(BQ) Part 2 book Microeconomics has contents: Pricing with market power, monopolistic competition and oligopoly, game theory and competitive strategy, markets for factor inputs, general equilibrium and economic efficiency, markets with asymmetric information, externalities and public goods.
Find more at www.downloadslide.com Part Three Market Structure and Competitive Strategy Part examines a broad range of markets and explains how the pricing, investment, and output decisions of firms depend on market structure and the behavior of competitors Chapters 10 and 11 examine market power: the ability to affect price, either by a seller or a buyer We will see how market power arises, how it differs across firms, how it affects the welfare of consumers and producers, and how it can be limited by government We will also see how firms can design pricing and advertising strategies to take maximum advantage of their market power Chapters 12 and 13 deal with markets in which the number of firms is limited We will examine a variety of such markets, ranging from monopolistic competition, in which many firms sell differentiated products, to a cartel, in which a group of firms coordinates decisions and acts as a monopolist We are particularly concerned with markets in which there are only a few firms In these cases, each firm must design its pricing, output, and investment strategies, while keeping in mind how competitors are likely to react We will develop and apply principles from game theory to analyze such strategies Chapter 14 shows how markets for factor inputs, such as labor and raw materials, operate We will examine the firm’s input decisions and show how those decisions depend on the structure of the input market Chapter 15 then focuses on capital investment decisions We will see how a firm can value the future profits that it expects an investment to yield and then compare this value with the cost of the investment to determine whether the investment is worthwhile We will also apply this idea to the decisions of individuals to purchase a car or household appliance, or to invest in education Chapters 10 Market Power: Monopoly and Monopsony 365 11 Pricing with Market Power 407 12 Monopolistic Competition and Oligopoly 447 13 Game Theory and Competitive Strategy 483 14 Markets for Factor Inputs 525 15 Investment, Time, and Capital Markets 555 363 M10_PIND1977_08_GE_C10.indd 363 14/10/14 9:59 AM Find more at www.downloadslide.com M10_PIND1977_08_GE_C10.indd 364 14/10/14 9:59 AM Find more at www.downloadslide.com 10 C h a p t e r Market Power: Monopoly and Monopsony Chapter Outline 10.1 Monopoly 366 10.2 Monopoly Power 376 I n a perfectly competitive market, the large number of sellers and buyers of a good ensures that no single seller or buyer can affect its price The market forces of supply and demand determine price Individual firms take the market price as a given in deciding how much to produce and sell, and consumers take it as a given in deciding how much to buy Monopoly and monopsony, the subjects of this chapter, are the polar opposites of perfect competition A monopoly is a market that has only one seller but many buyers A monopsony is just the opposite: a market with many sellers but only one buyer Monopoly and monopsony are closely related, which is why we cover them in the same chapter First we discuss the behavior of a monopolist Because a monopolist is the sole producer of a product, the demand curve that it faces is the market demand curve This market demand curve relates the price that the monopolist receives to the quantity it offers for sale We will see how a monopolist can take advantage of its control over price and how the profit-maximizing price and quantity differ from what would prevail in a competitive market In general, the monopolist’s quantity will be lower and its price higher than the competitive quantity and price This imposes a cost on society because fewer consumers buy the product, and those who pay more for it This is why antitrust laws exist which forbid firms from monopolizing most markets When economies of scale make monopoly desirable—for example, with local electric power companies—we will see how the government can increase efficiency by regulating the monopolist’s price Pure monopoly is rare, but in many markets only a few firms compete with each other The interactions of firms in such markets can be complicated and often involve aspects of strategic gaming, a topic covered in Chapters 12 and 13 In any case, the firms may be able to affect price and may find it profitable to charge a price higher than marginal cost These firms have monopoly power We will discuss the determinants of monopoly power, its measurement, and its implications for pricing Next we will turn to monopsony Unlike a competitive buyer, a monopsonist pays a price that depends on the quantity that it purchases The monopsonist’s problem is to choose the quantity that M10_PIND1977_08_GE_C10.indd 365 10.3 Sources of Monopoly Power 383 10.4 The Social Costs of Monopoly Power 385 10.5 Monopsony 390 10.6 Monopsony Power 393 10.7 Limiting Market Power: The Antitrust Laws 397 L i s t o f E x a m p le s 10.1 Astra-Merck Prices Prilosec 372 10.2 Elasticities of Demand for Soft Drinks 378 10.3 Markup Pricing: Super markets to Designer Jeans 380 10.4 The Pricing of Videos 382 10.5 Monopsony Power in U.S Manufacturing 396 10.6 A Phone Call about Prices 400 10.7 Go Directly to Jail Don’t Pass Go 401 10.8 The United States and the European Union versus Microsoft 402 365 14/10/14 9:59 AM Find more at www.downloadslide.com 366 PART • Market Structure and Competitive Strategy • monopoly Market with only one seller • monopsony Market with only one buyer • market power Ability of a seller or buyer to affect the price of a good maximizes its net benefit from the purchase—the value derived from the good less the money paid for it By showing how the choice is made, we will demonstrate the close parallel between monopsony and monopoly Although pure monopsony is also unusual, many markets have only a few buyers who can purchase the good for less than they would pay in a competitive market These buyers have monopsony power Typically, this situation occurs in markets for inputs to production For example, General Motors, the largest U.S car manufacturer, has monopsony power in the markets for tires, car batteries, and other parts We will discuss the determinants of monopsony power, its measurement, and its implications for pricing Monopoly and monopsony power are two forms of market power: the ability—of either a seller or a buyer—to affect the price of a good Because sellers or buyers often have at least some market power (in most real-world markets), we need to understand how market power works and how it affects producers and consumers 10.1 Monopoly As the sole producer of a product, a monopolist is in a unique position If the monopolist decides to raise the price of the product, it need not worry about competitors who, by charging lower prices, would capture a larger share of the market at the monopolist’s expense The monopolist is the market and completely controls the amount of output offered for sale But this does not mean that the monopolist can charge any price it wants—at least not if its objective is to maximize profit This textbook is a case in point Pearson Prentice Hall owns the copyright and is therefore a monopoly producer of this book So why doesn’t it sell the book for $500 a copy? Because few people would buy it, and Prentice Hall would earn a much lower profit To maximize profit, the monopolist must first determine its costs and the characteristics of market demand Knowledge of demand and cost is crucial for a firm’s economic decision making Given this knowledge, the monopolist must then decide how much to produce and sell The price per unit that the monopolist receives then follows directly from the market demand curve Equivalently, the monopolist can determine price, and the quantity it will sell at that price follows from the market demand curve Average Revenue and Marginal Revenue • marginal revenue Change in revenue resulting from a oneunit increase in output In §8.3, we explain that marginal revenue is a measure of how much revenue increases when output increases by one unit The monopolist’s average revenue—the price it receives per unit sold—is precisely the market demand curve To choose its profit-maximizing output level, the monopolist also needs to know its marginal revenue: the change in revenue that results from a unit change in output To see the relationship among total, average, and marginal revenue, consider a firm facing the following demand curve: P = - Q Table 10.1 shows