Competition, Market Structures and Business Decisions

A market consists of all firms and individuals willing and able to buy or sell a particular product at a given time
and place.
Competition, market structures and business decisions Competition, market structures and business decisions Market structures Market structures
The firm in competitive markets The firm in competitive markets
Non-perfect competition Non-perfect competition
Perfect Perfect competition competition
Monopoly Monopoly Oligopoly Oligopoly Monopolistic Monopolistic competition competition
Identical product Very small share of the market Price-taker Produces a homogeneous product Perfect information No barriers to entry (legal, technological, or resource) No technical progress Opportunity for normal profits in long run equilibrium ie. P= MC and P=AR=AC
Examples of Competitive Markets

Agricultural commodities. ( Milk market) Unskilled labor market. Restaurant business. ( in USA there are 900,000 restaurants brings about 45o billion $ in annual sales with an avg of 500000$ per year. There is a restaurant for every 300 people, with easy entry and exit and lots of buyer n sellers, good information and standard food quality, so it is next to impossible to make above normal profits)
Profit Maximization Imperative

Normal profit is return necessary to attract and maintain capital investment. Efficient firms can earn normal profit. Inefficient firms suffer losses.
Role of Marginal Analysis

Set M = MR MC = 0 to maximize profits. MR=MC when profits are maximized.
Market structures Market structures
Perfect competition competitive markets
Long Run Normal Profit Equilibrium With a horizontal market demand curve, MR=P. P=MR=MC=ATC. There are no economic profits. All firms earn a normal rate of return.
Market structures Market structures
Monopoly
One firm in industry Profit-maximiser Faces market demand curve One product No close substitutes Price-maker No restrictions on resources
Blockaded entry and/or exit Imperfect dissemination of information Opportunity for economic profits in long-run equilibrium.
Competition, market structures and business decisions Competition, market structures and business decisions Monopoly Market structures Market structures
Profit Maximization in Monopoly Markets

Price/Output Decisions A monopoly firm is the market. Market and firm demand curve slopes downward. Monopoly demand curve is always above the marginal revenue curve, P = AR > MR. Monopoly position allows above-normal profits. P > AC in long-run equilibrium. Set M = MR - MC = 0 to maximize profits. MR=MC at optimal output.
Economies of Scale Monopoly is sometimes the natural result of vigorous competitive forces. In natural monopoly, LRAC declines continuously and one firm is most efficient. Some real-world monopolies are government-created or government-maintained. Invention and Innovation Public policy sometimes confers explicit monopoly rights to spur productivity.
Dilemma of Natural Monopoly Monopoly has the potential for efficiency. Unregulated monopoly can lead to economic profits and underproduction.
Buyer Power Oligopsony exists when there are only a handful of buyers. Monopsony exists if there is only one buyer. Buyer power can be used to obtain less than competitive market prices.
Bilateral Monopoly Illustration Unrestrained monopoly gets higher than competitive market prices. Unrestrained monopsony gets lower than competitive market prices. Monopoly/monopso ny confrontation breeds compromise.
Competition, market structures and business decisions Competition, market structures and business decisions In the real life Market structures Market structures
A real firm in a market place (compare to the ideal one):

A typical firm, if it is not a small one, is not owner-managed Separation of ownership, long-term strategic and short-run current control (shareholders, board of directors, brunch managers) implies the segregation of objectives; Natural, economic and legal barriers Diversification (non-homogenous product, more than one kind of activity) Technical progress Different criteria for different time horizons (short-run operation vs long-run planning. Price-making Price/marketing strategies Imperfect information Investment lag
Competition, market structures and business decisions Competition, market structures and business decisions Market structures Market structures Oligopoly and Monopolistic Competition
Monopolistic Competition

Large number of sellers that offer differentiated products.
Normal profit opportunity in long-run equilibrium. Oligopoly

