Monopolies? a Theory of Disequilibrium Competition with Uncertainty
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Microeconomics Exam Review Chapters 8 Through 12, 16, 17 and 19
MICROECONOMICS EXAM REVIEW CHAPTERS 8 THROUGH 12, 16, 17 AND 19 Key Terms and Concepts to Know CHAPTER 8 - PERFECT COMPETITION I. An Introduction to Perfect Competition A. Perfectly Competitive Market Structure: • Has many buyers and sellers. • Sells a commodity or standardized product. • Has buyers and sellers who are fully informed. • Has firms and resources that are freely mobile. • Perfectly competitive firm is a price taker; one firm has no control over price. B. Demand Under Perfect Competition: Horizontal line at the market price II. Short-Run Profit Maximization A. Total Revenue Minus Total Cost: The firm maximizes economic profit by finding the quantity at which total revenue exceeds total cost by the greatest amount. B. Marginal Revenue Equals Marginal Cost in Equilibrium • Marginal Revenue: The change in total revenue from selling another unit of output: • MR = ΔTR/Δq • In perfect competition, marginal revenue equals market price. • Market price = Marginal revenue = Average revenue • The firm increases output as long as marginal revenue exceeds marginal cost. • Golden rule of profit maximization. The firm maximizes profit by producing where marginal cost equals marginal revenue. C. Economic Profit in Short-Run: Because the marginal revenue curve is horizontal at the market price, it is also the firm’s demand curve. The firm can sell any quantity at this price. III. Minimizing Short-Run Losses The short run is defined as a period too short to allow existing firms to leave the industry. The following is a summary of short-run behavior: A. Fixed Costs and Minimizing Losses: If a firm shuts down, it must still pay fixed costs. -
NETWORK EFFECTS Welfare Even Though No Explicit Compensation Accounts for This
From the book Networks, Crowds, and Markets: Reasoning about a Highly Connected World. By David Easley and Jon Kleinberg. Cambridge University Press, 2010. Complete preprint on-line at http://www.cs.cornell.edu/home/kleinber/networks-book/ Chapter 17 Network Effects At the beginning of Chapter 16, we discussed two fundamentally different reasons why individuals might imitate the behavior of others. One reason was based on informational effects: since the behavior of other people conveys information about what they know, observ- ing this behavior and copying it (even against the evidence of one’s own private information) can sometimes be a rational decision. This was our focus in Chapter 16. The other reason was based on direct-benefit effects, also called network effects: for some kinds of decisions, you incur an explicit benefit when you align your behavior with the behavior of others. This is what we will consider in this chapter. A natural setting where network effects arise is in the adoption of technologies for which interaction or compatibility with others is important. For example, when the fax machine was first introduced as a product, its value to a potential consumer depended on how many others were also using the same technology. The value of a social-networking or media- sharing site exhibits the same properties: it’s valuable to the extent that other people are using it as well. Similarly, a computer operating system can be more useful if many other people are using it: even if the primary purpose of the operating system itself is not to interact with others, an operating system with more users will tend to have a larger amount of software written for it, and will use file formats (e.g. -
Network Economics, Transaction Costs, and Dynamic Competition
Network Economics, Vertical Integration, and Regulation Howard Shelanski May 2012 1 New Institutional Economics Key concern is governance of transactions, not price and output. Unit of analysis is the transaction Key question: why a transaction is (or should be) organized or mediated by one institution as opposed to another: Markets vs “hierarchies” E.g., a firm’s make or buy decision: why does a firm buy some things and make others? 2 Origins Ronald Coase Key lessons Property Rights/Default Rules and Transaction Costs Matter Facts and Institutions Matter Oliver Williamson Institutions have differing competencies for governing transactions in the presence of transaction costs 3 Key Assumptions of the New Institutional Economics Bounded rationality: economic actors intend to be rational but are only limitedly so. Opportunism: economic actors will expect others to act opportunistically and seek mechanisms (institutions) to protect themselves from hold-up. Asset specificity: Specific investment is the key variable that allows opportunism and drives firms from markets toward hierarchical institutions. 4 The “Coase Theorum” Pollution example: a plant pollutes and imposes costs on a nearby farm. To what extent should the plant be allowed to pollute or the farmer be allowed to keep farming? theorum version 1: As long as both parties are free to bargain, the final amount of pollution not depend on the initial allocation of property rights. theorum version 2: when transactions costs exist, the final amount of pollution depends on the initial allocation of property rights. 5 Lessons and Policy Implications Institutions arise to economize on transaction costs. Sometimes private bargaining is best, at other times other institutions are more efficient. -
Managerial Economics Unit 6: Oligopoly