the behavior of total, average, and marginal revenue for this demand curve Note that revenue is zero when the price is $6: At that price, nothing is sold At a price of $5, however, one unit is sold, so total (and The courts use the term “monopoly power” to mean significant and sustainable market power, sufficient to warrant particular scrutiny under the antitrust laws In this book, however, for pedagogic reasons we use “monopoly power” differently, to mean market power on the part of sellers, whether substantial or not M10_PIND1977_08_GE_C10.indd 366 14/10/14 9:59 AM Find more at www.downloadslide.com Chapter 10 • Market Power: Monopoly and Monopsony 367 Table 10.1 Total, Marginal, and Average Revenue Price (P) Quantity (Q) Total Revenue (R) Marginal Revenue (MR) Average Revenue (AR) $6 $0 — — 5 5 $5 $5 4 8 3 4 3 9 1 3 2 8 −1 2 1 5 −3 1 arginal) revenue is $5 An increase in quantity sold from to increases revem nue from $5 to $8; marginal revenue is thus $3 As quantity sold increases from to 3, marginal revenue falls to $1, and when quantity increases from to 4, marginal revenue becomes negative When marginal revenue is positive, revenue is increasing with quantity, but when marginal revenue is negative, revenue is decreasing When the demand curve is downward sloping, the price (average revenue) is greater than marginal revenue because all units are sold at the same price If sales are to increase by unit, the price must fall In that case, all units sold, not just the additional unit, will earn less revenue Note, for example, what happens in Table 10.1 when output is increased from to units and price is reduced to $4 Marginal revenue is $3: $4 (the revenue from the sale of the additional unit of output) less $1 (the loss of revenue from selling the first unit for $4 instead of $5) Thus, marginal revenue ($3) is less than price ($4) Figure 10.1 plots average and marginal revenue for the data in Table 10.1 Our demand curve is a straight line and, in this case, the marginal revenue curve has twice the slope of the demand curve (and the same intercept).2 The Monopolist’s Output Decision What quantity should the monopolist produce? In Chapter 8, we saw that to maximize profit, a firm must set output so that marginal revenue is equal to marginal cost This is the solution to the monopolist’s problem In Figure 10.2, the market demand curve D is the monopolist’s average revenue curve It specifies the price per unit that the monopolist receives as a function of its output level Also shown are the corresponding marginal revenue curve MR and the average and marginal cost curves, AC and MC Marginal revenue and marginal cost are equal at quantity Q* Then from the demand curve, we find the price P* that corresponds to this quantity Q* How can we be sure that Q* is the profit-maximizing quantity? Suppose the monopolist produces a smaller quantity Q1 and receives the corresponding higher price P1 As Figure 10.2 shows, marginal revenue would then exceed marginal cost In that case, if the monopolist produced a little more than Q1, In §7.1, we explain that marginal cost is the change in variable cost associated with a one-unit increase in output If the demand curve is written so that price is a function of quantity, P a − bQ, total revenue is given by PQ aQ − bQ2 Marginal revenue (using calculus) is d(PQ)/dQ a − 2bQ In this example, demand is P − Q and marginal revenue is MR − 2Q (This holds only for small changes in Q and therefore does not exactly match the data in Table 10.1.) M10_PIND1977_08_GE_C10.indd 367 14/10/14 9:59 AM Find more at www.downloadslide.com 368 PART • Market Structure and Competitive Strategy Dollars per unit of output F igure 10.1 Average and Marginal Revenue Average and marginal revenue are shown for the demand curve P − Q Average Revenue (demand) Marginal Revenue 1 Output it would receive extra profit (MR − MC) and thereby increase its total profit In fact, the monopolist could keep increasing output, adding more to its total profit until output Q*, at which point the incremental profit earned from producing one more unit is zero So the smaller quantity Q1 is not profit maximizing, even though it allows the monopolist to charge a higher price If the monopolist produced Q1 instead of Q*, its total profit would be smaller by an amount equal to the shaded area below the MR curve and above the MC curve, between Q1 and Q* In Figure 10.2, the larger quantity Q2 is likewise not profit maximizing At this quantity, marginal cost exceeds marginal revenue Therefore, if the monopolist produced a little less than Q2, it would increase its total profit (by MC − MR) It could increase its profit even more by reducing output all the way to Q* The increased profit achieved by producing Q* instead of Q2 is given by the area below the MC curve and above the MR curve, between Q* and Q2 We can also see algebraically that Q* maximizes profit Profit p is the difference between revenue and cost, both of which depend on Q: p(Q) = R(Q) - C(Q) As Q is increased from zero, profit will increase until it reaches a maximum and then begin to decrease Thus the profit-maximizing Q is such that the incremental profit resulting from a small increase in Q is just zero (i.e., p> Q = ).Then p/Q = R/Q - C/Q = But R> Q is marginal revenue and C> Q is marginal cost Thus the profit-maximizing condition is that MR - MC = 0, or MR = MC M10_PIND1977_08_GE_C10.indd 368 14/10/14 9:59 AM Find more at www.downloadslide.com Chapter 10 • Market Power: Monopoly and Monopsony 369 Price MC P1 P* AC P2 Lost Profit from Producing Too Little (Q 1) and Selling at Too High a Price (P1) D = AR Lost Profit from Producing Too Much (Q 2) and Selling at Too Low a Price (P2) MR Q1 Q* Q2 Quantity F igure 10.2 Profit Is Maximized When Marginal Revenue Equals Marginal Cost Q* is the output level at which MR MC If the firm produces a smaller output—say, Q1—it sacrifices some profit because the extra revenue that could be earned from producing and selling the units between Q1 and Q* exceeds the cost of producing them Similarly, expanding output from Q* to Q2 would reduce profit because the additional cost would exceed the additional revenue An Example To grasp this result more clearly, let’s look at an example Suppose the cost of production is C(Q) = 50 + Q2 In other words, there is a fixed cost of $50, and variable cost is Q2 Suppose demand is given by P(Q) = 40 - Q By setting marginal revenue equal to marginal cost, you can verify that profit is maximized when Q = 10, an output level that corresponds to a price of $30.3 Note that average cost is C(Q)/Q 50/Q Q and marginal cost is C/Q 2Q Revenue is R(Q) P(Q)Q 40Q − Q2, so marginal revenue is MR R/Q 40 − 2Q Setting marginal revenue equal to marginal cost gives 40 − 2Q 2Q, or Q 10 M10_PIND1977_08_GE_C10.indd 369 14/10/14 10:00 AM Find more at www.downloadslide.com 370 PART • Market Structure and Competitive Strategy Cost, revenue, and profit are plotted in Figure 10.3(a) When the firm produces little or no output, profit is negative because of the fixed cost Profit increases as Q increases, reaching a maximum of $150 at Q* = 10, and then decreases as Q is increased further At the point of maximum profit, the slopes of the revenue and cost curves are the same (Note that the tangent lines rr’ and cc’ are parallel.) The slope of the revenue curve is R> Q, or marginal revenue, and the slope of the cost curve is C> Q, or marginal cost Because profit is maximized when marginal revenue equals marginal cost, the slopes are equal Figure 10.3(b) shows both the corresponding average and marginal revenue curves and average and marginal cost curves Marginal revenue and marginal cost intersect at Q* = 10 At this quantity, average cost is $15 per unit and price is $30 per unit Thus average profit is $30 - $15 = $15 per unit Because 10 units are sold, profit is (10)($15) = $150, the area of the shaded rectangle $ C 400 R rЈ 300 cЈ r 200 F igure 10.3 Example of Profit Maximization Part (a) shows total revenue R, total cost C, and profit, the difference between the two Part (b) shows average and marginal revenue and average and marginal cost Marginal revenue is the slope of the total revenue curve, and marginal cost is the slope of the total cost curve The profitmaximizing output is Q* 10, the point where marginal revenue equals marginal cost At this output level, the slope of the profit curve is zero, and the slopes of the total revenue and total cost curves are equal The profit per unit is $15, the difference between average revenue and average cost Because 10 units are produced, total profit is $150 150 Profit 100 c 50 10 15 (a) 20 Quantity $/Q 40 MC 30 20 AC Profit AR 15 MR 10 10 (b) M10_PIND1977_08_GE_C10.indd 