2011 Final Terms | ECON 4350 - Industrial Economics, Quizzes of Managerial Economics

Download 2011 Final Terms | ECON 4350 - Industrial Economics and more Quizzes Managerial Economics in PDF only on Docsity! TERM 1 Aggregate Concentration DEFINITION 1 A measure of the role played by large companies in the economy as a whole, commonly measured by the percentage of total assets controlled by the largest 50, 100, or 200 firms in an economy. TERM 2 Asset Specificity DEFINITION 2 The degree to which some assets are of value primarily to one firm. Asset specificity can arise due to geographic location, physical characteristics, or specialized human capital. TERM 3 Asymmetric Information DEFINITION 3 A situation in which some players in a game know different information than other players. TERM 4 Averch-Johnson effect DEFINITION 4 A theory suggesting that if a public utility is permitted to earn a rate of return greater than the market cost of capital, the utility will utilize too much capital relative to other inputs and therefore produce inefficiently from a social standpoint. TERM 5 Avoidable Costs DEFINITION 5 The sum of variable cost and the recoverable part of fixed cost. Avoidable costs are those that the firm will not have to pay if it produces zero output in the short run. TERM 6 Barometric Pricing DEFINITION 6 A form of price leadership in which price changes are initiated by a relatively small firm with no ability to enforce them. TERM 7 Basing Point Pricing System DEFINITION 7 A delivered price system under which one or more geographic locations are established as basing points, and buyers are charged prices that include standard freight charges from the nearest basing point, even if the seller's manufacturing plant is located far from the basing point. TERM 8 Bertrand Model DEFINITION 8 A model developed by Joseph Bertrand in 1883 that criticized Courtnot's result by showing that if firms assumed that all other firms hold their prices constant, Courtnot's logic results in an entirely different outcome with price equal to marginal cost. TERM 9 Book Value DEFINITION 9 The value of an asset used in accounting data that is calculated using the historical value of the asset. TERM 10 Bundling DEFINITION 10 A tying agreement in which the goods are purchased in fixed proportions. TERM 21 Conscious Parallelism DEFINITION 21 An antitrust law term meaning that a group of oligopolists behave in an identical manner, but there is a lack of proof that the firms ever met to agree on this parallel course of behavior. Conscious parallelism refers to the idea that rational business behavior in a tight oligopoly will lead firms to behave identically with regard to price and other business practices. TERM 22 Consumer Surplus DEFINITION 22 The difference between the maximum amount a consumer is willing to pay for a good and the amount he or she actually pays. Adding consumer surplus over manyindividualsgives a measure of the aggregate benefit consumers receive from buying a good. TERM 23 Contestable Market DEFINITION 23 A theory developed in the early 1980s which states that potential competition may be more important than actual competition. According to this theory, even a monopolized market may perform as though it were competitive if there isufficientpotential competition. TERM 24 Correlation Coefficient DEFINITION 24 A commonly used used statistical measure of the strength of the relationship between two variables. The correlation coefficient ranges from 1 to -1. If thecoefficientequals 1, a perfect linear relationship exists between the two variables. A correlation coefficient equal to -1 also indicated a perfect linear relationship; in this case therelationshipis inverse, If the coefficient equals 1, there is no relationship between variables. TERM 25 Courtnot-Nash Model DEFINITION 25 A quantity-based model of oligopoly behavior. In the Courtnot model, firms assume that the output of all other firms in the industry will remain constant. TERM 26 Creative Destruction DEFINITION 26 The theory of Joseph Schumpeter that capitalism moves forward in major technological leaps that destroy the old economic order and create a new order. TERM 27 Cross-Subsidization DEFINITION 27 The practice of conglomerate firms attempting to gain an increased market share in one market by using profits earned in another market to subsidize short-run losses. TERM 28 Credible Threat DEFINITION 28 A strategy to deter entry that appears rational from the standpoint of the potential entrant. TERM 29 Deadweight Loss DEFINITION 29 Losses of consumer and producer surplus that are not transferred to other parties. Deadweight loss is a measure of the misallocation of resources resulting from problems such as imperfect competition or taxation. TERM 30 Dependent Variable DEFINITION 30 The variable whose values are predicted in a regression equation; the left-hand size variable. TERM 31 Double Marginalization DEFINITION 31 A problem that exists with bilateral monopoly in a vertically structured industry, in which each successive vertical stage ofmonopolycauses a