MANAGERIAL

Chapter 9
OLIGOPOLY- market structure in which there are few firm large firm in the industry.
1. No explicit number of firm is required.
2. Firm offer either identical (as perfectly competitive market) or differentiated (as in
monopolistically competitive market).
3. Manager must consider the likely impact of his / her decision on the decision of the
other firm in the industry

DUOPOLY- An oligopoly composed of only two firm

Types of oligopoly
SWEEZY OLIGOPOLY – An oligopoly model is based on a very specific assumption
regarding how firm will respond to price increases and price cuts.

Marginal revenue = marginal cost

Key conditions:
1. There are few firms serving in many consumers.
2. The firm produced differentiated products.
3. Each firm believes rival will respond to a price reduction but will not follow a price
increase.
4. Barrier to entry exits.

COURNOT OLIGOPOLY- an oligopoly model in which each firm expects its own
output decision to have an impact on rival’s output decisions.

1. There are few firms serving many consumers.

2. The firm produces either differentiated or homogenous products
3. Each firm believes rivals will hold their output constant if it change its output
4. Barrier to entry exit.

 BEST RESPONSE (REACTION) FUNCTION- Function that defines profit

maximizing level of output.

 COLLUSION- firm can benefit at the expense of consumer by “agreeing”

to restrict output or, equivalent to charge a higher prices.
 STAKELBERG OLIGOPOLY – firm differ with respect when to make a decisions.
One firm (the leader) is assumed to make an output decision before other firm
choose their output.

Key conditions:
1. There are few firms serving many consumers.
2. The firm produces either differentiated or homogenous products.
3. A Single firm (the leader) choose an output before rivals select their output.
4. All other firm (the follower) take the leader.
5. Barrier to entry exit.

BERTRAND OLIGOPOLY – An industry where in firm engage in price competition

and react optimally to price charged by competitors.

Key conditions:
1. There are few firms serving many consumers.
2. The firm produces either differentiated or homogenous products.
3. Firm complete in price and react optimally to competitor’s price.
4. Consumer have perfect information and there are no transaction cost
5. Barrier to entry exits.
o Bertrand oligopoly is UNDESIRABLE – leads to zero economic profit.
o Bertrand oligopoly is DESIRABLE –leads to precisely the same outcome.
 BERTRAND DUOPOLY- consumer have perfect information and zero
transaction cost.
CONTESTABLE MARKETS-
 All firm have same access to technology
 Consumer respond quickly to price changes
 Existing firm cannot respond quickly to entry by lowering their price
 There are no sunk cost
SUNK COST- cost a new entrant must bear that cannot respond upon existing
the market.

Chapter 10

GAME THEORY –Very useful tool for manager. Use to analyse decision within a
firm.
SIMULTANEOUS MOVE-GAME – Make decision without knowledge.
SEQUENTIAL MOVE GAME - Make a move after observing.
ONE SHOT GAME - Underlying game played by only once.
REPEATED GAME - - Underlying game played by more than once.
BERTRAND DUPOLY GAME – Without knowledge of the rival’s price, this “pricing
game “is a simultaneous move game.

SIMULTANEOUS MOVE, ONE SHOT GAMES

STRATEGY – describe the action of the action of the player.
 DOMINANT STRATEGY- result in the highest payoff.
 SECURE STRATEGY- guarantees in the highest payoff.
 MIXED (RANDOMIZED) STRATEGY- Player randomizes over two or more
available actions In order to keep rival from being able to predict his or
her actions.
 TRIGGER STRATEGY – Strategy that contingent on the past.
STRATEGIC – planned decision of the player.
NASH EQUILIBRIUM – Set of strategies in which no player can improve her
payoff.
NORMAL FORM GAME – Representation of a game indicating the player.

APPLICATION OF ONE SHOT GAME DECISIOPN RULE

1. Pricing decision
2. Advertising and quality decision – advertise to increase their product
quality in attempt to increase the demand.
3. Coordination decision
4. Monitoring employees – used to analyse interaction between worker and
the manager.
INFINETLY REPEATED GAME – Game that played over and over again.

FACTORS THAT AFFECTING COLLUSION IN PRICING IN GAME

1. NUMBER OF FIRM
2. FIRM SIZE
3. HISTORY OF THE FIRM
4. PUNISHMENT MECHANISM
FINETLY REPEATED GAME – game that reprehensive a finite number of time,
that eventually end.

EXTENSIVE FORM GAME – a Game summarize the players.