Few sellers.
Economic profits are possible in long-run equilibrium. Dynamic Nature of Competition
Timely market structure information is required for managerial investment decisions
Competition, market structures and business decisions Competition, market structures and business decisions Market structures Market structures onopolistic competition
The market consists of n mono-product firms; The products are viewed by the buyers as close though not perfect substitutes for one another; Therefore, each of the sellers is a monopolist of its particular product variant with a limited degree of monopoly power. Such a monopolist is enjoying a monopoly power and making economic profit during only a short period of time from the introduction of an unique product or technology until such a technology becomes available to rivals, or until a new more innovative product is introduced by a rival.
Price Costs
MC
AC
Pm c
MR Qm c
Demand Quantity
Short-run Monopoly Equilibrium Monopolistically competitive firms take full advantage of short-run monopoly.
Price Costs
MC
AC
Price Costs
MC
AC
Pm c D2 MR2 MR1 D1 Quantity MR Qm c Quantity D
Entry of new firms offering product substitutes shifts the demand
Long-run equilibrium same costs, lower demand and excess capacity low output high price decision With differentiated
rice osts
MC
AC
Price Costs
MC
AC
Pm c Pac D2 MR2 MR1 D1 Quantity MR Qm Qac c D Quantity
Long-run equilibrium same costs, lower demand and excess capacity low output high price decision With differentiated products, P=AC at a point above minimum
Long-run equilibrium high output low price decision (corresponds to perfect Competition) With homogenous products, P=AC at minimum LRAC. This is a competitive market equilibrium with
Competition, market structures and business decisions Competition, market structures and business decisions Market structures Oligipoly Market structures
Oligopoly Market Characteristics

Few sellers. Homogenous or unique products. Blockaded entry and exit. Imperfect dissemination of information.
Opportunity for above-normal (economic) profits in longrun equilibrium. Examples of Oligopoly
National markets for aluminum, cigarettes, electrical equipment, filmed entertainment, ready-to-eat cereals, etc. Local retail markets for gasoline, food, specialized services, etc.
Overt and Covert Agreements
Cartels operate under formal agreements.
Powerful cartels function as a monopoly.

Collusion exists when agreements. Enforcement Problem

firms
reach
secret,
covert
Cartels are typically rather short-lived coordination problems often lead to cheating. Cartel subversion can be extremely profitable.
because
Detecting the source of secret price concessions can be extremely difficult.
Cartels and Collusion
Oligopoly Output-Setting Models

Cournot Oligopoly Cournot equilibrium output is found by simultaneously solving output-reaction curves for both competitors. Cournot equilibrium output exceeds monopoly output but is less than competitive output.
Stackelberg Oligopoly
Stackelberg model posits a first-mover advantage. Price wars severely undermine profitability for both leading and following firms. Price signaling can reduce uncertainty in oligopoly markets. Price leadership occurs when firms follow the industry leaders pricing policy.
Stackelberg Oligopoly
Price leader sets the price at P2 Profit is maximised at Q1. The follower(s) will supply the combined output of Q4-Q1 At P3- Follows will supply everything At P1 the leader will supply everything at no economic profit
Oligopoly Price-Setting Models

Bertrand Oligopoly: Identical Products
The Bertrand model focuses upon the price reactions. The Bertrand model predicts a competitive market price/output solution in oligopoly markets with identical products.
Oligopoly Price-Setting Models

Bertrand Oligopoly: Identical Products
The Bertrand model focuses upon the price reactions. The Bertrand model predicts a competitive market price/output solution in oligopoly markets with identical products.
Competition, market structures and business decisions Competition, market structures and business decisions Market structures Game Theory Basics Market structures
Types of Games

Zero-sum game: offsetting gains/losses. Positive sum game: potential for mutual gain. Negative-sum game: potential for mutual loss. Cooperative games: joint action is favored. Sequential games: moves in succession. Simultaneous-move game: coincident moves.
Role of Interdependence