grater price distortion compared with a vertically integrated firm. TERM 32 Downstream DEFINITION 32 In a vertically structured industry, a later stage of production. TERM 33 Dynamic Games DEFINITION 33 Games that are sequential, in which Firm 1 moves, then Firm 2 responds, then Firm 1 responds to Firm 2's response, and so on, and so on.... TERM 34 Economies of Scale DEFINITION 34 Also called increasing returns to scale. A production function exhibits economies of scale if a proportionate increase in all inputs results in a more than proportionate increase in output. In this case, with constant per-unit input prices, long- run average costs decrease as the quantity of output produces increases. TERM 35 Economies of Scope DEFINITION 35 A production function exhibits economies of scope if it is less costly for one firm to perform two activities than it is for two firms to perform the activitiesseparately. TERM 46 Fair Trade Laws DEFINITION 46 Aeuphemisticterm referring to laws that permit the use of resale pricemaintenance. TERM 47 Federal Trade Commission (FTC) DEFINITION 47 The regulatory commission established y the Federal Trade Commission Act of 1914. The FTC is charged with regulating firms to prevent "unfair methods of competition" TERM 48 First-Degree Price Discrimination DEFINITION 48 Price discrimination where each consumer pays his or her reservation rice for the good. Often called perfect discrimination. TERM 49 First-Mover Advantage DEFINITION 49 An advantage accruing to the first firm to enter an industry that later entrants have great difficulty overcoming. A common example is the productdifferentiationadvantage associated with being the first firm to enter a consumer good industry. TERM 50 Folk Theorem DEFINITION 50 A theorem that was part of the oral tradition among game theorists long before it was published, The grim strategyis an example. TERM 51 Foreclosure DEFINITION 51 In a vertically structured Industry, a situation in which downstream firms have difficulty finding buyers or upstream firms have difficulty obtaining inputs. TERM 52 Game Theory DEFINITION 52 The study of how interdependent decision makers make choices. A game must include players, actions, information, strategies, payoffs, outcomes and equilibria. TERM 53 Grim Strategy DEFINITION 53 A firm's strategy in an infinitely repeated game played with the following behavioral rules: start by cooperating and charging the collusive price; continue to charge the collusive price unless a competitor lowers price, in which case, you charge the Bertrand equilibrium price, P=MC, forever. TERM 54 Hart-Scott-Rodino Act DEFINITION 54 A 1976 law amending Section 7 of the Clayton Act by requiring advanced notification to the Justice Department and the FTC of any major merger. TERM 55 Herfindahl-Hirshman Index (HHI) DEFINITION 55 An index of market power that takes into account both the number of firms and the inequality of market shares. The HHI is defined as the sum of the squares of individual firm's market shares. TERM 56 Horizontal Merger DEFINITION 56 A merger involving firms that are direct competitors. The firms must compete in both the same product and geographic markets. TERM 57 Horizontal Product Differentiation DEFINITION 57 Differentiation between brands based on different product characteristics but not on different overall quality. For example, a McDonald's Quarter Pounder is somewhat different from a Burger King Whopper or Wendy's Single, but the overall quality of the three burgers is similar. TERM 58 Infinite Game DEFINITION 58 A static game that is repeated an infinite number of times. TERM 59 Injunction DEFINITION 59 A court order preventing a person or firm from carrying out a given activity or ordering a giver activity to be undertaken. TERM 60 Learning by Doing DEFINITION 60 The process whereby, because of production experience, firms lower their average costs as cumulative output increases. TERM 71 Network Externalities DEFINITION 71 A situation in which the utility that one user derives from consumption of a good increases as the number of other users of the good increases. TERM 72 Numbers Equivalent DEFINITION 72 The ratio of 10,000 over the HHI, that is, N in the following equation:N=(10,000/HHI)A measure of the number of equal sized firms that could "fit" in an industry TERM 73 Peak-Load Pricing DEFINITION 73 A pricing system in which firms charge higher prices during high-demand periods and lower prices during low-demand periods. TERM 74 Price Discrimination DEFINITION 74 The practice of charging different consumers different price- marginal cost margins for the same product. TERM 75 Price Squeeze DEFINITION 75 A pricing policy by a vertically integrated firm in which a firmsimultaneouslyincreases the price of an input and decreases the price of a finished good. TERM 76 Primary-Line Cases DEFINITION 76 Price discrimination antitrust casesinvolvinginjury or possible injury to a direct competitor or competitors of the firm practicing price discrimination. TERM 77 Prisoner's Dilemma DEFINITION 77 A game where all the players have