Intro
Compiled by Adib Zainab Student at Economics Department(2022)
Pareto Efficiency
Definition
Pareto's efficiency is defined as the economic situation when the circumstances of one individual cannot be made better without making the situation worse for another individual. Pareto's efficiency takes place when the resources are most optimally used. Pareto's efficiency was theorized by the Italian economist and engineer Vilfredo Pareto.
Description
It is a purely economic concept and has no relationship with the concept of equal or fair utilization of resources. It has wide applications in the field of economics and engineering.
It is the final optimum solution beyond which any change would directly lead to loss in the allocation of resources. Pareto's efficiency is, thus, the complete solution in itself. However, it is almost impossible to achieve.
HERFINDAHL-HIRSCHMAN INDEX
The term "HHI" means the Herfindahl–Hirschman Index, a commonly accepted measure of market concentration. The HHI is calculated by squaring the market share of each firm competing in the market and then summing the resulting numbers. For example, for a market consisting of four firms with shares of 30, 30, 20, and 20 percent, the HHI is 2,600 (302 + 302 + 202 + 202 = 2,600).
The HHI takes into account the relative size distribution of the firms in a market. It approaches zero when a market is occupied by a large number of firms of relatively equal size and reaches its maximum of 10,000 points when a market is controlled by a single firm. The HHI increases both as the number of firms in the market decreases and as the disparity in size between those firms increases.
The agencies generally consider markets in which the HHI is between 1,500 and 2,500 points to be moderately concentrated, and consider markets in which the HHI is in excess of 2,500 points to be highly concentrated. See U.S. Department of Justice & FTC, Horizontal Merger Guidelines § 5.3 (2010). Transactions that increase the HHI by more than 200 points in highly concentrated markets are presumed likely to enhance market power under the Horizontal Merger Guidelines issued by the Department of Justice and the Federal Trade Commission. See id.
Concentration Ratio
Market Performance
The efficiency of a MARKET in utilizing scarce resources to meet consumers' demandsfor goods and services; that is, how well a market has contributed to the optimization of economic welfare. Key elements ofmarket performance include:
- PRODUCTIVE EFFICIENCY;
- DISTRIBUTIVE EFFICIENCY, that is, the ability of a market to produce and distribute its products at the lowestpossible cost;
- ALLOCATIVE EFFICIENCY, that is, the extent to which the market prices charged to buyers are consistent withsupply costs, including a NORMAL PROFIT return to suppliers;
- TECHNOLOGICAL PROGRESSIVENESS, the ability of suppliers to introduce new cost-cutting production anddistribution techniques and superior products over time;
- PRODUCT PERFORMANCE, that is, the quality and variety of products offered by suppliers.
In the THEORY OF MARKETS, market performance is determined by the interaction of MARKET STRUCTURE andMARKET CONDUCT, while market performance itself has an effect on market structure and conduct. See PARETO OPTIMALITY, RESOURCE ALLOCATION, MARKET STRUCTURE-CONDUCT-PERFORMANCE SCHEMA, PERFECT COMPETITION, MONOPOLISTIC COMPETITION, OLIGOPOLY, MONOPOLY.
Vertical and horizontal linkages
Horizontal integration and vertical integration are competitive strategies that companies use to consolidate their position among competitors. Horizontal integration is the acquisition of a related business. A company that opts for horizontal integration will take over another company that operates at the same level of the value chain in an industry. Vertical integration refers to the process of acquiring business operations within the same production vertical. A company that opts for vertical integration takes complete control over one or more stages in the production or distribution of a product.
While horizontal integration and vertical integration are both ways that companies grow, there are important differences between the two strategies. Vertical integration occurs when a business owns all parts of the industrial process while horizontal integration occurs when a business grows by purchasing its competitors. This article will help explain the most important distinctions between horizontal integration and vertical integration and will help companies decide which strategy is the most advantageous for them by elucidating the pros and cons of each approach.