Managerial Economics Unit 6: Oligopoly Rudolf Winter-Ebmer Johannes Kepler University Linz Summer Term 2019 Managerial Economics: Unit 6 - Oligopoly1 / 45 OBJECTIVES Explain how managers of firms that operate in an oligopoly market can use strategic decision-making to maintain relatively high profits Understand how the reactions of market rivals influence the effectiveness of decisions in an oligopoly market Managerial Economics: Unit 6 - Oligopoly2 / 45 Oligopoly A market with a small number of firms (usually big) Oligopolists \know" each other Characterized by interdependence and the need for managers to explicitly consider the reactions of rivals Protected by barriers to entry that result from government, economies of scale, or control of strategically important resources Managerial Economics: Unit 6 - Oligopoly3 / 45 Strategic interaction Actions of one firm will trigger re-actions of others Oligopolist must take these possible re-actions into account before deciding on an action Therefore, no single, unified model of oligopoly exists I Cartel I Price leadership I Bertrand competition I Cournot competition Managerial Economics: Unit 6 - Oligopoly4 / 45 COOPERATIVE BEHAVIOR: Cartel Cartel: A collusive arrangement made openly and formally I Cartels, and collusion in general, are illegal in the US and EU. I Cartels maximize profit by restricting the output of member firms to a level that the marginal cost of production of every firm in the cartel is equal to the market's marginal revenue and then charging the market-clearing price. F Behave like a monopoly I The need to allocate output among member firms results in an incentive for the firms to cheat by overproducing and thereby increase profit. -
Platform Envelopment Working Paper
Platform Envelopment Thomas Eisenmann Geoffrey Parker Marshall Van Alstyne Working Paper 07-104 Copyright © 2007, 2008, 2009, 2010 by Thomas Eisenmann, Geoffrey Parker, and Marshall Van Alstyne Working papers are in draft form. This working paper is distributed for purposes of comment and discussion only. It may not be reproduced without permission of the copyright holder. Copies of working papers are available from the author. Platform Envelopment Thomas Eisenmann, Geoffrey Parker, Marshall Van Alstyne Revised, July 27 2010 ABSTRACT Due to network effects and switching costs in platform markets, entrants generally must offer revolutionary functionality. We explore a second entry path that does not rely upon Schumpeterian innovation: platform envelopment. Through envelopment, a provider in one platform market can enter another platform market, combining its own functionality with the target’s in a multi-platform bundle that leverages shared user relationships. We build upon the traditional view of bundling for economies of scope and price discrimination and extend this view to include the strategic management of a firm's user network. Envelopers capture share by foreclosing an incumbent’s access to users; in doing so, they harness the network effects that previously had protected the incumbent. We present a typology of envelopment attacks based on whether platform pairs are complements, weak substitutes or functionally unrelated, and we analyze conditions under which these attack types are likely to succeed. Keywords: Market entry, platforms, network effects, bundling, foreclosure Acknowledgements: Funding from NSF grant SES-0925004 is gratefully acknowledged. Thomas Eisenmann Geoffrey Parker Marshall Van Alstyne Professor Associate Professor Associate Professor Harvard Business School Freeman School of Business Boston University SMG Rock Center 218 Tulane University 595 Commonwealth Ave. -
Critical Mass and Network Evolution in Telecommunications
Forthcoming in Toward a Competitive Telecommunications Industry: Selected Papers from the 1994 Telecommunications Policy Research Conference, Gerard Brock (ed.), 1995. Critical Mass and Network Evolution in Telecommunications by Nicholas Economides and Charles Himmelberg December 1994 Abstract Network goods exhibit positive consumption externalities, commonly known as "network externalities." In markets, this fact can give rise to the existence of a critical mass point, that is, a minimum network size that can be sustained in equilibrium, given the cost and market structure of the industry. In this paper, we describe the conditions under which a critical mass point exists for a network good. We also characterize the existence of critical mass points under various market structures. Surprisingly, neither existence nor the size of the minimum feasible network depends on market structure. Thus, even though a monopolist enjoys an additional degree of freedom through its influence over expectations, and even though monopolistic and oligopolistic markets will in general provide a smaller sized network than perfect competition, the critical mass point is nonetheless the same. We extend these results by making the model dynamic and by generalizing it to allow durable goods. Introducing network externalities to a dynamic model of market growth increases the speed at which market demand grows in the presence of a downward time trend for industry marginal cost. We use this prediction to calibrate the model and obtain estimates of the parameter measuring a consumer’s valuation of the installed base (i.e., the network effect) using aggregate time series data on prices and quantities in the US fax market. -
Network Effects on Tweeting
