Can you go a a bit slower?
What do you mean by blackbox and can you give me an example
We considered firms tobe a black box in IO because we disregard the detailed production process of the output but instead focus on the numerical expression of how input values are transformed into output. For example, production of a firm that is expressed as \(Q=f(K,L)\). Although in undergraduate course level, we are given the funtional form of f(), whether that be Cobb-Douglas or Lentief production function,as we study economics further, most of the time we need to devise the appropriate functional form that defines the relationship between inputs and output. That is why we call it blackbox.
One additional profit max problem to solve algebraically (in-class exercise)
We’ll have an in-class exercise to practice the concepts next Monday.
Profit maximizing point occurs where MR=MC, why?
Intuitively, if MR is greater than MC, this means that there’s a chance that a firm could further increase its profit by producing additional units. If MR is less than MC, this also means that there’s a chance that a firm could further increase its profit by producing less units. Only when MR=MC is when a firm cannot deviate its production level to maximize the profit, meaning that the quantity at which MR=MC is when its profit is maximized.
In econ, we mention average costs but then it never is used. Why is that? Is there any use?
We use average cost when we look at long-term supply and demand. Market price is set at the minimum average total cost, where a firm does not earn any profit in the long-run in the perfect competitive market.
If market power reduces efficiency, then is the only advantage profits? It is good for the firm, but not the market/economy?
Yes. essentially the market power and its problem are examined in multiple aspects but are related to analyzing welfare, economic efficiency vs. cost effectiveness, innovation. We weigh between the benefit and cost raised by such conduct to determine whether such firm behavior is perceived antitrust.
How do eithically guided companies fit into the reasons for not maximizing profits that you covered, such as in the case of Patagonia’s high ranges?
It’s not. These type of firms need value function that is different from profit function.
How can you identify killer acquisitions?
Killer acquisition is defined by acquisitions by the incumbents for the sole purpose of killing the target’s innovative project to prempt future competition. This is empirically hard to measure as we need to be able to detect and acurately measure whether there’s an overlap between acquirer’s or incumbent’s portfolio and the target projects in development, and then to be able to observe the state of that project after the acquisition (whether it was discontinued after the merger). If we do get access to such data, a simple model would be (assuming that all confounding factors are controlled for) include dummy variable that denotes the time of the acquisition to see the status of the project (whether it be discontinued or not). Useful paper that deals with killer acquisition (Cunningham et al. 2021)