Florida Gulf Coast University

Intermediate Price Theory

Topic Outline and Learning Outcomes

 Under each major heading is a list of concepts that will be covered. Assignments are made throughout - PR refers to your textbook. To perform well in this course you need to be able to explain and use each concept mentioned. I have included specific learning outcomes for each section under "Be able to: ..."

PRODUCTION, COSTS, PROFIT MAXIMIZATION, AND COMPETITIVE SUPPLY

COSTS

PROFIT MAXIMIZATION AND COMPETITIVE SUPPLY

Analyzing Competitive Markets

Read: PR Chapter 9
Major Topics:
Review of consumer surplus and producer surplus
Welfare conditions under pure competition
Pareto-optimality
Using supply and demand curves as marginal benefit and marginal cost curves
Price Controls - an upper limit on price
Natural Gas
Rent Controls
Price Minimums - a lower limit on price
The Airline Industry under the CAB
Agricultural markets
Limiting entry in tobacco and peanut markets
Price supports
Production quotas
Import quotas and tariffs
Taxation
Subsidies

Read and Discuss the Hayek article
The competitive model as a benchmark

Be able to:
• Show the distribution of CS and PS under competitive market conditions
• Define pareto-optimality
• Explain what effects we can expect if government sets price below the equilibrium price
• Explain what effects we can expect if government sets price above the equilibrium price
• Explain what effects price supports have on markets
• Explain what effects production quotas have on markets
• Explain the effects of a tax on a competitive market
• Explain the effects of a subsidy on a competitive market
• Be able to discuss the role of prices in a market economy (Hayek)

MARKET STRUCTURES - PURE MONOPOLY

Read: PR 10.1
Major Topics:
Price-making behavior
The assumptions of pure monopoly
Profit-maximizing firm/industry behavior in monopolized markets

Read: PR 10.2
Major Topics:
Some observations on monopoly
Mark-up pricing
The "disappearing" the supply curve
The effect of a tax on a monopolist
Operating in the elastic range of the demand curve
Measuring monopoly power
Monopoly and the "guarantee" of profit
The Lerner Index
Concentration Ratios (Class notes)
The Hirfindahl Index (Class notes)

Read: PR 10.3
Major Topics:
Sources of monopoly power

Read: PR 10.4
Major Topics:
Welfare costs of monopoly
Natural Monopoly
Regulating the natural monopolist
Marginal cost pricing versus Average cost pricing

Read: PR 10.7
Major Topics:
Antitrust Law

 Be able to:
•Explain the importance of price making behavior in monopoly markets
• List the assumptions of pure monopoly
• Discuss the profit-maximizing behavior of a monopolist
• Discuss the pricing decision of the monopolist
• Discuss the supply curve under monopoly
• Discuss the relevant range of prices for a monopolist
• Show how a tax could actually increase quantity offerings to the market
• "Measure" monopoly power using the Lerner and Hirfindahl indices
• Explain the major sources of monopoly
• Explain the social or welfare costs of monopoly
• Define a natural monopoly
• Outline the pro's and con's of price regulation of a natural monopolist. Be sure to clearly delineate between MC pricing and AC pricing.

The extraction of Consumer Surplus - Pricing decisions

Read: PR 11.1 & 11.2
Major Topics:
Price discrimination
Three necessary conditions
Types of price discrimination
First degree or Perfect price discrimination
Second degree or Block pricing
Third degree or Segmented market pricing discrimination

Read: PR 11.3
Intertemporal Price Discrimination and Peak-Load Pricing

Read: PR 11.4
The Two-Part Tariff

Read: PR 11.6 -SKIP SPRING 2004
Advertising

Be able to:
• Explain why a firm would want to price discriminate
• Outline the conditions necessary for price discrimination to be effective
• Differentiate among 1st, 2nd, and 3rd degree price discrimination
• Explain Intertemporal Price Discrimination
• Explain Peak-Load Pricing
• Explain how a firm must address the decision to advertise if it is going to profit maximize-SKIP SPRING 2004