Network Effects on Tweeting Jake T. Lussier and Nitesh V. Chawla Interdisciplinary Center for Network Science and Applications (iCeNSA), University of Notre Dame, Notre Dame, IN 46556, USA {jlussier,nchawla}@nd.edu http://www.nd.edu/∼(jlussier,nchawla)/ Abstract. Online social networks (OSNs) have created new and exciting ways to connect and share information. Perhaps no site has had a more profound effect on information exchange than Twitter.com. In this pa- per, we study large-scale graph properties and lesser-studied local graph structures of the explicit social network and the implicit retweet network in order to better understand the relationship between socialization and tweeting behaviors. In particular, we first explore the interplay between the social network and user tweet topics and offer evidence that suggests that users who are close in the social graph tend to tweet about simi- lar topics. We then analyze the implicit retweet network and find highly unreciprocal links and unbalanced triads. We also explain the effects of these structural patterns on information diffusion by analyzing and vi- sualizing how URLs tend to be tweeted and retweeted. Finally, given our analyses of the social network and the retweet network, we provide some insights into the relationships between these two networks. Keywords: Data mining, social networks, information diffusion. 1 Introduction A microblogging service launched in 2006, Twitter.com has since grown into one of the most popular OSNs on the web and one of the most prominent technologi- cal influences on modern society. Twitter is not only an environment for social tie formation, but also for information exchange and dissemination. -
An Overview of Social Networks and Economic Applications∗
An Overview of Social Networks and Economic Applications∗ Matthew O. Jackson† Final Version: June 25, 2010 Written for the Handbook of Social Economics‡ Abstract In this chapter I provide an overview of research on social networks and their role in shaping behavior and economic outcomes. I include discussion of empirical and the- oretical analyses of the role of social networks in markets and exchange, learning and diffusion, and network games. I also include some background on social network char- acteristics and measurements, models of network formation, models for the statistical analysis of social networks, as well as community detection. Keywords: Social Networks, Network Games, Graphical Games, Games on Net- works, Diffusion, Learning, Network Formation, Community Detection, JEL Classification Codes: D85, C72, L14, Z13 1 Introduction The people with whom we interact on a regular basis, and even some with whom we in- teract only sporadically, influence our beliefs, decisions and behaviors. Examples of the effects of social networks on economic activity are abundant and pervasive, including roles in transmitting information about jobs, new products, technologies, and political opinions. ∗Financial support from the NSF under grant SES–0647867 is gratefully acknowledged. Thank you to Matthew Elliott, Carlos Lever, and Yves Zenou for comments on earlier drafts. †Department of Economics, Stanford University, Stanford CA 94305, USA. http://www.stanford.edu/∼jacksonm e-mail: [email protected] ‡Edited by Jess Benhabib, Alberto Bisin, and Matthew O. Jackson, forthcoming, Elsevier Press. 1 They also serve as channels for informal insurance and risk sharing, and network structure influences patterns of decisions regarding education, career, hobbies, criminal activity, and even participation in micro-finance. -
Network Effects, Trade, and Productivity
Preprint, forthcoming on Managerial and Decision Economics ∗ Network Effects, Trade, and Productivity Tianle Song† and Susheng Wang‡ April, 2019 Abstract: We consider network effects in the monopolistically competitive model of trade devel- oped by Melitz and Ottaviano (2008). We show that a larger network effect intensifies competition by allowing more productive firms to raise prices and earn higher profits, but forcing less productive firms to reduce prices and earn lower profits. As a result, low productivity firms are driven out of the market. We also show that when network effects are asymmetric, it may be difficult for firms from a country with a small network effect to compete with firms from a country with a large network effect. Keywords: network effects, heterogeneous firms, international trade, productivity JEL classification: F10, F12 ∗ We thank the editor and an anonymous referee for their constructive and insightful feedback. † Corresponding author. Institute for Social and Economic Research, Nanjing Audit University. Email: tsong @connect.ust.hk. ‡ Department of Economics, Hong Kong University of Science and Technology. Email: [email protected]. 1. Introduction A network effect is a positive effect that arises when the value of a product or service to a user in- creases with the total number of users. Many products, especially telecommunication products and consumer electronics, feature network effects. As an example, the consumer utility of using a tele- phone increases directly with the size of the communication network. Consumer benefits can also depend indirectly on the size of the network. For instance, the users of Macintosh computers are better off when there are more users, because the increased demand may lead to a greater variety of Macintosh software (Church et al. -
A Primer on Profit Maximization
