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MICROECONOMICS (Monopoly (Pricing with market power uniform = all…

- - - - 2nd Degree:
        a) Non-linear Prices: Prices depend on quantity -> different prices per unit
        ex. Quantity discount, package prices, block pricing
        Two-part tariffs (Total price = T+p*q; T= Consumer surplus, p=MC)
        b) Self-selection
        
        Product differentiation ex. Business and Economy class (incentive compatibility!)
        
        Flexibility ex. length of stay requirements, early bird discount
        ex. Coupon (allow price discrimination: only customers with very elastic demand use coupons)
      - 3rd Degree ex. Student discount
        Profit = P1Q1+P2Q2-C(Q1+Q2)
        -> MR(Q1)=MC(Q1+Q2) and MR(Q2)=MC(Q1+Q2)
        -> MR1=MR2 (because MR=P(1+1/E)
        -> P1/P2=(1+1/E1)/(1+1/E2) Price is higher for the consumer group with the less elastic demand
        Even if third-degree price discrimination is feasible, it may not pay to sell to both groups of consumers if marginal cost is increasing
      - 1st Degree = perfect
        Price = Willingness to pay = Reservation price
        -> MR= Reservation price of marginal consumer
        -> MC = Reservation price; Q*= D(MC)
        -> No DWL, Profit = Producer surplus monopoly + consumer Surplus + DWL (Maximum!)
        imperfect first degree price discrimination: individualized, but no exactly willingness to pay (insufficient information) ex. car salesman
  - - - Economics of Scale
        = Situation where output can be doubled for less than a double of cost
        -> natural monopoly: economies of scale are so large that is is most efficient for a single firm to serve the market (ex. high set up costs, konstant marginal cost -> decreasing average costs)
        :pencil2:Natural monopolies
        = Firm can produce the entire output of the market at a lower cost than what it would cost if there were several Utilities ex. electricity, gas, telephone service often natural monopolies
        -> Strong regulations ex. Price regulation (can reduce DWL)
        
        Patents
        
        Licences
        
        Complete and exclusive control of input
        
        networking effect
        
        switching costs
        
        advertising
  - - - FOC: MR=MC
        
        Perfect competition: P is sonst. -> P'=0 => MR=P=MC
        
        Monopolist: P is downward sloping -> P'< 0 => MR(Q)<P(Q); MR=MC < P
      - Taxation
        
        MR(Q) = MC(Q)+ t
        
        Price increase can be higher than t
        
        Rule of thumb: P=MC/(1+(1/Ed))
      - Multiplant Monopolist
        
        Same MC between the plants
        
        MR=MC => MR (Q1+Q2) = MC1(Q1) = MC2(Q2)
    - - Elasticity:
        
        MR=P+P(1/Ed) <=> MC=P+P(1/Ed)
        
        measure of market power: (P-MC)/P= -1/Ed
        
        elastic: very reactive (Ed >1)-> low market power
        
        inelastic: less reactive (Ed < 1)-> higher market power
        
        if the MC=0 then profit maximization = revenue maximization and the revenue is maximized if Ed = -1
    - - Social costs of market power
        
        Deadweight loss( P>MC + elastic demand)
        
        Rent seeking = Spending money in socially unproductive efforts to acquire, maintain, or exercise market power ex. lobbying, uninformative marketing -> Social cost > DWL
        
        Inefficiency in production:
        :pencil2:X-Inefficiency = Production costs are not minimized for the given technology and production quantity
        
        Dynamic efficiency/ inefficiency? (trade-off between max. profits now and future)
- - - - :checkered_flag:In a sealed-bid second-price or an English auction, bidding one's reservation price is a weakly dominant strategy for every potential buyer
        :checkered_flag: In a sealed-bid first or a Dutch auction a bidder's optimal strategy depends on the expected bidding strategies of the other bidders and the statistical distribution of the reservation prices
        -> in equilibrium every bidder bids less that their reservation price
        
        Revenue Equivalence Theorem
        = There is a broad category of auction games for which equilibrium expected bidder surplus are the same across the different auction formats, ceteris paribus
        -> auction format doesn't matter
        -> bids will different event though expected revenue is the same
        
        Maximize auction revenue:
        
        let as many participate as possible
- - - - Emission Standards
        
        Set a legal limit on the level of emissions
        
        Enforcement by sanctions, fines, prosecution
        
        Firms produce at the efficient level and incur the associated abatement costs.
        
        The emissions standard increases the average cost of production and therefore reduces entry
        
        Advantage:
        
        Assume that policymakers are uncertain regarding the abatement cost curves.
        
        Without knowing the exact abatement costs, policymakers will not know exactly the optimal emissions level and the optimal standard or fee
        
        Standards create a higher certainty about the level of emissions that will be reached
      - Emission fees
        
        Charge levied on each unit of a firm's emissions.
        
        Set per-unit fee equal to MCA at the efficient emission level
        
        Firm will produce at the efficient level
        
        Firm pays fee for the units of pollution emitted
        
        Advantage:
        
        Assumptions
        – Must set same standard or fee for all firms
        – Firms have asymmetric abatement costs
        
        Under these assumptions, fees achieve the same level of abatement at a lower costs than the standard
        
        The fees also serve as an incentive to install technology to further reduce emissions
      - Transferable emission permits
        System of permits allows trade of emissions
        – Each permit is a license to emit a unit of emissions
        – Agency sets the overall level of emissions by issuing a fixed
        number of permits.
        – Permits are tradable on a competitive market: Price of permit = Marginal cost of the reduction of emissions of all firms
        – Permit prices are determined by forces of supply and demand in the competitive market: Firms with high marginal costs of abatement will buy permits from firms with lower marginal costs
        -> In a market equilibrium the marginal costs of all participating firms will be equal
        Advantage:
        
        Fixed goal concerning emissions reached with minimal costs (combines advantages of standards and fees).
        
        Better than standards and fees if costs of abatement of the firms are heterogeneous and if there is uncertainty regarding the level of emissions.
        
        Possible Problems:
        
        How to distribute the permits („Grandfathering“ or auction)?
        
        Imperfect competition in the market for emissions?
- - - - 2. Finitely repeated games
        Backward induction -> same outcome as one-time game
        
        Cooperation is possible if:
        
        termination point is unkown
        
        uncertainty regarding competitor's rationality
        
        Cooperation is difficult if:
        
        many players
        
        "impatient" (value present payoff higher)
        
        uncertainty about prices ex. fluctuating demand
      - 1. Infinitely repeated games
        
        cooperation is possible because deviation can be punished
        
        ex. Grim tigger = deviation leads to competition in every future period
        Tit-for-Tat = the firm follows as soon as the competitor lowers its price and will increase again immedelty when the other decides to increase
      - Sequential games
        
        Examples:
        
        Stackelberg Model
        
        product choice game (1st mover advantage)
        
        attacks and counter attacks, market entry, negotiations
        
        Graphical: Decision tree
        
        Subgame perfection
    - - Dominant strategy
        = a strategy that is always more profitable than all other possible strategies regardless of the opponent's actions
        -> If equilibrium exists = Nash equilibrium
      - Maximin strategies
        = Strategy that maximizes the minimum gain that can be earned
        :warning: outcome don't have to be a Nash equilibrium
      - Pure strategy
        = a strategy in which the payer makes a specific fixed choice
      - Mixed strategy
        = a strategy in which the player makes a random choice among two or more possible actions, based on a chosen set of probabilities
        --> player chooses probability distribution ex. Elf-meter-schießen