Key Words

Marginal Revenue – is the addition to the total revenue from the sale of one extra unit of output.

Marginal Cost – is the addition to total cost from the production of an extra unit of output.

Dominant Strategy – A player’s optimal strategy regardless of what other player’s do.

Cartel – A select group of firms which agree to fix prices and output in order to maximise their overall profits.

Nash Equilibrium – A situation where no player has a reason to change their strategy.

N-Firm Concentration Ratio – The total market share of the n-largest firms in a market.

Shut-Down Price – the price at which a firm is producing below its variable costs and should hence shut down.

Price Discrimination – Is a practise of charging different consumers different prices for the same product or service because of differences in their price elasticity of demand for the product, without there being any difference in the cost of production to produce the good.

Contestable Market – A market where the existing firm only makes a normal profit because it can’t set prices high in order to discourage entry to the market. This is due to the absence of barriers to entry and exit.

Hit-and-Run Tactic – A tactic where a firm enters a market to make a ‘quick buck’; make supernormal profit and then quickly leaves the market. For this tactic to occur we assume that there can be rapid entrance and exit to a market, that supernormal profit is being made in this market and that there are no barriers to entry and exit (including no sunk costs).

Price Satisficing – making enough profit to be meetings the targets and expectations of shareholders.

X-Inefficiency – is where a firm operates at a point above its long run average cost curve and is hence inefficient.

Allocative efficiency – occurs if a firm is operating at the point where P=MC. It is when resources are being distributed in a way which consumers can gain no more welfare without a loss of welfare to other consumers.

Productive efficiency – is achieved if a firm is producing at the lowest point on its LRAC curve.

Structure-Conduct-Performance Paradigm – the theory that by knowing the structure of a market, one can predict how a firm will behave as well as the performance of the market in terms of efficiencies.

Predatory Pricing – is an illegal tactic whereby a firm reduces prices in order to oust competition.

Ancillary Firms – Firms which provide support for incumbents in an industry. For example ancillary firms supply big car motor manufacturers with vital components for cars.

Organisational Slack - Where managers allow spare capacity to exist, thereby enabling them to respond more easily to changed circumstances.

Price Wars – A pricing strategy whereby an incumbent firm reduces its prices in order to capture rivals customers, it hopes it can retain these customers even when prices are risen again.

Limit Pricing – A pricing strategy whereby an incumbent firm sets prices low enough to deter new entry, but high enough to maintain a supernormal profit. This is possible due to economies of scale in the market.

Interdependent – Firms which set their strategy on what other firms in the market are doing.

Regulatory Capture – is the situation where a regulator loses an unbiased view of an industry and becomes sympathetic to their arguments.

Patent – A legal protection of an idea or process giving property rights for a period of time. This acts as a barrier to entry and encourages investment because only the creator is guaranteed profit from a commercial success which it patents.

Monopsony – A market where there is only one buyer.

Page last updated on 15/04/14