Strategic Considerations
Classic Riddle

Rational behavior can give suboptimal result. Rationality can hamper beneficial cooperation. Dominant strategy gives best result regardless of moves by other players. Secure strategy gives best result assuming the worst possible scenario.
Business Application

Broad Implications
Nash Equilibrium Concept

Neither player can improve their payoff through a unilateral change in strategy. Nash equilibrium concept is broader than the concept of a dominant strategy equilibrium. Every dominant strategy equilibrium is also a Nash
equilibrium. Nash equilibrium can exist where there is no dominant strategy equilibrium.
Nash Bargaining
Role of Reputation

Infinitely repeated games occur over and over again without boundary or limit. Firms receive sequential payoffs that shape current and future strategies. Reputations for high quality give consumers confidence for repeat transactions. In a one-shot game, poor quality can fool customers. In an infinitely repeated game, poor quality is shunned by customers.
Product Quality Games

Uncertain Final Period

Finitely repeated games have limited duration. With end point uncertainty, a finitely repeated game mirrors an infinitely repeated game. Enforcing end-of-game performance is difficult. Solution: simply extend the game! Benefits earned by the player able to make the initial move in a sequential move or multistage game.
End-of-game Problem

First-mover Advantages
Competition, market structures and business decisions Competition, market structures and business decisions Competitive strategies in Imperfectly competitive Competitive strategies in Imperfectly competitive markets markets
s Not all industries offer the same potential for sustained profitability; s Not all firms are equally capable of exploring the profit potential that is available. s An effective competitive strategy in imperfectly competitive markets must be founded on the firms competitive advantage.
s A competitive advantage is a unique or rare ability to create, distribute or service valued by customers. s It is a business-world analogue to what economists call comparative advantage or when one nation or region of the country is better suited to the production of one product than to the production of some other product s Above-normal rate of return require a competitive advantage that cannot easily be copied In production; In distribution; or In marketing
s Reasons for competitive advantage:

s Access to a unique resource
s (Exclusive) Access to a mineral deposit
s(Exclusive) Access to a material

s Efficient energy source s Unique climatic condition s Unique technology s Unique (specially qualified or very talented) labour force; or
s Access to a unique market

s A university bookshop s The rice market in Japan s etc
Competition, market structures and business decisions Competition, market structures and business decisions Non-price competition. Non-price competition. Product differentiation Product differentiation
increase in time of the number of product categories increase in time of the number of product categories supplied and the number of items in each category supplied and the number of items in each category
Product differentiation refers to the Product differentiation refers to the
s Historically, a step from oligopolistic to monopolistic competition
Competition, market structures and business decisions Competition, market structures and business decisions Non-price competition. Non-price competition. Product differentiation Product differentiation
A simple model of the reason for product differentiation Price