a dominant strategy that results in a worse outcome than if they pursued some other strategy or strategies. TERM 78 Producer Surplus DEFINITION 78 The difference between the revenue a producer receives from selling a product and the minimum amount the producer would e willing to sell the product for; the amount producers receive for a good in excess of the opportunity costs of producing it. TERM 79 Product Proliferation DEFINITION 79 The strategic decision to preempt potential entrants y creating brands to fill every available product niche. TERM 80 Raising Rivals Costs DEFINITION 80 Any strategy that attempts to increase rivals' production costs to make entry more difficult. TERM 81 Ramsey Price: DEFINITION 81 The price that maximized total social benefits subject to therequirementthat profits cannot be negative. TERM 82 Reaction Function DEFINITION 82 A function that shows the optimal output (price) that one firm will produce (charge) in response to any output (price) produced (charged) by competitors. TERM 83 Reciprocity DEFINITION 83 A practice whereby a large conglomerate encourages its suppliers to purchase inputs from another of the conglomerate's divisions. TERM 84 Regression Analysis DEFINITION 84 The most widely used statistical technique in economics. The technique involves developing a mathematical equation that describes the relationship between a variable to be forecast and the variable(s) believed to be related to the forecast variable. TERM 85 Repeated Game DEFINITION 85 A static game that is played more than once. TERM 96 Static Game DEFINITION 96 A game in which the players move simultaneously. TERM 97 SCP Paradigm DEFINITION 97 An industrial organization paradigm that is primarily empirical in its orientation. Te paradigm was developed in the 1940s and 1950s by Professors Mason Bain, who hypothesized that a direct relationship exists among market structure, market conduct, and market performance. TERM 98 Survivor Test DEFINITION 98 A test of economies of scale based on the idea that, over time, the firms that survive in an industry, supplying constant or increasing fractions of an industry's total output, must beefficient. A decreasing share out output over time is evidence of relative inefficiency; firms or plants of this size are not surviving. TERM 99 Switching Costs DEFINITION 99 The cost for a user of changing from one service to another or of adopting a new technology. Switching costs include the costs of breaking a contract, the costs of training and of learning a new system, the costs of converting data from one software program to another, the costs of searching, and the costs associated with giving up loyalty benefits such as frequent flyer miles. The higher the switching costs, the more a consumer is locked in to using a specific service or product. TERM 100 Symmetric Information DEFINITION 100 A game in which al players have exactly the same information when each player moves. TERM 101 Tactic Collusion DEFINITION 101 A method of collusion in which firms set identical prices without ever meeting to discuss prices because of a "meeting of the minds". TERM 102 Third Degree Price Discrimination DEFINITION 102 Price discrimination where consumers are separated into two or more groups according to their elasticities of demand, and groups with more inelastic demand face higher price- marginal cost margins. TERM 103 Tying Agreements DEFINITION 103 A tying agreement exists when a firm with market power over good X requires its buyers to purchase another good, good Y, to obtain good X. Also known as a tie-in-sale. TERM 104 Tit-For-Tat Strategy DEFINITION 104 A strategy in a prisoner's dilemma game in which the tit-for- tat player starts off in the first round cooperating, and in every subsequent round N>1, adopts his/her opponent's strategy in the previous round. TERM 105 Tobin's Q DEFINITION 105 A measure of profitability using the ratio of the market value of the firm to the replacement value of its assets. I a perfectly competitive industry in long-run equilibrium, the value of q would be 1; the market value of the firm would just equal what it would cost to rebuild it. TERM 106 Transaction Costs DEFINITION 106 The costs of using the market to make a transaction and to gather the information to make those transactions. TERM 107 Trigger Price Strategy DEFINITION 107 A firm's strategy in an infinitely repeated game played with the following behavioral rules: Start by cooperating and charging the joint profit-maximizing price; continue to charge the joint-maximizing price unless a competitor lowers price, in which case, charge the Bertrand equilibrium price, P=MC, forever. TERM 108 Two-Part Tariff DEFINITION 108 A two part tariff consists of a lump-sum payment (for example, a copier machine rental) combined with a per-unit charge (for example, a per-copy charge). TERM 109 Upstream DEFINITION 109 In a vertically structured industry, an earlier stage of production. TERM 110 Vertical Merger DEFINITION 110 A merger involving firms that produce at different stages of production in the same industry.