370 15 20 Quantity 14/10/14 10:00 AM Find more at www.downloadslide.com Chapter 10 • Market Power: Monopoly and Monopsony 371 A Rule of Thumb for Pricing We know that price and output should be chosen so that marginal revenue equals marginal cost, but how can the manager of a firm find the correct price and output level in practice? Most managers have only limited knowledge of the average and marginal revenue curves that their firms face Similarly, they might know the firm’s marginal cost only over a limited output range We therefore want to translate the condition that marginal revenue should equal marginal cost into a rule of thumb that can be more easily applied in practice To this, we first write the expression for marginal revenue: MR = (PQ) R = Q Q Note that the extra revenue from an incremental unit of quantity, 1PQ2 > Q, has two components: Producing one extra unit and selling it at price P brings in revenue (1)(P) P But because the firm faces a downward-sloping demand curve, producing and selling this extra unit also results in a small drop in price P> Q which reduces the revenue from all units sold (i.e., a change in revenue Q[P> Q]) Thus, MR = P + Q Q P P = P + Pa ba b Q P Q We obtained the expression on the right by taking the term Q 1P> Q2 and multiplying and dividing it by P Recall that the elasticity of demand is defined as Ed = 1P>Q2 1Q> P2 Thus 1Q>P2 1P> Q2 is the reciprocal of the elasticity of demand, 1/Ed, measured at the profit-maximizing output, and The elasticity of demand is discussed in §§2.4 and 4.3 MR = P + P(1/Ed) Now, because the firm’s objective is to maximize profit, we can set marginal revenue equal to marginal cost: P + P(1/Ed) = MC which can be rearranged to give us P - MC = - P Ed (10.1) This relationship provides a rule of thumb for pricing The left-hand side, (P - MC)/P, is the markup over marginal cost as a percentage of price The relationship says that this markup should equal minus the inverse of the elasticity of demand.4 (This figure will be a positive number because the elasticity Remember that this markup equation applies at the point of a profit maximum If both the elasticity of demand and marginal cost vary considerably over the range of outputs under consideration, you may have to know the entire demand and marginal cost curves to determine the optimum output level On the other hand, you can use this equation to check whether a particular output level and price are optimal M10_PIND1977_08_GE_C10.indd 371 14/10/14 10:00 AM Find more at www.downloadslide.com 372 PART • Market Structure and Competitive Strategy of demand is negative.) Equivalently, we can rearrange this equation to express price directly as a markup over marginal cost: In §8.1, we explain that a perfectly competitive firm will choose its output so that marginal cost equals price In §4.3 and Table 4.3, we explain that when price is increased, expenditure—and thus revenue—increases if demand is inelastic, decreases if demand is elastic, and is unchanged if demand has unit elasticity P = MC + (1/Ed) (10.2) For example, if the elasticity of demand is −4 and marginal cost is $9 per unit, price should be $9/(1 - 1/4) = $9/.75 = $12 per unit How does the price set by a monopolist compare with the price under competition? In Chapter 8, we saw that in a perfectly competitive market, price equals marginal cost A monopolist charges a price that exceeds marginal cost, but by an amount that depends inversely on the elasticity of demand As the markup equation (10.1) shows, if demand is extremely elastic, Ed is a large negative number, and price will be very close to marginal cost In that case, a monopolized market will look much like a competitive one In fact, when demand is very elastic, there is little benefit to being a monopolist Also note that a monopolist will never produce a quantity of output that is on the inelastic portion of the demand curve—i.e., where the elasticity of demand is less than in absolute value To see why, suppose that the monopolist is producing at a point on the demand curve where the elasticity is −0.5 In that case, the monopolist could make a greater profit by producing less and selling at a higher price (A 10-percent reduction in output, for example, would allow for a 20-percent increase in price and thus a 10-percent increase in revenue If marginal cost were greater than zero, the increase in profit would be even more than 10 percent because the lower output would reduce the firm’s costs.) As the monopolist reduces output and raises price, it will move up the demand curve to a point where the elasticity is greater than in absolute value and the markup rule of equation (10.2) will be satisfied Suppose, however, that marginal cost is zero In that case, we cannot use equation (10.2) directly to determine the profit-maximizing price However, we can see from equation (10.1) that in order to maximize profit, the firm will produce at the point where the elasticity of demand is exactly −1 If marginal cost is zero, maximizing profit is equivalent to maximizing revenue, and revenue is maximized when Ed = -1 Example Astra-Merck Prices Prilosec In 1995, a new drug developed by Astra-Merck became available for the long-term treatment of ulcers The drug, Prilosec, represented a new generation of antiulcer medication Other drugs to treat ulcer conditions were already on the market: Tagamet had been introduced M10_PIND1977_08_GE_C10.indd 372 in 1977, Zantac in 1983, Pepcid in 1986, and Axid in 1988 These four drugs worked in much the same way to reduce the stomach’s secretion of acid Prilosec, however, was based on a very different biochemical mechanism and was much more effective than these earlier drugs By 14/10/14 10:00 AM Find more at www.downloadslide.com INDEX • 731 Discrimination, price See Price discrimination Diseconomies of scale, 269–270, 316 Diseconomies of scope, 273 Disequilibrium, market, 604 Disney Channel, 434 Disneyland, 424 Disposable diaper industry, capital investment in, 572–574 DiTella, Raphael, 105n4 Diversifiable risk, 570–571 Diversification risk and, 184–185 stock market and, 185 Dividend yields for S&P 500, 198 Dixit, Avinash, 488n5, 512n19, 566n10 Dollar bill game, 485 Dominant firm model, 472–473 Dominant strategy, 486–487 Dranove, David, 190n9 Dreyfus, Mark K., 576n15 Dulberger, Ellen R., 129n15 Duopoly, 454, 458 DuPont, 510–511 Durability demand and, 64–65 supply and, 69–70 Durable equipment consumption of, 67 investment in, 66–67 Dutch auction, 513 DVD rentals, effect on movie theater tickets, 592–593 E eBay, 518–520 Economic efficiency bargaining and, 681–682 of competitive markets, 331–336, 605–606 equity and, 606–609 exchange and, 598–606, 620 free trade and, 614–619 market failure and, 621–623 monopolistic competition and, 450–451 production and, 609–614, 620 Economic forecasting, 700–701 Economic inefficiency, moral hazard and, 641 Economic rent definition of, 313 factor markets and, 538–540 Economic theories, 29–30 Economies of scale, 269–270 barriers to entry and, 384 learning versus, 276–278 Economies of scope, 272–275 Edgeworth box, 599–600 Education benefits of, 636–638 college costs and, 37–38, 52 Z05_PIND1977_08_GE_INDX.indd 731 determining spending levels of, 690–691 net present value and, 577 public, 687 Effective yield, bond, 562–563 Efficiency, public goods and, 687–688 Efficiency wage theory, 650–652 Efficient allocations, 598, 600–602 Effluent fees, 261–263 Egalitarian view of equity, 607, 608 Eggs, cost of, 37–38, 52 Elasticity in supply and demand, 57–63, 150–152 See also Price elasticity advertising and, 439 arc elasticity of demand, 60–61 cross-price elasticity of demand, 59 definition of, 57 income elasticity of demand, 58–59, 64–67 linear demand curve, 58 long-run, 319–320 monopolies and, 384 monopsony and, 393–397 oil and, 80–82 point vs arc elasticities, 60–61 price markup and, 381 short-run market and, 304–305 short-run vs long-run elasticities, 63–72 soft drinks and, 378 tax impact on, 355 Electric power, cost functions for, 282–283 Ellerman, A.D., 671n10 Ellerman, Denny, 671n10 Elliott, Kimberly Ann, 618n9 Ellis, Gregory M., 583n21 Elobeid, Amani, 594n1 Emissions efficient levels of, 664 emissions trading and clear air, 669–671 marginal external costs of, 662 standards vs fees and, 665–667 stock externalities and, 674–680 sulfur dioxide, 661–662, 668–669 transferable emissions permits, 667–668 Emissions fee, 664–665 Emissions standard, 664 Empty threats, 502 Endowment effect, 204–205 Energy efficiency, 265–267 through capital substitution for labor, 266 through technological change, 266 Energy Independence and Security Act, 41 Engel curves, 140–142 English (or oral) auction, 513 Enomoto, Carl E., 