SUBGAME PERFECT EQUILIBRIUM - Strategies that constitute a Nash

equilibrium and allows the player to improve his own payoff at any stage of
the game.
CHAPTER 11

PRICE DISCRIMINATION – Practice of charging different prices to consumer

for the same good or services.
 First degree price discrimination –maximum price he or she willing to
pay for each unit of good purchased.
 Second degree discrimination-the practice of posting a discrete
schedule of declining prices for different ranges of quantises.
 Third degree discrimination- firm with market power produces the
output at which marginal revenue to each group equal to marginal
cost.
Two part pricing – pricing strategy in which consumer are charged a fixed fee
for the right to purchase a product plus a per unit charge for each unit of
purchased.
BLOCK PRICING – Pricing strategy in which identical product are packaged
together in order to enhance profit by forcing customer to make all o0r none
decision to purchased.
COMMODITY BUNDING- Price of bundling several different products
together and selling them at a single “bundle price”.
PEAK LOAD PRICING – Pricing strategy in which higher prices are charged
during peak hours than during off- peak hours.
CROSS SUBSIDY – pricing strategy in which profit gained from the sale of one
product are used to subsidize sales of a related product.
TRANSFER PRICING – pricing strategy in which a firm optimally sets the
internal price at which an upstream division sells an input to a downstream
division.
PRICE MATCHING- a strategy in which a firm advertises a price and a promise
to match any lower price offered by competitor.

PRICING STRATEGIES IN MARKET WITH INTENSE PRICE COMPETITION

 PRICE MATCHING
 INDUCING BRAND LOYALTY- Strategies that induce brand loyalty.
o BRAND LOYAL- CUSTOMER WILL CONTINUE TO BUY A FIRM
PRODUCT.
 RANDOMIZED PRICING- a firm intentionally varies its price in an
attempt to “hide” price information from consumers and rivals.
 CHAPTER 12

MEAN (EXPECTED VALUE)- the sum of the probabilities that different outcome will occur
multiplied by the resulting pay offs.
VARIANCE - the sum of the probabilities that different outcome will occur multiplied by
the squared deviation from the mean of random variable.
STANDARD DEVITION – the square root of variance.

UNCERTAINTY AND CONSUMER BEHAVIOR

 RISK AVERSE – preferring a sure amount of Ṡ M to a risky prospect with an
expected value of Ṡ M.
 RISK LOVING- A risky prospect with an expected value of Ṡ M to a sure amount
of Ṡ M.
 RISK NEUTRAL – indifferent between a risky prospect with an expected value of
Ṡ M sure amount of Ṡ M.

MANAGERIAL DECISIONS WITH RISK –AVERSE CON SUMERS

PRODUCT QUALITY- Used to analysed situation where consumers are
uncertain about product quality.
CHAIN STORES –Firm interest to become part of chain store instead of
remaining independent.
INSURANCE – they are willing to pay to avoid risk.

COURNOT SEARCH
RESERVATION PRICE –Consumer is indifferent between purchasing at
that price and searching for a lower price.

PRODUCER SEARCH – consumer search for store changing low prices,

produce search for low prices of output.

PROFIT MAXIMIZATION- can also be modified to deal with uncertainty.

ASYMMETRIC INFORMATION- a situation that exist when some people

have better information than others.

HIDDEN CHARACTERISTICS- thing in one party to a transaction knows

about itself but which are unknown by the other party.
 HIDDEN ACTION- action taken by one party in a relationship that cannot
be observed by the other party.

ADVERSE SELECTION- where individuals have hidden characteristic and

which a selection process result in a pool of individuals with undesirable
characteristics

Two types of people with bad driving records

 Those who are poor drivers and frequently have accidents
 Those who are good driver but, due purely to bad luck, have been
involved in numerous accidents in the past.

MORAL HAZARD - one party to a contract takes a hidden action

that benefit him or her at the expense of another party.

SIGNALING AND SCREENING

SIGNALING- an attempt by an informed party to send an
observable indicator of his or her hidden characteristics to a
uniformed party.
SCREENING – A uniformed party to sort individuals according to
their characteristic.
SELF SELECTION DEVICE- mechanism in which informed parties
are presented with a set of option, and option their choose to
reveal their hidden characteristic to an uniformed party.
Auction- buyer complete for the right to own good, services or
more generally, anything of value.

TYPES OF AUCTION
 ENGLISH AUCTION- ascending sequential- bid auction
bidders observe the bids of other and decide whether ot
not increase the bid
 FIRST PRICE SEALED –BID AUCTION - simultaneous move
auction submit bids on pieces of paper.
 SECOND PRICE SEALED –BID- simultaneous move auction
which bidders simultaneously submit bids
 DUCTH AUCTION- . ascending sequential- bid auction in
which the auctioneer begins with high asking price and
gradually reduces asking price
 INFORMATION STRUCTURE

INDEPENDENT PRIVATE VALUES –Auction environment does not defend on other

bidder valuation of the object.
AFFLIATED (CORRELETED) VALUE ESTIMATED- ascending sequential- bid auction uses
his or her information to estimate their valuation: the higher a bidder value estimate,
the more likely it is that other bidders also have a high value estimated.
COMMON VALUE- Not unknown uses their own (private) information to form an
estimate of the items true common value.
WINNER’S CURSE- “Bad news “conveyed to the winner that his or her estimate of the
item value exceed the estimate of all others bidders.