PowerPoint Presentation Lecuture 7-8 Managerial Economics - PowerPoint by S3a3DA

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									         Competition, market structures and business decisions
 ECW2731                    Market structures
Weeks 7 & 8

                     What is the market structure?

        • The competitive environment in the market for
          any product is the market structure faced by the
          firm
              – Is measured in terms of
                  • the number of the actual buyers and sellers plus potential
                    entrants
                  • Barriers to entry and exit
                  • Capital requirements
                  • Price vs Non-price competition
                  • Etc
              – Potential entrants pose a sufficiently credible threat of
                entry to affect price/output decisions of incumbents
         Competition, market structures and business decisions
 ECW2731                    Market structures
Weeks 7 & 8



                Factors that Shape the Competitive
                           Environment
     • Product Differentiation
              – R&D, innovation, and advertising are important in
                many markets.
     • Production Methods
              – Economies of scale can preclude small-firm size.
     • Entry and Exit Conditions
              – Barriers to entry and exit can shelter incumbents
                from potential entrants.
     • Buyer Power
              – Powerful buyers can limit seller power.
         Competition, market structures and business decisions
 ECW2731                    Market structures
Weeks 7 & 8




          The firm in competitive markets                  Non-perfect competition



              Perfect competition                                 Monopoly


                                                                  Oligopoly


                                                          Monopolistic competition
         Competition, market structures and business decisions
 ECW2731                    Market structures    “Perfect competition” – competitive markets
Weeks 7 & 8



                 Profit maximiser
                 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
                 No investment lag - Immediate implementation of
                  production decisions)
                 Homogeneous goals of the owners and
                  managerial staff
         Competition, market structures and business decisions
 ECW2731                    Market structures    “Perfect competition” – competitive markets
Weeks 7 & 8




    • Examples of Competitive Markets
              – Agricultural commodities.
              – Some prominent markets for intermediate goods and
                services.
              – Unskilled labor market.
                  Competition, market structures and business decisions
 ECW2731                     Market structures    “Perfect competition” – competitive markets
Weeks 7 & 8




    • 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 Mπ = MR – MC = 0 to maximize profits.
              – MR=MC when profits are maximized.
                 Competition, market structures and business decisions
 ECW2731                      Market structures           Monopoly
Weeks 7 & 8




                                   Basic Properties
       •      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
 ECW2731                   Market structures           Monopoly
Weeks 7 & 8




    • Examples of Monopoly
       – Electricity utilities,
       – Gas
       – Water
       – Public Tramsport
       – Telecommunications
              Competition, market structures and business decisions
 ECW2731                   Market structures           Monopoly
Weeks 7 & 8

                         Social Costs of Monopoly
                                                           •   Monopoly Underproduction
                                                                Monopolists produce too
                                                                  little output.
                                                                Monopolists charge prices
                                                                  that are too high.
                                                           Deadweight Loss from
                                                             Monopoly
                                                              Monopoly markets creates
                                                                a loss in social welfare
                                                                due to the decline in
                                                                mutually beneficial trade
                                                                activity.
                                                              There is also a wealth
                                                                transfer problem
                                                                associated with
                                                                monopoly.
                                                                  Under monopoly,
                                                                    consumer surplus is
                                                                    transferred to
                                                                    producer surplus.
                 Competition, market structures and business decisions
 ECW2731                      Market structures           Monopoly
Weeks 7 & 8


                      Social Benefits From Monopoly


     • 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.
              Competition, market structures and business decisions
 ECW2731                   Market structures           Monopoly
Weeks 7 & 8




                           Monopoly Regulation


   • Dilemma of Natural Monopoly
      Monopoly has the potential for efficiency.
      Unregulated monopoly can lead to economic profits and
         underproduction.