382n9 Entry and exit, competitive equilibrium and, 308, 310–312 Entry barriers competitive strategy and, 384 oligopolies and, 452 Entry deterrence, 506–512 Entry fees, 422 Equal marginal principle, 120 Equilibrium, 49–50, 636 competitive, 309–312, 603–605 consumer, 603–605 Cournot equilibrium, 456–457, 460–461 dominant strategies and, 487 exchange efficiency and, 603–605 factor markets and, 538–541 general analysis and, 591–598 labor market, 538–541 long-run, 309–312, 449–450 market changes and, 50–56 Nash equilibrium, 454, 462, 463, 465, 488–494 oligopoly and, 453–454 short-run, 449–450 Stackelberg equilibrium, 488, 488n6 supply and demand and, 49–50 Equilibrium price, 73 Equilibrium quantity, 73 Equitable allocations, 606–609 egalitarian view of, 607, 608 market-oriented view of, 607, 608 perfect competition and, 608–609 Rawlsian view of, 607, 608 social welfare functions and, 607–608 utilitarian view of, 607, 608 utility possibilities frontier and, 606–608 Equity, four views of, 608 Espey, Molly, 68n11 Ethanol global market, 594–596 European antitrust laws, 400 European Merger Control Act, 400 European Union, 400 ex ante forecasts, 700 Excess demand, 82, 604 Excess supply, 604 Exchange economy, defined, 598 Exchange efficiency, 598–606 advantages of trade and, 598–599 competitive equilibrium and, 603–605 contract curve and, 602–603 Edgeworth box and, 599–600 efficient allocations and, 600–602 Excise tax, effects on monopolies, 375 Executive compensation, 643–644 Exhaustible resources, 580–583 Expansion path, 263–265 Expansion strategy, 505 Expected payoff, 491 Expected returns, 192 Expected utility, 179, 209 Expected value, 175 ex post forecasts, 701 Extensive form of a game, 499–500 Extent of market, 33–36 External costs, negative, 658–660 20/10/14 4:03 PM Find more at www.downloadslide.com 732 • INDEX Externalities, 657–662 common property resources, 683–686 crawfish fishing in Louisiana, 685–686 emissions example, 663–674 marginal external benefit, 660 marginal external costs, 659 marginal social benefit, 660 marginal social costs, 659 market failure, 331–333, 663–674 municipal solid waste example, 674 negative externalities and inefficiency, 658–660 positive externalities and inefficiency, 660–661 property rights, 680–683 public goods, 686–690 recycling example, 671–673 stock, 674–680 F Facebook, 162–163 Factor inputs demand when one input is variable, 526–529 demand when several inputs are variable, 529–530 marginal revenue product, 527 market supply of, 535–537 supply to a firm, 533–535 Factor markets competitive, 525–538 economic rent and, 538–540 equilibrium in, 538–541 market demand curve and, 530–531 with monopoly power, 546–551 with monopsony power, 542–546 Factors of production, 218 Factory, net present value of, 566–567 Fair, Ray C., 537n3 Fairness, 206–208 Farber, Henry S., 210n34 Federal funds rate, 586 Federal Trade Commission Act (1914, amended 1938, 1973, 1975), 399 Financial losses, competitive firm- incurring, 297–298 Firm interactions, monopoly power and, 385 First-degree price discrimination, 409–412 First mover advantage, 459–460 Fisher, Franklin M., 70n12 Fishing industry common property resources and, 683–686 property rights and, 681 Fishman, Alan, 643 Fixed costs, 247–248 Fixed input, 219 Fixed-proportions production function, 233–234 Fixed-weight indexes, 127 Flows vs stocks, 556–557 Foley, Patricia, 77n16 Z05_PIND1977_08_GE_INDX.indd 732 Food, Conservation, and Energy Act of 2008, 63 Food cooperatives, 291 Food crisis, 226–228 cereal yields and world price of food, 227 index of world food production per capita, 227 Ford, Henry, 652 Ford Motor Company, 41, 101–102, 112, 318, 397, 453, 652 Formby, John P., 154n5 Fox, Merritt B., 642n9 Framing, 205 Frech, H E.III, 122n12 Free entry and exit, perfect competition and, 288–289 Free riders, 689 Free trade, 614–619 comparative advantage and, 614–615 expanded possibilities frontier and, 615–616 gains from, 614–619 protectionism and, 618–619 Friedlaender, Ann F., 274n11 Friedman, James W., 488n5 Frijters, Paul, 105n5 Fudenberg, Drew, 488n5 Fullerton, Don, 669n7 Future cash flows, negative, 568 G Games, defined, 483 Game theory See also Prisoners’ dilemma acquiring a company and, 486 auctions and, 512–520 bargaining strategy and, 504–505 battle of the sexes game, 493–494 beach location game, 489–490 commitment and credibility and, 502–504 dominant strategy and, 486–487 empty threats and, 502 entry deterrence and, 506–512 extensive form of a game and, 499–500 finite number of repetitions and, 495 infinitely repeated game, 495 matching pennies game, 492–493 maximin strategies and, 490–492 mixed strategies and, 492–494 moving first advantage and, 500–501 Nash equilibrium and, 488–494 noncooperative vs cooperative games, 484–485 product choice problem, 488–489 repeated games, 494–498 reputation and, 503–504 sequential games, 498–501 strategic decisions and, 483–486 tit-for-tat strategy, 494–495 winner’s curse and, 515–516 Gasoline demand for, 64–65, 67–69 long-run demand for, 155–156 prices and per capita consumption, 155 rationing of, 122–124 taxes on, 146–148, 357–359 Gates, Bill, 402 Gateway, 248 General Electric, 67 General equilibrium analysis, 591–598 “contagion” across world stockmarkets, 596–597 economic efficiency, 597–598 General Foods, 452 General Mills, 91 General Motors, 29, 67, 113, 191, 192, 215, 281, 318, 366, 397 Ghemawat, Pankaj, 505n12, 510n16 Ghosh, Soumendra N., 382n9 Gibson, Robert C., 68n11 Giffen good, 146 Gillette, 425 Gillingham, Kenneth, 265n8 Glaister, Stephen, 68n11 Global warming, 675–680 reducing GHG emissions, 679 Gokhale, Jagadeesh, 129n17 Golden parachutes, 644 Gonik, Jacob, 650n19 Gordon, Robert J., 129n15 Government bailouts, 199 Government intervention competitive markets and, 325–331 price controls, 82–84 price supports and, 340–341 Graham, Daniel, 68n11 Graham, David, 339n7 Greene, David, 68n11 Greene, William H., 283n19 Greenhouse gases See Global warming Greenstone, Michael, 159n9 Griffin, James M., 79n18, 302n4 Griliches, Zvi, 129n15 Gross domestic product (GDP), 66–67 Grossman, Gene M., 617n7 Guarantees, product, 638 H Hahn, Robert W., 669n8 Haisken-Denew, John P., 105n5 Hall, Robert E., 115n10 Halvorsen, Robert, 583n21 Hamermesh, Daniel, 639n7 Hamilton, James D., 78n19 Hansen, Julia, 154n5 Happiness marginal utility and, 121–122 ordinal scale for, 105–106 Harrison, David, Jr., 689n25 Hauser, John, 463n5 Health care consumer choice of, 114–115 inefficiency in health care system, 622–623 production function for, 225–226 Herd behavior, 198, 209 20/10/14 4:03 PM Find more at www.downloadslide.com INDEX • 733 Hersey Products, 497 Herzlinger, Regina E., 645n16 Hester, Gordon L., 669n8 Hewlett-Packard, 32, 249 Himmelberg, Charles, 209n33 Hochman, Eithan, 236n11 Holden, Reed, 299n3 Home Box Office, 434 Homogeneous products, price competition with, 460461 Horizontal integration, 647 Horizontal summation of demand, 148 Hortaỗsu, Ali, 518n22 Hossain, Tankim, 209n32 Hotelling, Harold, 581n20 Hotelling rule, 581n20 Housing cooperatives, 291–292 demand for, 153–154 long-run supply of, 321–322 selling a house, 206 Housing price bubble, 199–202 Hufbauer, Gary Clyde, 618n9 Human capital, 576–580 Human kidneys, market for, 333–336 Hybrid cars, 40 I IBM, 249, 437 Ideal cost-of-living indexes, 125–126 Import tariffs or quotas, 348–352 Incentive design, in integrated firms, 648–650 Incentive programs, 342–343 Income budget constraints and, 108 distribution of, 53 elasticities of demand, 58–60, 65 happiness and, 106 individual demand and, 137–138 risk aversion and, 180–181 from sales jobs, 175, 178 Income-consumption curve, 138–139 Income effects, 145–146 Increasing-cost industries, 316–317 Increasing returns to scale, 237, 270 Incremental profit, 410n3 Indifference curves consumer preferences and, 95–96 convexity, 99 ordinal utility function and, 104 risk and, 194–197 risk aversion and, 183 shape of, 97–98 utility functions and, 103–104 Indifference maps, 96–97 Individual demand, 136–143 See also Market demand; Networkexternalities Engel curves and, 140–142 Giffen good and, 146 income and substitution effects and, 143–148 Z05_PIND1977_08_GE_INDX.indd 733 income changes and, 138–139 individual demand curve and, 136–138 normal vs inferior goods and, 139–140 price changes and, 136, 137 substitutes and complements and, 142–143 Individual resource producer, production decisions by, 580–581 Industries, definition of, 32 Industry demand for labor, determining, 530–531 Inefficiency negative externalities and, 658–660 positive externalities and, 660–661 Inelastic demand, 150, 329 Inferior goods, 139–140, 145 Infinitely elastic demand, 58, 59 Infinitely repeated game, 495 Infiniti, 434 Inflation-adjusted