Industrial Organisation of Restaurants ... Error! Bookmark not defined.
Why study Yelp? ... Error! Bookmark not defined.
Setup ... Error! Bookmark not defined.
Challenge: endogeneity ... Error! Bookmark not defined.
Data sources ... Error! Bookmark not defined.
Fixed effects ... Error! Bookmark not defined.
Regression discontinuity ... Error! Bookmark not defined.
Yelp and chains ... Error! Bookmark not defined.
Is Yelp’s impact on chains different? ... Error! Bookmark not defined.
Yelp penetration and chain revenue ... Error! Bookmark not defined.
Conclusions ... Error! Bookmark not defined.
Summary ... Error! Bookmark not defined.
Week 8: Advertising ... Error! Bookmark not defined.
Introduction ... Error! Bookmark not defined.
A model of advertising ... Error! Bookmark not defined.
Persuasive and informational advertising ... Error! Bookmark not defined.
Persuasive advertising ... Error! Bookmark not defined.
Informational advertising ... Error! Bookmark not defined.
Advertising to signal quality ... Error! Bookmark not defined.
A caveat: advertising frauds ... Error! Bookmark not defined.
Advertising and competition: model of informational advertising (Hotelling) Error! Bookmark not defined.
Summary ... Error! Bookmark not defined.
Week 9: Entry and Predation ... Error! Bookmark not defined.
Entry ... Error! Bookmark not defined.
Determinants of entry ... Error! Bookmark not defined.
Types of entry (Geroski 1991) ... Error! Bookmark not defined.
Predation ... Error! Bookmark not defined.
Reality ... Error! Bookmark not defined.
Market structure and entry (Bain, 1956) ... Error! Bookmark not defined.
Predatory conduct ... Error! Bookmark not defined.
Limit pricing ... Error! Bookmark not defined.
Stackelberg model with fixed costs ... Error! Bookmark not defined.
Is the incumbent is being predatory? ... Error! Bookmark not defined.
Is predation credible? ... Error! Bookmark not defined.
Summary ... Error! Bookmark not defined.
Week 2, 3, 4: Comparing models ... 6
Week 5: Price Discrimination ... Error! Bookmark not defined.
Week 1: Perfect Competition and Monopoly
Elements of a market
Demand/ consumer preferences: how much consumers value a good
Demand curve: relationship between the marginal consumer’s willingness to pay for a unit of the good vs the quantity consumed
- ! = # − %&
Elasticity: price sensitivity of a good - ' =
% #$%&'( )& *% #$%&'( )& +
=
,*,+×
+*=
-./×
+*- More elastic: ∆& > ∆!, flatter D curve, lower profits - Less elastic: ∆& < ∆!, steeper D curve, higher profits
Marginal revenue (MR): using the “twice as steep” rule, which states that multiplying the slope of the demand by 2 will get the MR curve
- -. = # − /%&
Firm costs/ technology: how firms produce the good
Total costs (TC(q)): all costs associated with producing the good Marginal costs (MC(q)): cost of producing an additional unit of good
- -0(2) = 40′(2)
Conduct/ market structure: structure of the market and how they change outcomes - Assumption: firms are profit-maximising
1. Perfect competition - Assumptions:
o Homogenous divisible output o Perfect information
o No transactional costs
o Price takers: firms are small and can’t influence the price o No externalities
o Free entry and exit - Firm’s problem: Π = !2 − 0(2)
o ! is given by the market
o 2 is the quantity chosen by the firm to produce o 0(2) is the total cost of producing 2 units - Short-run condition: positive profits
o The firm will produce until ! = -0(2) - Long-run condition: zero-profit condition
o The firm produces until ! = -0(2) in the short-run, making positive profits > other firms enter
o In the long-run, free entry leads to a zero-profit condition
o Outcome is efficient (market can still be efficient if making positive profits)
2. Monopoly - Assumptions:
o A single firm sells the product o No entry allowed
o No substitutable goods
o Firm may choose either price or quantity, but bounded by demand curve o Linear pricing only, no price discrimination
- Firm’s problem: -.(&) = -0(&) to solve for profits
o Firm’s demand curve = market demand curve since no entry allowed, i.e.,
! > -0 and the firm receives positive profits Surplus and efficiency
Surplus: measurement of how well-off consumers and firms are in the economy
- Consumer surplus (CS): difference between consumers’ willingness to pay and the amount they actually pay
- Producer surplus (PS): difference between the cost of production and amount they actually receive
- Total surplus: consumer surplus + producer surplus Surplus and efficiency under perfect competition
- Maximises total surplus
o Producing less would reduce surplus as consumers would be willing to pay more than it costs to produce the good
o Produce more would reduce surplus as additional goods would cost more to produce than the consumer’s willingness to pay
- Efficient: cannot change the allocation to make someone better off without making someone else worse off
Surplus under monopoly
Week 2, 3, 4: Comparing models
Simultaneous h Simultaneous
Cournot (2 firms) Hotelling Sequential
Bertrand Stackelberg (Sequential Cournot)
Sequential Hotelling
Competition Price Quantity Different tastes Price Quantity Different tastes
Best response !
!= !
"= $ %
!∗= & − $ 2) − %
"∗2
%
"∗= & − $ 2) − %
!∗2
p
$∗(p
!)
= p
!+ $ + . p
!∗(p
$) 2
= p
$+ $ + . 2
!
!= !
"= $ %
"∗(%
!)
= & − $ 2) − %
!2
%
!∗= & − $ 2)
p
!∗(p
$)
= p
$+ $ + . 2 p
$∗= $ + 3.
2 Equilibrium
quantities N.A. %
!∗= %
"∗= & − $
3) D
$∗= D
!∗= 1 2
N.A. %
!∗= & − $
2)
%
"∗= & − $ 4)
D
$∗= 31 8 D
!∗= 51 Equilibrium price !
!= !
"= $ 8
5 = 2$ 5 = & + 2$
3
p
$∗= p
!∗= . + $ !
!= !
"= $ 5 = & + 3$
4 p
$∗= $ + 3.
2 p
!∗= $ + 5.
2