Considers constant quantity as well as nonchanging AC and MC corresponding to this quantity Producing a little bit different product a firm might hope to charge a higher price
P* P
Quantity
Competition, market structures and business decisions Competition, market structures and business decisions Non-price competition. Non-price competition. Barriers to entry Barriers to entry
Price
Absolute cost advantages: Ability of established firms to produce any given level of output at lower unit costs than potential entrants
P* P
LAC* LAC
Q* Q
Quantity
Economies of scale:
Price LAC P D
Ability of established firms * To produce any given level of output greater than a certain level Q* at lower unit costs and * To restrict potential entrants who are not able to invest in that level of production
Q*
Quantity
Product differentiation advantages:
Price LAC P* D1 D2 Q* D2 Quantity
Variety of demand curves and common LAC. Some firms have advantage of technology or specialisation and are facing demand curves to the right of the critical one.
Competition, market structures and business decisions Competition, market structures and business decisions Non-profit-maximising competition. Non-profit-maximising competition.
Appear as the result of Appear as the result of Ability to affect prices and Ability to affect prices and Separation of ownership and managerial control Separation of ownership and managerial control
Managers aim at stability and increase in salaries Stability may be achieved through the increase in the scale of operations Increase in sales (not in profit) affects managers remuneration Banks and retailers would prefer to deal with firms increasing the volume of sales
*
Competition, market structures and business decisions Competition, market structures and business decisions Non-profit-maximising Non-profit-maximising competition. competition.
P, Cost
MC
AC
MR
D Q
Profit maximising decision
P, Cost
MR
D Q
Increasing sales, the firm is moving to the right and downward the demand curve and, therefore, decreases price, The limitation is AC curve. Some profit should be earned anyway
Profit Sales maximising maximising decision decision
P, Cost
MC
AC
MR
D Q
Profit maximising decision
P, Cost
MC
Old sales maximising decision is a profit maximising decision at a new level of average cost
AC
MR
D Q
Old profit maximisin g decision
New profit maximisin g decision
Competition, market structures and business decisions Competition, market structures and business decisions Measurement of market structures Measurement of market structures Seller concentration Seller concentration
refers to the degree to which production for a refers to the degree to which production for a particular market or or in a particular industry particular market or or in a particular industry is concentrated in the hand of few large firms is concentrated in the hand of few large firms
Seller concentration Seller concentration
Measurement of concentration
number of firms in the market size distribution of firms in the market
The Australian Bureau of Statistics
8140.0.55.001 Industry Concentration Statistics
C2542 - Paint Manufacturing in Australia

KEY COMPETITORS (www.ibisworld.com.au/static/iwabout/SamIndPart.asp)
MAJOR PLAYERS
Table: Market Share Market Share Major Player Range - 25.00% 22.00% Orica Limited (2004) - 19.00% 17.00% Wattyl Limited (2004) - 11.00% 9.00% Barloworld Australia Pty Limited (2004) - 9.00% 7.00% Akzo Nobel Industries Limited (2003)
Tfm te dty eo d h i sn i u a sr e r i hn s r t r e aoig teiefhr uu c r nt hs o eop. cd o z t i t t X i -h uu fh im te t t ter op o f X - teuu fnsy h t t idt op o u r -tehefh imte dty hsa o er i hns r t f n iu r op uu tt Trtof lgt im te dty h a o a sf sn i u e i r e r i hn s r op uu tt
Xi X X X Cr = = 1 + 2 ++ r ... X X X i= X 1
r
Xi X
Concentration Ratios

Group market share data are called concentration ratios. CRi = Xi, where Xi is market share of the ith leading firm. CRi = 100 for monopoly. CRi 0 for a perfectly competitive industry.
Herfindahl-Hirschmann Index
Calculated in percentage terms, the HHI is the sum of squared market shares for all competitors. HHI = Xi2, where Xi2 is squared market share of the ith firm. HHI = 10,000 for monopoly. HHI 0 for a perfectly competitive industry.
Limitations of Census Information

Slow reports hinder usefulness. National statistics obscure local markets.
Diagrammatic approach 100%

Cumulative % of output
The curve of real (not equal distribution The curve of equal distribution of shares of the market among firms
This distance measures concentration
No of firms cumulated from the largest
Competition, market structures and business decisions Competition, market structures and business decisions Multinational companies. Vertical and horizontal coordination. Multinational companies. Vertical and horizontal coordination.
Diversification Diversification
Vertical coordination Vertical coordination
Multinational company Multinational company
Competition, market structures and business decisions Competition, market structures and business decisions Multinational companies. Vertical and horizontal coordination. Multinational companies. Vertical and horizontal coordination. Diversification Diversification
Invest in production facilities to produce a product D
A firm X producing a good A
Buys shares of a firm Y producing a good B
Invents a new product C
Competition, market structures and business decisions Competition, market structures and business decisions Multinational companies. Vertical and horizontal coordination. Multinational companies. Vertical and horizontal coordination. Vertical coordination Vertical coordination
Invest in production facilities or buys shares of or coordinate activities with a firm producing an input D
Invest in facilities or buys shares of or coordinate activities with a firm providing professional training for employees
Invest in production facilities or buys shares of or coordinate activities with a firm using A as an input A firm X producing a good A
Invest in production facilities or buys shares of or coordinate activities with a firm using A as an input A firm X producing a good A
Invest in or buys shares of or coordinate activities with a firm specialising in the selling of product A
Competition, market structures and business decisions Competition, market structures and business decisions Multinational companies. Vertical and horizontal coordination. Multinational companies. Vertical and horizontal coordination. Multinational company Multinational company
Undertake vertical coordination measures abroad A firm producing a good A in a home country Conduct diversification practices abroad
Establishes branches in other countries
Buys share of analogous firms in other countries