returns, 192 Inflexibility, short-run production, 267–268 Information market failure and, 332 value of and risk, 188–190 Informational cascades, 201, 203 Inglehart, Ronald, 105n6 Input choices, production and, 216 Input efficiency, 609–610 Input flexibility, 231 Input price changes, 301–302 Input substitution, 232–233 Insurance, 185–187 actuarial fairness and, 186–187 adverse selection and, 630–631 law of large numbers and, 186 moral hazard and, 639–641 risk and, 186–187 title insurance, 187–188 Integrated firm, asymmetric information in, 648–650 Intercollegiate athletics, cartelization of, 476–477 Interest rates determination of, 584–586 present discounted value and, 557–560 variety of, 585–586 International Bauxite Association (IBA), 473 International Coffee Agreement (ICA), 71n13 International competition, strategic trade policy and, 508–510 International Competition Network, 400 International Council of Copper Exporting Countries (CIPEC), 475, 476 International trade comparative advantage and, 615 expanded possibilities frontier and, 615–616 gains from, 614–619 protectionism and, 618–619 Internet auctions, 518–520 Internet bubble, 199 Intertemporal price discrimination, 418–421 Intertemporal production decisions, 580–583 individual resource producers and, 580–581 market price behavior and, 580–581 resource production by monopolist, 582–583 user cost and, 581–582 Interviews, demand determination and, 167 Investment decisions, consumer, 574–576 Investment portfolio, risk and, 193–194 iPod production, 617–618 Irvin, Thomas R., 661n3 Irwin, D A., 279n26 Isocost line, 259 Isoelastic demand, 151–152 Isoquant maps, 231 Isoquants, 230–231 Isoutility curve, 103 J Jensen, Clarence W., 351n13 Jet fuel, demand for, 532–533 Job market signaling, 634–639 Johnson, D Gale, 351n13 Jones, Charles I., 115n10 Jorgenson, Dale W., 129n15 Joskow, Paul, 671n10 Just, Richard E., 236n11 K Kahn, James R., 68n11 Kahneman, Daniel, 122n11, 203n24, 205n27, 208n31 Kao Soap Ltd., 463–465, 467–468 Kaplan, Daniel P., 339n7 Kaplow, Louis, 667n5 Kaserman, David L., 335n4, 335n5 Katz, Lawrence, 550n10 Kessler, Daniel, 190n9 Killinger, Kerry, 643, 644n13–14 Kimberly-Clark, 511–512, 572–574 Kinked demand curve model, 469–470 Klein, Benjamin, 437n19 Klenow, P J., 279n15 Knetsch, Jack, 203n24, 205n27 Knight, Frank, 174n1 Knittel, Chris, 155n6 Kohlhase, Janet E., 537n3 Kraemer, Kenneth L., 617n8 Kraft General Foods, 166 Krasker, William S., 645n16 Kreps, David, 461n2, 493n7 Krueger, Alan, 40n8, 545n7, 550n10 Krugman, Paul R., 509n14 L Labor curve average product of, 223 marginal product of, 223 20/10/14 4:03 PM Find more at www.downloadslide.com 734 • INDEX Labor market asymmetric information in, 650–652 equilibrium in, 538–541 predicting requirements in, 277 productivity and, 228 signaling in, 634–638 Labor supply elasticities of, 537 for one- and two-earner households, 537–538 shifts in, 528 Land rent, 540 Langley, Sudchada, 61n8, 153n3 Laspeyres price index, 126–127 Law of diminishing marginal returns, 223–225 Law of large numbers, 186 Law of small numbers, 209 Learning curve changes in cost and, 275–279 versus economies of scale, 276–278 graphing of, 275–276 in practice, 278–279 Least-squares criterion, 697 Least-squares estimator, 698n2 Least-squares regression, 280 Lee, Jungmin, 639n7 Lee, William C., 122n12 Legal service auctioning, 518 Legal solutions, property rights and, 682–683 Lehn, Kenneth, 633n3 Lemons problem, 629 Lenovo, 32 Leontief production function, 233–235 Lerner Index of Monopoly Power, 379–381 Levinsohn, James, 113n8 Lewbel, Arthur, 433n17 Lexus, 434 Lieberman, Marvin, 278n13 Lin, William, 63n9 Linden, Greg, 617n8 Linear demand curves, 58 Linear regression, 696 Linear supply and demand curves, 73–76, 151, 457–459 Linux, 398 List, John A., 205n8 Loanable funds, supply and demand of, 584–586 Loewenstein, George, 203n23, 210n34 Long, M.W., 378n6 Long-run average cost curve (LAC), 268 Long-run competitive equilibrium, 311 accounting profit and, 309–310 economic profit and, 309–310 entry and exit and, 308, 310–312 firms having different costs and, 312 firms having identical costs, 312 monopolistic competition and, 449–450 opportunity cost of land and, 312 zero economic profit and, 310 Z05_PIND1977_08_GE_INDX.indd 734 Long-run costs, 257–267 average costs, 268–269 choosing inputs and, 259–261 cost minimization with varying output levels and, 263–264 cost minimizing input choice and, 258–259 effluent fees and, 261–263 expansion path and, 263–265 isocost line and, 259 price of capital and, 258 relationship with short-run costs, 271–272 rental rate of capital and, 258–259 user cost of capital and, 257–258 Long-run elasticities, 63–72, 319–320 Long-run expansion path, 267 Long-run marginal cost curve, 268–269 Long-run producer surplus, 313–314 Long-run production, 219 Long-run profit maximization, 308–309 Long-run supply, 314–322 constant-cost industries and, 315–316 decreasing-cost industries and, 318 elasticity and, 319–320 increasing-cost industries and, 316–317 tax effects and, 318–319 Loss aversion, 205 Lost earnings, value of, 559–560 Lustgarten, Steven H., 397n17 M MacAvoy, Paul W., 83n22 MacCrimmon, Kenneth R., 183n7 MacCulloch, Robert, 105n4 MacKie-Mason, Jeffrey K., 474n12 Macroeconomics, definition of, 27 Macunovich, Diane J., 537n3 Majority-rule voting, 690 Major league baseball asymmetric information and, 634 lemons in, 633–634 monopsony power and, 544–545 Maloney, M T., 670n9 Malthus, Thomas, 225, 226 Managerial incentives, 648–650 applications, 650 Manthy, Robert S., 54n4 Marginal benefit, 111 Marginal costs average-marginal relationship, 253–254 consumer choice and, 111 estimation of, 299–300 external, 659 monopolies and, 367–369 opportunity, 547 production and, 250–251 profit maximization and, 292–295 short-run, 252 Marginal expenditure, 391, 533, 542–543 Marginal products labor curve and, 223 production process and, 220–221 relationship with average products, 223 Marginal rate of substitution, 98–99, 138 Marginal rate of technical substitution, 232, 261 Marginal rate of transformation, 610–611 Marginal revenue monopoly and, 366–367 one variable input and, 526–529 profit maximization and, 292–295, 369–370 several variable inputs and, 529–530 Marginal revenue product, 527 Marginal social cost, 659 Marginal utility consumer choice, 119–124 Market baskets (market bundles) budget line and, 107 consumer preferences and, 93–94 Market-clearing price, 49, 334 Market concentration, monopolies and, 384 Market data, fitting supply and demand curves to, 73–76 Market definition, 32, 33–34 Market demand, 148–156 coupons and rebates and, 417 curve of, 530–531 elasticity of demand and, 150–152 from individual to market demand, 148–150 inelastic demand, 150 isoelastic demand, 151–152 Market failure, 331–333 correcting, 663–674 externalities and, 332, 622 incomplete information and, 621–622 lack of information and, 332 market power and, 621 public goods and, 622, 688–689 Marketing experiments, direct, 167 Market mechanism, supply and demand curve and, 45, 49–50 Market-oriented view of equity, 607, 608 Market power, 366, 621 elasticities of demand for soft drinks, 378 production, price, and monopoly power, 379 Market price, 32–33 Market price behavior, 581 Markets competitive vs noncompetitive, 32 extent of, 33–36 nature of, 31–36 perfectly competitive, 32 role of, 29 Market signaling, asymmetric information and, 634–639 Market supply elasticity of, 304–305 short-run curves and, 303–308 Market value maximization, 290n1 Markup pricing, 380–381 20/10/14 4:03 PM Find more at www.downloadslide.com INDEX • 735 Matching pennies game, 492–493 Maximin strategies, game theory and, 490–492 Mayer, Christopher, 209n33 McAfee, Preston, 512n19 McClennan, Mark, 190n9 McDermott, Shaun P., 669n7 McDonald’s, 436, 632 McKean, Brian J., 669n8 Medical care, value of information and, 189–190 Medicare, 631n2, 632–633 Menell, Peter S., 674n13 Merck, 289 Mercurio Europeo, 474 Metals, supply of, 69–70 Metering demand, 436–437 Microeconomics definition of, 27 reasons to study, 40–42 themes of, 28–31 Microsoft, 398, 563–565 Microsoft Corporation, 249, 402–403, 437, 526 Milgrom, Paul, 512n19 Military pay, 541 Milk cartel, 477–478 Miller, Jonathan, 292n2 Mineral resources, 53–55 Minimum cost, producing an output and, 260 Minimum prices, 336–339 Minimum wage history of, 39–40 teenage labor markets and, 545–546 unemployment and, 337 Miranda, Marie Lynn, 674n13 Mixed bundling, 431–434 Mixed strategies, game theory and, 492–494 Mobil Oil, 437 Models, 29–30 Monopoly, 366–376, 448–452 See also Antitrust laws; Monopsony average and marginal revenue and, 366–367 bilateral monopoly, 396 cartels and, 474 deadweight loss and, 386 definition