Central Washington University ScholarWorks@CWU All Faculty Scholarship for the College of Business College of Business Fall 2011 A Primer on Profit aM ximization Robert Carbaugh Central Washington University, [email protected] Tyler Prante Los Angeles Valley College Follow this and additional works at: http://digitalcommons.cwu.edu/cobfac Part of the Economic Theory Commons, and the Higher Education Commons Recommended Citation Carbaugh, Robert and Tyler Prante. (2011). A primer on profit am ximization. Journal for Economic Educators, 11(2), 34-45. This Article is brought to you for free and open access by the College of Business at ScholarWorks@CWU. It has been accepted for inclusion in All Faculty Scholarship for the College of Business by an authorized administrator of ScholarWorks@CWU. 34 JOURNAL FOR ECONOMIC EDUCATORS, 11(2), FALL 2011 A PRIMER ON PROFIT MAXIMIZATION Robert Carbaugh1 and Tyler Prante2 Abstract Although textbooks in intermediate microeconomics and managerial economics discuss the first- order condition for profit maximization (marginal revenue equals marginal cost) for pure competition and monopoly, they tend to ignore the second-order condition (marginal cost cuts marginal revenue from below). Mathematical economics textbooks also tend to provide only tangential treatment of the necessary and sufficient conditions for profit maximization. This paper fills the void in the textbook literature by combining mathematical and graphical analysis to more fully explain the profit maximizing hypothesis under a variety of market structures and cost conditions. It is intended to be a useful primer for all students taking intermediate level courses in microeconomics, managerial economics, and mathematical economics. It also will be helpful for students in Master’s and Ph.D. -
The Influence of Network Effect on the Valuation of Online Networking
Bucknell University Bucknell Digital Commons Honors Theses Student Theses 2015 The nflueI nce of Network Effect on the Valuation of Online Networking Companies Yi Xu Bucknell University, [email protected] Follow this and additional works at: https://digitalcommons.bucknell.edu/honors_theses Recommended Citation Xu, Yi, "The nflueI nce of Network Effect on the Valuation of Online Networking Companies" (2015). Honors Theses. 313. https://digitalcommons.bucknell.edu/honors_theses/313 This Honors Thesis is brought to you for free and open access by the Student Theses at Bucknell Digital Commons. It has been accepted for inclusion in Honors Theses by an authorized administrator of Bucknell Digital Commons. For more information, please contact [email protected]. II Acknowledgements It is my proud privilege to express my gratitude to Prof. Janet Knoedler, Prof. Gregory Krohn, and Prof. Christopher Magee, who provided substantial help on designing, structuring, and conducting this research project. I am extremely thankful to Prof. Sharon Garthwaite and Prof. Karl Voss for their advice on the mathematical models. I also thank Sarah Decker and Cameron Norsworthy for their help on reading and initial editing of the thesis. III Table of Contents Chapter 1 Introduction…………………………………………………………………………………… 1 Chapter 2 Literature Review ………………………………………………………………………….. 4 Chapter 3 Theoretical Model ………………………………………………………………………….. 12 Chapter 4 Empirical Model .………………………………………………….…………………………. 28 Chapter 5 Empirical Result ……………………………………………………….…………………….. 37 Chapter 6 Conclusion ..…………………………………………………………………………………….. 45 IV List of Tables Chapter 4 Empirical Models 1) Table of Key Variables…………………………………………………………………………… 32 Chapter 5 Empirical Result 2) Regression Result for Group 1 Models…………………………………………………...... 37 3) Regression Result for Group 2 Models…………………………………………………….. 39 V List of Figures Chapter 2 Literature Review Figure 1. -
Principles of Microeconomics
PRINCIPLES OF MICROECONOMICS A. Competition The basic motivation to produce in a market economy is the expectation of income, which will generate profits. • The returns to the efforts of a business - the difference between its total revenues and its total costs - are profits. Thus, questions of revenues and costs are key in an analysis of the profit motive. • Other motivations include nonprofit incentives such as social status, the need to feel important, the desire for recognition, and the retaining of one's job. Economists' calculations of profits are different from those used by businesses in their accounting systems. Economic profit = total revenue - total economic cost • Total economic cost includes the value of all inputs used in production. • Normal profit is an economic cost since it occurs when economic profit is zero. It represents the opportunity cost of labor and capital contributed to the production process by the producer. • Accounting profits are computed only on the basis of explicit costs, including labor and capital. Since they do not take "normal profits" into consideration, they overstate true profits. Economic profits reward entrepreneurship. They are a payment to discovering new and better methods of production, taking above-average risks, and producing something that society desires. The ability of each firm to generate profits is limited by the structure of the industry in which the firm is engaged. The firms in a competitive market are price takers. • None has any market power - the ability to control the market price of the product it sells. • A firm's individual supply curve is a very small - and inconsequential - part of market supply.