          ECW3830 COMPETITION AND REGULATION
         Competition, market structures and business decisions
 ECW2731                    Market structures   Oligopoly and Monopolistic Competition
Weeks 7 & 8


         Contrast Between Monopolistic Competition
                       and Oligopoly

     • 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
 ECW2731                    Market structures   Мonopolistic competition
Weeks 7 & 8




   • 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.
         Competition, market structures and business decisions
 ECW2731                    Market structures   Мonopolistic competition
Weeks 7 & 8



                Price
                Costs                                 MC
                                                                           AC


                     Pmc




                                                MR               Demand
                                                Q
                                       Qmc                       Quantity


   Short-run Monopoly Equilibrium
     Monopolistically competitive firms take
     full advantage of short-run monopoly.
         Competition, market structures and business decisions
 ECW2731                    Market structures   Мonopolistic competition
Weeks 7 & 8




Price
                          MC                      Price
Costs                                 AC
                                                  Costs                    MC    AC



                                                      Pmc

                        D2       D1
                                                                           D
                                                                   MR
                      MR1          Quantity
               MR2                                               Qmc            Quantity

                                                     Long-run equilibrium same costs,
                                                     lower demand and excess capacity
      Entry of new firms offering                    – low output high price decision
      product substitutes shifts                          With differentiated products,
      the demand and MR curves)                           P=AC at a point above
                                                          minimum LRAC.
               Competition, market structures and business decisions
 ECW2731                  Market structures   Мonopolistic competition
Weeks 7 & 8




Price                                           Price
Costs                   MC          AC                                    MC
                                                Costs                                  AC


                                                   Pm
                                                   Pacc

                      D2       D1                                          D
                                                                MR

                    MR1          Quantity                  Qmc Qac                  Quantity
              MR2
     Long-run equilibrium same costs, lower        Long-run equilibrium– high output low price
     demand and excess capacity – low              decision (corresponds to perfect
     output high price decision                    Competition)
         With differentiated products, P=AC        With homogenous products, P=AC at minimum
                                                   LRAC.
         at a point above minimum LRAC.
                                                         This is a competitive market equilibrium
         P > MR = MC.                                    with homogeneous production.
                 Competition, market structures and business decisions
 ECW2731                    Market structures           Oligipoly
Weeks 7 & 8




      • Oligopoly Market Characteristics
              • Few sellers.
              • Homogenous or unique products.
              • Blockaded entry and exit.
              • Imperfect dissemination of information.
              • Opportunity for above-normal (economic) profits in long-run
                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.
                  Competition, market structures and business decisions
 ECW2731                     Market structures           Oligipoly
Weeks 7 & 8


                              Cartels and Collusion

    • Overt and Covert Agreements
              • Cartels operate under formal agreements.
                 • Powerful cartels function as a monopoly.
              • Collusion exists           when       firms      reach    secret,   covert
                agreements.
    • Enforcement Problem
              • Cartels are typically rather short-lived because coordination
                problems often lead to cheating.
              • Cartel subversion can be extremely profitable.
              • Detecting the source of secret price concessions can be
                extremely difficult.
                    Competition, market structures and business decisions
 ECW2731                       Market structures     Game Theory Basics
Weeks 7 & 8




    • 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.

    • Role of Interdependence
              – Sequential games: moves in succession.
              – Simultaneous-move game: coincident moves.

    • Strategic Considerations
                  Competition, market structures and business decisions
 ECW2731                     Market structures     Game Theory Basics
Weeks 7 & 8



                               Prisoner’s Dilemma

    • Classic Riddle
              – Rational behavior can give suboptimal result.
              – Rationality can hamper beneficial cooperation.

    • Business Application
              – Dominant strategy gives best result regardless of moves by
                other players.
              – Secure strategy gives best result assuming the worst
                possible scenario.

    • Broad Implications
         Competition, market structures and business decisions
 ECW2731                    Competitive strategies in Imperfectly competitive markets
Weeks 7 & 8




         A competitive advantage is a unique or rare ability to
          create, distribute or service valued by customers.
              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
         Above-normal rate of return require a competitive
          advantage that cannot easily be copied
              In production;
              In distribution; or
              In marketing
          Competition, market structures and business decisions
 ECW2731                     Competitive strategies in Imperfectly competitive markets
Weeks 7 & 8



             Reasons for competitive advantage:
                 Access to a unique resource
                      (Exclusive) Access to a mineral deposit
                      (Exclusive) Access to a material
                      Efficient energy source
                      Unique climatic condition
                      Unique technology
                      Unique (specially qualified or very talented) labour
                       force; or
                 Access to a unique market
                      A university bookshop
                      The rice market in Japan
                      etc
         Competition, market structures and business decisions
 ECW2731                                     Non-price competition.
Weeks 7 & 8
                                             Product differentiation




                                 Product differentiation
                      refers to the increase in time of the number of
                   product categories suppled and the number of items
                                      in each category




         Historically, a step from oligopolistic to monopolistic
          competition

								
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