of, 365, 366, 448 demand shifts and, 373–374 economic efficiency and, 450–451 elasticity of market demand and, 384 factor markets and, 546–551 firm interactions and, 385 Lerner Index and, 379–380 makings of, 448–449 measuring power of, 379–380 monopsony compared, 393 multiplant firms and, 375–376 natural monopoly, 388–389 number of firms and, 384–385 output decisions and, 367–369 Z05_PIND1977_08_GE_INDX.indd 735 perfect competition versus, 450 power of, 376–383 price regulation and, 387–388 pricing rule of thumb and, 371–372, 380 production with two plants, 377 regulation in practice and, 389–390 rent seeking and, 386–387 resource production by monopolist, 582–583 short and long run equilibrium and, 449–450 social costs of, 385–390 sources of power, 383–385 tax effects and, 374–375 unionized and nonunionized workers and, 548 wage rates and, 547–548 Monopsony, 390–393 bargaining power and, 544 buyer interaction and, 395 deadweight loss from, 395 definition of, 365, 366 elasticity of market supply and, 394–395 factor markets and, 542–546 marginal and averaged expenditure and, 542–543 monopoly compared, 393 monopsonist buyer, 392 number of buyers and, 395 power and, 390–393 purchasing decisions and, 543–544 social costs of, 395–396 sources of power, 394–395 U.S manufacturing and, 396–397 Montero, J P., 671n10 Moral hazard, 639–641 Morgan, John, 189n8, 209n32 Morkre, Morris E., 351n13 Morrison, S., 339n7 Movies bundling of, 427–428 DVD rental effect on, 592–593 Mueller, Michael J., 583n21 Multiplant firms, monopolies and, 375–376 Multiple regression analysis, 696–703 demand for coal (example), 702–703 economic forecasting, 700–701 estimation, 697–698 goodness of fit, 700 statistical tests, 698–700 Municipal solid waste regulation, 674 Murphy, Kevin M., 546n8 Mutual funds, diversification and, 185 Myers, Stewart, 570n12 N Nagle, Thomas, 299n3 Narasimhan, Chakravarthi, 416n5 Nash, John, 454 Nash equilibrium, 454, 462, 463, 465, 488–494 National Collegiate Athletic Association (NCAA), 477 National defense, 687 National Organ Transplantation Act, 333, 334 Natural Gas Policy Act of 1978, 83n22 Natural gas shortages, price controls and, 83–84, 330–331 Natural monopoly, 385 Natural resource prices, 53–55 Negative externalities, 658–660 Negatively correlated variables, 185 Negative network externalities, 161–162 Neptune Water Meter Company, 497 Net present value capital investment decisions and, 565–569 of college education, 577 discount rates and, 571–572 interest rates and, 585–586 Network externalities, 159–163 bandwagon effect and, 160 Internet auctions and, 519 negative, 161–162 positive, 159–161 snob effect and, 161 Neumark, David, 40n8, 546n8 Nevin, John R., 452n1 Nevo, Aviv, 416n5 Newell, Richard G., 265n8 New York taxicab supply, 320–321, 346– 347, 569 Noll, Roger, 544n5 Nominal discount rate, 567–568 Nominal prices, 36–40 Noncompetitive markets, 32 Nonconstant sum game, 484n2 Noncooperative games, 466, 484–485 Nondiversifiable risk, 193, 570–571 Nonexclusive goods, 686–687 Nonprice rationing, 122–124 Nonprofit hospitals, 645 Nonprofit organizations, 645 Nonrival goods, 686 Nonsystematic risk, 570n12 Nonunionized workers, monopoly power and, 548 Normal vs inferior goods, 139–140 Normative analysis, 30–31 North American Free Trade Agreement (NAFTA), 618–619 Northeast Interstate Dairy Compact, 477 Northwestern University Law School, 246–247 No-shirking constraint curve, 651 O Office space, September 11 effects on, 55–56 Oi, Walter Y., 422n12 Oil market, upheaval in, 78–82 price elasticity estimates, 79 price of crude oil, 79 Saudi production cut, impact of, 81 20/10/14 4:03 PM Find more at www.downloadslide.com 736 • INDEX Oligopoly, 452–460 Cournot model and, 454–457 definition of, 448 dominant firm model and, 472–473 first mover advantage and, 459–460 kinked demand curve model and, 469–470 market equilibrium and, 453–454 Nash equilibrium and, 454 prisoners’ dilemma and, 468–473 Stackelberg model and, 459–460 Oligopsony, 390 Olson, C Vincent, 339n7 Omidyar, Pierre, 519 One-earner households, labor supply and, 537–538 Online consumer electronics market, value of information in, 189 Online trading, 197 Opportunity costs of capital, 566 of land, 312 marginal cost and, 300 measuring, 244–245 Optimal strategy, defined, 484 Orange, 425, 426 Ordinal utility function, 104 Organization of Petroleum Exporting Countries (OPEC), 68, 78–82, 474–475, 581, 583 Organ Procurement and Transplantation Network (OPTN), 333 Orr, James, 56n5 Output decisions, monopolies and, 367–369 Output efficiency, 611–612 Output rule, 296 Over-the-counter drugs, advertising expenditures and, 440–441 P Paasche index, 127–128 Pakes, Ariel, 113n8 Palmer, Karen, 265n8 Parallel conduct, 398 Pareto, Vilfredo, 598 Pareto efficient allocation, 598, 607 Pareto inefficient allocation, 607 Parry, Ian, 68n11 Partial equilibrium analysis, 591, 592 Patents, 384 Payment streams, valuing of, 558–559 Payoff defined, 484 expected, 491 matrix, 466 risk and, 175 Peak-load pricing, 418, 420–421 P/E ratio for S&P 500, 198 Perfect competition, equity and, 608–609 Perfect complements, 99–101 Perfectly competitive markets, 287–289 free entry and exit and, 288–289 Z05_PIND1977_08_GE_INDX.indd 736 price taking and, 288 product homogeneity and, 288 Perfectly elastic supply, 305 Perfectly inelastic supply, 305 Perfect price discrimination, 410 Perfect substitutes, 99–101 Perpetuities, 561–562 Persian Gulf stability, 78–79 Petrin, Amil, 101n3 Petroleum products, short-run production of, 302–303 Peyer, Urs, 644n14 Pfizer, 289 Phelps Dodge, 77 Pillsbury, 417 Pindyck, Robert S., 68n11, 79n18, 83n22, 380n8, 474n12, 566n10, 583n21, 680n18, 696n1 Point elasticity of demand, 60 Polinsky, A Mitchell, 178n5 Pollution demand for clean air and, 689–690 emissions example, 663–674 global warming and, 675–680 recycling and, 671–673 solid waste, 674 value of clean air and, 158–159 Positive analysis, 30–31 Positively correlated variables, 185 Positive network externalities, 159–161 Potential interactions, 32 Predatory pricing, 398 Prediction accuracy, 30 Preemptive investment strategy, 505–506 Present discounted value, 557–560 Price caps, 390 Price changes budget constraints and, 108–110 individual demand and, 136 Price competition, 461 Bertrand model and, 460–461 choosing prices and, 462–463 with differentiated products, 461–463 with homogeneous products, 460–461 Price-consumption curve, 136 Price controls, 82–84, 327–331 Price discrimination, 409–418 See also Bundling consumer group creation and, 413–414 first-degree, 409–412 imperfect, 410–412 intertemporal, 418–420 peak-load pricing and, 418, 420–421 perfect, 410 relative prices and, 414–415 second-degree, 412, 413 third-degree, 412–418 two-part tariffs and, 422–427 Price elasticity See also Elasticity in supply and demand air travel and, 417–418 consumer expenditures and, 150–152 coupons and, 417 housing demand and, 153–154 Price elasticity of demand, 57 Price elasticity of supply, 60 Price leadership, 470 Price minimums, 336–339 Price of capital, 258 Price of risk, 194 Price regulation, monopolies and, 387–388 Price rigidity, 469–471 Prices, role of, 29 Price setting, by dominant firm, 472–473 Price signaling, 470 Price supports, 340–347 consumers and, 340 government and, 340–341 import quotas and tariffs and, 348–352 producers and, 340 Price taking, 288, 293–295 Pricing, monopolies and, 371–372 Prilosec pricing, 372–373 Prime rate, 471, 586 Principal-agent problem, 641–647 incentives and, 646–647 in private enterprises, 642–643 in public enterprises, 644–645 Prisoners’ dilemma, 466–468, 491–492 Prius, 40 Private proceedings, antitrust laws and, 399 Private-sector unionism, decline of, 549–550 Private-value auctions, 513–514 Probabilities, subjective, 209 Procter & Gamble, 448, 463–465, 467–468, 511–512, 572–574 Producer Price Index (PPI), 36, 124 Producers, price supports and, 340 Producer surplus, 326–331 change in, 328–329 in long run, 313–314 versus profit, 307–308 short run, 306–308 Production See also Production costs cost constraints and, 216 decisions of firms and, 215–216 factors of, 215–216 firms and their production decisions, 216–219 flows (inputs and outputs), 218 function of, 216 health care, production function for, 225–226 input choices and, 216 measuring costs of, 243–251 production function, 218 returns to scale and, 237–240 short run vs long run, 219 technology and, 215–216 Production choice problem, 503 Production costs accounting costs, 244 average costs, 251 cost functions and, 280–281 20/10/14 4:03 PM Find more at www.downloadslide.com INDEX • 737 degree of economies of scope, 273–274 diseconomies of scope and, 273 dynamic changes in costs, 275–279 economic costs, 244 economies and