Competition, Market Structures and Business Decisions

Caricato da

Informazioni sul documento

Descrizione originale:

Copyright

Formati disponibili

Condividi questo documento

Condividi o incorpora il documento

Opzioni di condivisione

Hai trovato utile questo documento?

Questo contenuto è inappropriato?

Copyright:

Formati disponibili

Competition, Market Structures and Business Decisions

Caricato da

Copyright:

Formati disponibili

A market consists of all firms and individuals willing and able to buy or sell a particular product at a given time

The firm in competitive markets The firm in competitive markets

Non-perfect competition Non-perfect competition

Perfect Perfect competition competition

Monopoly Monopoly Oligopoly Oligopoly Monopolistic Monopolistic competition competition

Examples of Competitive Markets

Profit Maximization Imperative

Role of Marginal Analysis

Market structures Market structures

Perfect competition competitive markets

Market structures Market structures

Profit Maximization in Monopoly Markets

A real firm in a market place (compare to the ideal one):

Large number of sellers that offer differentiated products.

Normal profit opportunity in long-run equilibrium. Oligopoly

Economic profits are possible in long-run equilibrium. Dynamic Nature of Competition

Timely market structure information is required for managerial investment decisions

Pm c D2 MR2 MR1 D1 Quantity MR Qm c Quantity D

Entry of new firms offering product substitutes shifts the demand

Pm c Pac D2 MR2 MR1 D1 Quantity MR Qm Qac c D Quantity

Oligopoly Market Characteristics

Opportunity for above-normal (economic) profits in longrun equilibrium. Examples of Oligopoly

Overt and Covert Agreements

Cartels operate under formal agreements.

Powerful cartels function as a monopoly.

Detecting the source of secret price concessions can be extremely difficult.

Cartels and Collusion

Oligopoly Output-Setting Models

Oligopoly Price-Setting Models

Oligopoly Price-Setting Models

Nash Equilibrium Concept

Product Quality Games

Uncertain Final Period

s Reasons for competitive advantage:

s(Exclusive) Access to a material

s Access to a unique market

Product differentiation refers to the Product differentiation refers to the

s Historically, a step from oligopolistic to monopolistic competition

A simple model of the reason for product differentiation Price

Product differentiation advantages:

Price LAC P* D1 D2 Q* D2 Quantity

Profit maximising decision

Profit Sales maximising maximising decision decision

Profit maximising decision

Old profit maximisin g decision

New profit maximisin g decision

Seller concentration Seller concentration

number of firms in the market size distribution of firms in the market

The Australian Bureau of Statistics

8140.0.55.001 Industry Concentration Statistics

C2542 - Paint Manufacturing in Australia

Limitations of Census Information

Slow reports hinder usefulness. National statistics obscure local markets.

Diagrammatic approach 100%

This distance measures concentration

No of firms cumulated from the largest

Vertical coordination Vertical coordination

Multinational company Multinational company

Invest in production facilities to produce a product D

A firm X producing a good A

Buys shares of a firm Y producing a good B

Invents a new product C

A firm X producing a good A