Monopolistic Competition
Read:
PR 12.1
Major Topics:
Assumptions and Characteristics
SR equilibrium
Profits and Losses
LR equilibrium
"Excess Capacity" - the costs of differentiation
Comparison with pure competition
Advertising and the dynamic effects of product differentiation on cost curves (Class Notes)

Be able to:
• List the assumptions of monopolistic competition
• Discuss the profit-maximizing behavior of a monopolistically competitive firm
• Discuss the SR pricing and output decision of a monopolistically competitive firm
• Discuss the LR pricing and output decision of a monopolistically competitive firm
• Explain the role of entry and exit in the LR
• Define and explain the concept of excess capacity in the LR
• Compare the monopolistically competitive firm to the competitive firm
• Discuss the static and dynamic role of advertising

Oligopoly
Read:
PR 12. 2 - 12.6
Major Topics:
Assumptions and Characteristics
Nash Equilibrium - define and explain
Cournot Equilibrium - define, explain, derive
Bertrand Equilibrium - define, explain, derive (homogeneous products only)
When to use Cournot and Bertrand Models
Competition vs. Collusion
The payoff matrix
The Prisoner's Dilemma
Implications of the Prisoner's Dilemnma for Oligopolisitic Pricing
Price Rigidity - Kinked demand curve model
Price leadership models by the low cost firm
Price leadership models by the dominant firm
Cartels and collusion
Formalized market coordination
Decisions required to form a cartel
Factors which make it easier to form a cartel
Why cartels fail
Informal market coordination

Be able to:
• List the assumptions of oligopoly
• Discuss the profit-maximizing behavior of an oligopolist
• Discuss the SR pricing and output decision of an oligopolist
• Discuss the LR pricing and output decision of an oligopolist
• Define a Nash Equilibrium
• Define, explain and derive a Cournot Equilibrium
• Define, explain and derive a Bertrand Equilibrium
• Conpare and contrast the uses of Cournot vs. Bertrand
• Construct and use a payoff matric
• Explain the Prisoner's Dilemma and use it in a payoff matrix analysis
• Discuss the implications of the Prisoner's Dilemma for Oligopolistic Pricing - "Schizophrenia Pricing"
• Develop the kinked demand curve model to explain price rigidity
• Develop a price leadership model based on the low cost firm
• Develop a price leadership model based on the dominant firm
• Define cartels and collusion
• Outline the decisions which are required to form a cartel
• Outline the factors which make it easier to form a cartel
• Explain why cartels eventually fall apart

Game Theory and Competitive Strategy
Read:
PR 13.1 - 13.9
Major Topics:
Gaming and Strategic Decisions
Dominant Strategies
The Nash Equilibrium Revisited
SKIP: Mixed Strategies
Repeated Games
Sequential Games
Threats, Commitments, and Credibility
Entry Deterence
Bargaining Strategy
Auctions

Be able to:
• Explain the difference between cooperative and noncooperative games
• Identify and explain dominant strategies in a payoff matrix
• Show single and multiple Nash Equilibria in a payoff matrix
• Explain the Nash Equilibrium in a beach location game
• Identify and explain the maximin strategy in a payoff matrix
• Explain how a repeated game affects choices (again using a payoff matrix)
• Explain how a sequential game affects choices (again using a payoff matrix)
• Explain why there is an advantage to moving first
• Construct and use a payoff matric
• Explain the Prisoner's Dilemma and use it in a payoff matrix analysis
• Discuss the implications of the Prisoner's Dilemma for Oligopolistic Pricing - "Schizophrenia Pricing"
• Develop the kinked demand curve model to explain price rigidity
• Develop a price leadership model based on the low cost firm
• Develop a price leadership model based on the dominant firm
• Define cartels and collusion
• Outline the decisions which are required to form a cartel
• Outline the factors which make it easier to form a cartel
• Explain why cartels eventually fall apart

 Disclaimer: The schedules and procedures in this course are subject to change in the event of extenuating circumstances.

Web page Last Updated on January 26, 2005

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© Bradley K. Hobbs, Ph.D. 2001. All written portions of this work are those of Bradley K. Hobbs and his alone.
Intellectual property rights are claimed over my intellectual product (Read "Capitalism" by Ayn Rand.)