diseconomies of scale and, 269–270 economies of scope and, 272–275 energy reduction, 265–267 estimating and predicting of, 279–283 fixed costs, 247–248 learning curve and, 275–279 long-run and short-run relationship and, 271–272 long-run average costs and, 268–269 long-run costs, 257–267 marginal costs, 250–251 opportunity costs, 244–245 product transformation curves, 272–273 short-run costs, 251–256 short-run production inflexibility, 267–268 shutting down and, 247 sunk costs, 245–246 total costs, 247 variable costs, 247–248 Production decisions, intertemporal, 580–583 Production efficiency, 609–614 input efficiency, 609–610 marginal rate of transformation and, 610–611 output efficiency and, 611–612 output markets and, 613–614 Production possibilities frontier, 610–611 Production quotas, 341–346 Production technology, 215–216 Production with one variable input (labor), 220–229 average and marginal products and, 220–221 average product of labor curve and, 223 labor productivity and, 228 law of diminishing marginal returns and, 223–225 marginal product of labor curve and, 223 product curve slopes and, 221–223 Production with two variable inputs, 230–237 diminishing marginal returns and, 231–233 fixed-proportions production function and, 233–234 input flexibility and, 231 isoquants and, 230–231 perfect substitutes and, 233, 234 substitution among inputs and, 232–233 Products choice problem, 488–489 curve slopes, 221–223 differentiation, price competition and, 461–463 Z05_PIND1977_08_GE_INDX.indd 737 diversity, monopolistic competition and, 451 homogeneity, perfect competition and, 288 transformation curves, 272–273 Profit maximization, 290–292 See also Competitive firms assumptions of, 290 choosing output in the long run, 308–314 highly competitive markets, 289 long run, 308–309 management cost considerations and, 299–300 marginal cost and revenue and, 292– 295, 370 organizational forms and, 291 short-run by competitive firm, 295–297 Profits competitive equilibrium and, 309–312 producer surplus versus, 307–308 Property rights, 680–681 bargaining and economic efficiency, 681–682 legal solutions and, 682–683 Prospective sunk costs, 246, 248 Protectionism, 618–619 Public education, 687 Public goods, 686–690 definition of, 622 efficiency and, 687–688 market failure and, 688–689 nonexclusive goods, 686–687 private preferences for, 690–692 Public organizations, principal-agent problem and, 644–645 Publishing, price discrimination and, 421 Purchasing decisions, with monopsony power, 543–544 Purchasing power, 109 Pure bundling, 431–432 Pure monopoly, 365, 376 Pure monopsony, 366 Putnam, Howard, 400 Q Quadratic cost function, 281 Quality uncertainty, 628–634 Quantity discounts, 412 Quigley, John, 154n4, 322n11 R Rabin, Matthew, 203n23 Range of products, 33 Rapaport, Carol, 56n5 Raphael, Stephen S., 322n11 Raphael, Steven, 154n4 Rate of return See Effective yield, bond Rate-of-return regulation, 389 Rationing, gasoline, 122–124 Rawls, John, 607n3 Rawlsian view of equity, 607, 608 Raw material costs, 47 Reaction curves, Cournot equilibrium and, 456 Real discount rate, 567–568 Real prices, 36–40 Real returns, 192 Rebates, 147–148, 416–417 Recreation, revealed preference for, 118–119 Recycling, 671–673 Reference point, 204–205 Refundable deposits, 673 Regression See Multiple regression analysis Regression residual, 697 Regulation, monopolies and, 389 Regulatory lag, 390 Reiley, David Jr., 488n5 Relative prices, determination of, 414–415 Relative valuations, bundling and, 428–431 Rental rate of capital, 258–259 Rent-maximizing policy, 548 Rent seeking, 386–387 Repeated games, 494–498 Reputation, 503–504 Research and development (R&D), 661, 675 Reservation prices, 409, 428 Reserve price, auctioning and, 513 Resource depletion, 580–583 degrees of, 583 price of exhaustible resource, 582 Resource production, by monopolist, 582–583 Restaurants, pricing and, 435–436 Return, tradeoff with risk, 193–194 Return on assets, 191–193 Returns to scale, 237–240 constant, 237 decreasing, 237 description of, 238 increasing, 237 Revealed preference, 116–119 Revenue-sharing arrangements, 647 Reynolds, R Larry, 335n4 Rhône-Poulenc of France, 401 Rigidity, price, 469–470 Risk See also Assets; Behavioral economics aversion to, 180–183 budget line and, 194 business executives and, 183–184 decision making and, 177–178 demand for risky assets, 190–198 description of, 174–179 diversification and, 184–185 expected value and, 175 indifference curves and, 194–197 information value and, 188–190 insurance and, 186–187 investment portfolio and, 193–194 investor’s choice problem and, 194–197 nondiversifiable risk, 192 pooling of, 631 preferences toward, 179–184 20/10/14 4:03 PM Find more at www.downloadslide.com 738 • INDEX Risk (continued) premiums, 180–182, 569 price of, 194 probability and, 174–175 reduction of, 184–190 risk loving, 180, 181 risk neutral, 180, 181 tradeoff with return, 193–194 variability and, 175–177 Risk adjustments, 569–574 capital asset pricing model and, 571–572 discount rate and, 571–572 diversifiable vs nondiversifiable risk, 570–571 Riskless assets, 191 Risky assets, 191 asset returns, 191–193 Rite Aid, 563–565 Robinson-Patman Act (1936), 399 Roche A.G of Switzerland, 401 Rockwell International, 497 Rose, Nancy L., 339n7 Rose-Ackerman, Susan, 335n5 Rossi-Hansberg, Esteban, 617n7 Rotemberg, Julio J., 208n30, 470n10 Roth, Alvin E., 335n4 R-squared (R2), 700 Rubinfeld, Daniel L., 158n8, 166n12, 689n25, 696n1 Rule-of-thumb, 208–209 S Saft, Lester F., 437n19 Salaries See Wages Salathe, Larry, 61n8, 153n3 Sales jobs, income from, 175, 178 Salesperson incentives, 650 Saloner, Garth, 470n10 Sample, 698 Sanford, Scott, 63n9 Sanger, David E., 345n9 Satterthwaite, Mark, 190n9 Saudi Arabia oil production, 80–82 Scale economies index (SCI), 281 Schaller, Bruce, 346n11 Scheinkman, Jose, 461n2 Schelling, Thomas, 508n13 Scherer, F M., 34n4, 351n13 Schill, Michael H., 292n2 Schmalensee, R., 671n10 Schmalensee, Richard L., 433n17 Scholten, Patrick, 189n8 Sealed-bid auction, 513 Secondary supply, 69 Second-degree price discrimination, 412, 413 September 11 terrorist attacks, 55–56 Sequential games, 498–501 Shavell, Steven, 178n5, 667n5 Sherman Act (1890), 398, 400, 401 Sherwin, Robert A., 34n3 Shields, Dennis, 63n9 Shields, Michael A., 105n5 Shirking model, 651 Z05_PIND1977_08_GE_INDX.indd 738 Shortage, price pressures and, 49–50 Short-run average cost curve (SAC), 268 Short-run costs, 251–256 average-marginal relationship, 253–254 cost curves and, 252–254 determinants of, 251–252 diminishing marginal returns and, 252 inflexibility and, 267–268 marginal costs and, 252 relationship with long-run costs, 271–272 total cost as a flow, 254 Short-run elasticities, 63–72 Short-run equilibrium, monopolistic competition and, 449–450 Short-run expansion path, 268 Short-run production, 219 Short-run profit maximization, 293, 295–297 Short-run supply curves, 303–308 Shubik, Martin, 485, 485n3 Shut downs, 247, 297–298 Sibley, David S., 339n7 Signaling, 637 market, 634–639 price, 470 Simonsohn, Uri, 204n25 Sinai, Todd, 209n33 Skeath, Susan, 488n5, 512n19 Skinner, Robert, 63n9 Small, Kenneth, 68n11 Smith, Adam, 605 Smith, Vernon, 204n25 Smith, W James, 154n5 Snob effect, 161 Snow shovel demand, 207 Social costs monopolies and, 385–390 monopsonies and, 395–396 Social rate of discount, 678 Social Security system solvency, 129 Social welfare functions, 607–608 Soft drinks, elasticities of demand for, 378 Software, production costs of, 249–250 Sönmez, Tayfun, 335n4 Sotheby’s auction house, 517, 518 Specific taxes, effects of, 353–356 Speculative demand, 153 Spence, Michael, 634n4 Sprint, 425–427 Stackelberg equilibrium, 488, 488n6 Stackelberg model, 459–460, 498, 501 Standard and Poor’s/Case-Shiller Housing Price Index, 200, 202 Standard deviation, 176–177 Standard error of forecast (SEF), 701 Standard error of the regression, 700 Standard of living, labor productivity and, 228–229 Statistical tests, 698–700 Steel production, 261–263 Sterner, Thomas, 68n11 Stigler, George J., 34n3 Stiglitz, Joseph E., 650n20 stock buildup and impact of, 675–678 Stock externalities, 674–680 Stockholder control, 643 Stock of capital, 228 Stocks and stock market buying on margin, 197 “contagion”, 596–597 diversification and, 185 investing in, 197–198 risk and, 191–193 stock prices in U.S and Europe, 597 Stocks vs flows, 556–557 Stollery, Kenneth R., 583n21 Strategic behavior, 682 Strategic decisions, gaming and, 483–486 Strategic trade policy, international competition and, 508–510 Strategy, defined, 484 Subjective probability, 174 Subsidies, effects of, 356–357 Substitute goods, 48–49, 142–143 Substitution among inputs, 232–233 Substitution effects, 