Network externalities:
Network externality has been defined as a change in the benefit, or surplus, that an agent derives from a good when the number of other agents consuming the same kind of good changes. As fax machines increase in popularity, for example, your fax machine becomes increasingly valuable since you will have greater use for it. This allows, in principle, the value received by consumers to be separated into two distinct parts. One component, which in our writings we have labeled the autarky value, is the value generated by the product even if there are no other users. The second component, which we have called synchronization value, is the additional value derived from being able to interact with other users of the product, and it is this latter value that is the essence of network effects
Royalty:
A royalty is a legally binding payment made to an individual or company for the ongoing use of their assets, including copyrighted works, franchises, and natural resources. An example of royalties would be payments received by musicians when their original songs are played on the radio or television, used in movies, performed at concerts, bars, and restaurants, or consumed via streaming services. In most cases, royalties are revenue generators specifically designed to compensate the owners of songs or property when they license out their assets for another party's use.
Cost complimentaries
Flexible manufacturing technology
A flexible manufacturing system (FMS) is a production method that is designed to easily adapt to changes in the type and quantity of the product being manufactured. Machines and computerized systems can be configured to manufacture a variety of parts and handle changing levels of production.
A flexible manufacturing system (FMS) can improve efficiency and thus lower a company's production cost. Flexible manufacturing also can be a key component of a make-to-order strategy that allows customers to customize the products they want.
Such flexibility can come with higher upfront costs. Purchasing and installing the specialized equipment that allows for such customization may be costly compared with more traditional systems.
Lerner Index
is a measurement of market power in an industry. The index measurement the price-cost margin (mark up). Its measured by the difference between the output price. under conditions of perfect competition, output prices equal MC (leading to an electively efficient equilibrium output) while price move increasingly above MC as market power increases and we head towards an oligopoly, duopoly and monopoly. L=1/M (absolute value of elasticity of demand) or p-mc/p
Price discrimination
Link to source material Price discrimination is the practice of charging different prices to different customers. There are three forms of price discrimination, defined and explained in what follows.
Price Discrimination = charging different prices to different customers.
Incentive Compatibility Constraint
Vertical Differentiation
An example of vertical differentiation is when customers rank products based on a measurable factor, such as price or quality, and then choose the most highly ranked item.
Although the measurements are objective, each customer chooses to measure a different factor. For example, a restaurant might top one customer's list because their meals are lower in calories. Another customer might choose a different restaurant because the meals are cheaper, and price is the most important factor for them.
Horizontal Differentiation
An example of horizontal differentiation is when customers choose between products based on personal preference rather than an objective measurement.
For example, whether someone chooses a vanilla, chocolate, or strawberry milkshake comes down to personal taste. If most of the products on the market cost about the same and have many of the same features or qualities, the purchase decision is based on subjective preference.
Bundling and tie-in sales:
Tying occurs when a supplier makes the sale of one product (the tying product) conditional upon the purchase of another (the tied product) from the supplier (i.e. the tying product is not sold separately). Bundling refers to situations where a package of two or more products is offered at a discount.
Tying and bundling are common commercial practices and rarely raise competition concerns.
However, in limited cases an undertaking with a substantial degree of market power can harm competition through tying or bundling.
For example, in the context of bundling, an undertaking with a substantial degree of market power in the market for one of the products that forms part of the bundle may use bundling to harm competitors in the markets for the other products that are part of the same bundle. This may give rise to foreclosure in the latter markets, leading potentially to higher prices for consumers.
Pure bundling
Bundling usually consists of giving consumers an option to buy a set of items together as a package at a lower price than what they would pay to buy them all individually, in a process known as mixed bundling. However, there also exists an alternative, rarer form of this strategy called pure bundling.
Pure bundling does not give customers the option to buy items separately. An item that consists of several products or services must be bought as one or not at all. Examples include Microsoft Corp.'s Office 365 software and television channel plans—cable providers often offer packages, meaning customers cannot just pick and choose which channels they want to pay for.
Mixed bundling
Resale price maintenance (RPM)
Resale price maintenance occurs when a supplier of goods enforces, or tries to enforce, a minimum price at which the reseller must on-sell those goods. A reseller may be a distributor or a retailer. Resale price maintenance prevents resellers from setting their prices independently and can lead to increased prices for consumers. It is a form of anti-competitive conduct and is unlawful