144–145 Sugar quota, 350–352 Sulfur dioxide emissions, 661–662, 668– 669 See also Emissions Sumner, Daniel A., 355n14 Sunk costs, 245–246 amortizing of, 248–249 entry deterrence and, 505, 506 versus fixed costs, 248–249 Supermarket chains advertising and, 440–441 markup pricing and, 380–381 Supplemental Security Income, 129 Supply See also Supply and demand durability and, 69–70 elasticities of, 60 of loanable funds, 584–586 long-run, 314–322 restrictions, 341–342 supply curves, 46–47 variables affecting, 47 Supply and demand See also Elasticity in supply and demand changing market conditions and, 72–76 demand curves, 47–49 equilibrium and, 49–50 linear curves and, 73–76 market equilibrium changes and, 50–56 market mechanism and, 49–50 price controls and, 82–84 supply curves, 46–47 Surplus consumer, 156–159 market clearance and, 49–50 Systematic risk, 570n12 T Takeda Chemical Industries of Japan, 401 Tariffs, 348–350 two-part tariffs, 422–427 world ethanol market and, 594–596 20/10/14 4:03 PM Find more at www.downloadslide.com INDEX • 739 Tarr, David G., 351n13 Taubenslag, Nancy, 497n10 Taubman, Alfred, 517 Taxes effects of, 353–356 firm output and, 319 monopolies and, 374–375 specific, 353–356 Tax-exempt status, 645 Taxicab drivers, 210–211 Taxicab supply, in New York, 320–321, 346–347, 569 Technical efficiency, 609 Technical feasibility, 219 Technological change, 228 Technological improvements, effect of, 224 Technology, production, 215, 218 Teece, David J., 79n18 Teenage labor markets, minimum wage and, 545–546 Thaler, Richard, 203n24, 205n27, 210n34 Theory of the firm, 29, 215 Third-degree price discrimination, 412–418 Tirole, Jean, 488n5 Titanium dioxide industry, entry deterrence and, 510–511 Tit-for-tat strategy, 494–495 Title insurance, 187–188 T-Mobile, 425–427 Tokgoz, Simla, 594n1 Tollison, Robert D., 387n12 Toothpaste market, 448 Total costs, 247, 254 Toyota, 40, 318 Trade, advantages of, 598–599 Tradeable emissions permits, 667–668, 670 Trade-offs, optimal, 28–29 Transitivity, consumer preferences and, 94 Trapani, John M., 339n7 Treasury bills rates of, 585 risk and, 192 Treasury bond rate, 585 Treaty of the European Community, 400 Triplett, Jack E., 129n16 Trucking industry, economies of scope in, 274–275 Tullock, Gordon, 387n12 Tussing, Arlon R., 83n22 Tversky, Amos, 208n31 Two-earner households, labor supply for, 537–538 Z05_PIND1977_08_GE_INDX.indd 739 Two-part tariff, 422–427 many consumers and, 423–425 single consumer and, 422 two consumers and, 423 Tying, 436–437 U Ulen, Thomas, 681n19 Ultimatum game, 207 Uncertainty, consumer behavior and, 209 bubbles, 199–203 informational cascades, 201, 203 Unemployment, 652 Unequal probability outcomes, 177 Unilever, Ltd., 463–465, 467–468 Unionized workers decline of, 548 monopoly power and, 548 as percentage of total, 549 Unit-elastic demand curve, 151 Ünver, M Utku, 335n4 Usage fees, 422 Used car market, asymmetric information and, 628–630 User cost of capital, 257–258 User cost of production, 581–582 Utilitarian view of equity, 607, 608 Utility, 102 Utility functions, 103–104 Utility possibilities frontier, 606–608 V Value of complete information, 188 in online consumer electronics market, 189 Variability, 175–177 Variable costs, 247–248 Variable profit, 409, 410, 410n3 Variance, calculating, 176 Verizon, 425–427 Vertical integration, 647 Videos, pricing of, 382–383 Viscusi, W Kip, 576n15 Voicu, Ioan, 292n2 W Wages computer skills and, 550–551 discrimination in, 548 efficiency and, 650–652 inequality of, 53 monopoly power and, 547–548 substitution and income effects, 536 Wal-Mart, 505–506 Walt Disney World, 424 Walton, Sam, 505 Wang, Charles C.Y., 644n15 Wang, Judy S., 274n11 Warranties, 638, 641 Wascher, William, 40n8, 546n8 Washington Mutual, 643 Waste disposal, 671–673 Water meter industry, 497 Webb-Pomerene Act (1918), 398n18 Wehrung, Donald A., 183n7 Weitzman, Martin, 583n21, 650n19, 680n18 Welch, Finis, 546n8 Welfare economics, 605 Welfare effects, 327, 607–608 Welfare loss, 340–341 Westcott, Paul C., 63n9 Wetzstein, Michael E., 641n8 Wheat aggregate demand for, 152–153 market for, 61–63 price supports and, 343–346 production function for, 235–236 Whinston, Clifford, 339n7 Whitacre, Mark, 401n20 White, Lawrence J., 685n21 Williamson, Oliver, 218n3 Winner’s curse, 515–516 Wohlgenant, Michael K., 355n14 Wolfram, Catherine, 416n5 Wood, Geoffrey E., 618n9 Workers, trade-offs and, 28–29 World copper industry, 305–306 World food production per capita, 227 X Xerox Corporation, 436–437, 639 Y Yandle, Bruce, 670n9 Yellen, Janet L., 650n20 Z Zavodny, Madeline, 545n7 Zero economic profit, 310, 314 Zero emissions policy, 677 Zilberman, David, 236n11 20/10/14 4:03 PM Find more at www.downloadslide.com Z05_PIND1977_08_GE_INDX.indd 740 20/10/14 4:03 PM Find more at www.downloadslide.com Z05_PIND1977_08_GE_INDX.indd 741 20/10/14 4:03 PM Find more at www.downloadslide.com Z05_PIND1977_08_GE_INDX.indd 742 20/10/14 4:03 PM Find more at www.downloadslide.com Z05_PIND1977_08_GE_INDX.indd 743 20/10/14 4:03 PM Find more at www.downloadslide.com Z05_PIND1977_08_GE_INDX.indd 744 20/10/14 4:03 PM Find more at www.downloadslide.com List of Examples 9.6 The Sugar Quota 350 9.7 A Tax on Gasoline 357 10.1 Astra-Merck Prices Prilosec 372 14.2 Labor Supply for One- and Two-Earner Households 537 14.3 Pay in the Military 541 10.2 Elasticities of Demand for Soft Drinks 378 14.4 Monopsony Power in the Market for Baseball Players 544 10.3 Markup Pricing: Supermarkets to Designer Jeans 380 14.5 Teenage Labor Markets and the Minimum Wage 545 10.4 The Pricing of Videos 382 14.6 The Decline of Private-Sector Unionism 549 10.5 Monopsony Power in U.S Manufacturing 396 14.7 Wage Inequality Revisited 550 10.6 A Phone Call about Prices 400 15.1 The Value of Lost Earnings 559 10.7 Go Directly to Jail Don’t Pass Go. 401 15.2 The Yields on Corporate Bonds 563 10.8 The United States and the European Union versus Microsoft 402 15.3 The Value of a New York City Taxi Medallion 569 11.1 The Economics of Coupons and Rebates 416 15.4 Capital Investment in the Disposable Diaper Industry 572 11.2 Airline Fares 417 15.5 Choosing an Air Conditioner and a New Car 575 11.3 How to Price a Best-Selling Novel 421 15.6 Should You Go to Business School? 578 11.4 Pricing Cellular Phone Service 425 15.7 How Depletable are Depletable Resources? 583 11.5 The Complete Dinner versus la Carte: A Restaurant’s Pricing Problem 435 16.1 The Global Market for Ethanol 594 11.6 Advertising in Practice 440 16.2 “Contagion” across Stock Markets around the World 596 12.1 Monopolistic Competition in the Markets for Colas and Coffee 451 16.3 Trading Tasks and iPod Production 617 12.2 A Pricing Problem for Procter & Gamble 463 16.5 Inefficiency in the Health Care System 622 12.3 Procter & Gamble in a Prisoners’ Dilemma 467 17.1 Medicare 632 12.4 Price Leadership and Price Rigidity in Commercial Banking 471 17.2 Lemons in Major League Baseball 633 12.5 The Prices of College Textbooks 472 12.6 The Cartelization of lntercollegiate Athletics 476 17.4 Reducing Moral Hazard: Warranties of Animal Health 641 12.7 The Milk Cartel 477 17.5 CEO Salaries 643 13.1 Acquiring a Company 486 17.6 Managers of Nonprofit Hospitals as Agents 645 13.2 Oligopolistic Cooperation in the Water Meter Industry 497 13.3 Competition and Collusion in the Airline Industry 497 16.4 The Costs and Benefits of Special Protection 618 17.3 Working into the Night 638 17.7 Efficiency Wages at Ford Motor Company 652 18.1 The Costs and Benefits of Sulfur Dioxide Emissions 661 18.2 Reducing Sulfur Dioxide Emissions in Beijing 668 13.4 Wal-Mart Stores’ Preemptive Investment Strategy 505 18.3 Emissions Trading and Clean Air 669 13.5 DuPont Deters Entry in the Titanium Dioxide Industry 510 18.4 Regulating Municipal Solid Wastes 674 13.6 Diaper Wars 511 18.6 The Coase Theorem at Work 683 13.7 Auctioning Legal Services 518 18.7 Crawfish Fishing in Louisiana 685 13.8 Internet Auctions 518 18.8 The Demand for Clean Air 689 14.1 The Demand for Jet Fuel 532 A.1 The Demand for Coal 702 CVR_PIND1977_08_GE_FEP.INDD 18.5 Global Warming 678 16/10/14 11:17 AM ... 16 14 12 10 1990 19 92 1994 1996 1998 VHS 20 00 DVD 20 02 2004 20 06 20 08 20 10 HD-DVD F igure 10.9 Video Sales Between 1990 and 1998, lower prices induced consumers to buy many more videos By 20 01,... more at www.downloadslide.com 374 PART • Market Structure and Competitive Strategy $/Q MC $/Q MC P1 P1 = P2 D2 P2 MR2 D2 D1 D1 MR2 MR1 MR1 Q1 = Q2 Quantity Q1 Q2 Quantity (b) (a) F igure 10.4 Shifts... cost of production for Plant 1, Q2 and C2 be the output and cost of production for Plant 2, and QT = Q1 + Q2 be total output Then profit is p = PQT - C1(Q1) - C2(Q2) The firm should increase output