characteristic mono- oligo- mono- com- poly poly polis- peti- tic c. tion structure # firms?...
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CHARACTERISTIC MONO- OLIGO- MONO- COM- POLY POLY POLIS- PETI- TIC C. TION STRUCTURE # firms? differentiated? entry is: market power?CONDUCT: interdependece?Marginal Cost Pricing?PERFORMANCE: High prices? Economic Profits?Efficient capacity util? Efficient investment? Allocatively Efficient?
One Few Many ManyUnique ? Yes NoBlocked Impeded Easy EasyYES YES YES NO
NO YES NO NO NO NO NO YES
Yes Yes Yes No Yes Yes No No No No Under Yes No No No Yes No No No Yes
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12
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Price ($/copier)4 COPIER PRODUCING PLANTS
LRAC(envelope)
#4#3#2
#1
Most EfficientInvestment(lowest point)
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Price ($/copier)4 COPIER PRODUCING PLANTS
LRAC
LRMC
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1000s Copiers per month
Price ($/copier)
LRAC
LRMCDEMAND
MR
MR=MC
PROFIT MAXIMIZATION
CHARACTERISTIC MONO- OLIGO- MONO- COM- POLY POLY POLIS- PETI- TIC C. TION STRUCTURE # firms? differentiated? entry is: market power?CONDUCT: interdependece?Marginal Cost Pricing?PERFORMANCE: High prices? Economic Profits?Efficient capacity util? Efficient investment? Allocatively Efficient?
One Few Many ManyUnique ? Yes NoBlocked Impeded Easy EasyYES YES YES NO
NO YES NO NO NO NO NO YES
Yes Yes Yes No Yes Yes No No No No Under Yes No No No Yes No No No Yes
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4
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8
1 0
1 2
1 4
0 5 1 0 1 5 2 0 2 5
Copiers per month
Price ($/copier)
LRAC
LRMCDEMAND
MR
MR=MC
PROFIT MAXIMIZATION
TC
TOTAL COST
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1 4
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Price ($/copier)
LRAC
LRMCDEMAND
MR
MR=MC
PROFIT MAXIMIZATION
TR
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Price ($/copier)
LRAC
LRMCDEMAND
MR
MR=MC
PROFIT MAXIMIZATION
TC
TOTAL COST
PRO-FIT
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DEMANDMR
MR=MC
OTHER EFFICIENCIES?
MIN SRAC
MIN LRAC
P=LRMC
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Price ($/copier)
DEMANDMR
MR=MC
OTHER EFFICIENCIES?
MIN SRAC
MIN LRAC
P=LRMC
NOT EFFICIENTINVESTING
INEFFICIENTCAPACITY UTILIZATION
(ALLOCATIVELYINEFFICIENT)
NONE!!
MONOPOLY
• HIGH PRICES (P>SRAC)
• HIGH LONG RUN PROFITS (P>LRAC)
• INEFFICIENT CAPACITY (SRAC NOT THROUGH MIN OF LRAC)
• INEFFICIENT CAPACITY UTILIZATION (NOT AT MIN SRAC)
• INEFFICIENT ALLOCATION OF RESOURCES (P>MC)
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5
1 0
1 5
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2 5
0 5 1 0 1 5 2 0 2 51000s Copiers per month
Price ($/copier)OLIGOPOLY MODELS
4X
3X
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1X
Average Explicit CostLong Run Average CostDemandamerican choice
european choice
japanese choice
OLIGOPOLY
• HIGH PRICES (P>SRAC)
• HIGH LONG RUN PROFITS (P>LRAC)
• INEFFICIENT CAPACITY (SRAC NOT THROUGH MIN OF LRAC)
• INEFFICIENT CAPACITY UTILIZATION (NOT AT MIN SRAC)
• INEFFICIENT ALLOCATION OF RESOURCES (P>MC)
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1 0
1 2
0 5 1 0 1 5 2 0 2 5
Copiers per month (000s)
Price ($/copier)
LRMC
MONOPOLISTIC COMPETITION
MR
Demand
LRAC
Long Run ProfitMaximizing Output
MONOPOLISTIC COMPETITION
• HIGH PRICES (P>SRAC)
• NO LONG RUN PROFITS (P=LRAC)
• INEFFICIENT CAPACITY (SRAC NOT THROUGH MIN OF LRAC)
• UNDERUTILIZED CAPACITY (AT LOWER OUTPUT THAN MIN SRAC)
• INEFFICIENT ALLOCATION OF RESOURCES (P>MC)
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Price ($/copier)
Copiers per month0 1 BILL 2 BILL 3BILL
Price ($/copier)
COMPETITION
DEMAND
LRAC
LRMCSUPPLY
MARKET FIRM POINT OF VIEW
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1 2
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1000s Copiers per month
Price ($/copier)
Copiers per month0 1 BILL 2 BILL 3BILL
Price ($/copier)
COMPETITION
DEMAND
SRAVC
SUPPLY
MARKET FIRM POINT OF VIEW
SRMC
SRACA
BSHUT DOWN PRICE
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1 2
0 5 1 0 1 5 2 0 2 5
Copiers per month
Price ($/copier)
Copiers per month0 1 BILL 2 BILL 3BILL
Price ($/copier)
COMPETITION
DEMAND
LRAC
LRMCSUPPLY
MARKET FIRM POINT OF VIEW
PROFIT
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1 0
1 2
0 5 1 0 1 5 2 0 2 5
Copiers per month
Price ($/copier)
Copiers per month0 1 BILL 2 BILL 3BILL
Price ($/copier)
ENTRY DUE TO PROFIT
DEMAND
LRAC
LRMCSUPPLY
MARKET FIRM POINT OF VIEW
SHIFT
LOSS
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1 2
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Price ($/copier)
Copiers per month0 1 BILL 2 BILL 3BILL
Price ($/copier)
COMPETITIVE EQUILIBRIUM: THROUGH NATURAL MARKET FORCES
DEMAND
LRAC
LRMC
SUPPLY
MARKET FIRM POINT OF VIEW
PERFECT COMPETITION
• LOWEST PRICES (P= MIN SRAC)
• NO LONG RUN PROFITS (P=LRAC)
• EFFICIENT CAPACITY (SRAC THROUGH MIN OF LRAC)
• FULLY UTILIZED CAPACITY (AT SAME OUTPUT AS MIN SRAC)
• EFFICIENT ALLOCATION OF RESOURCES (P=MC)
PORTER’S INDUSTRY STUDY
• STRUCTURAL ANALYSIS (# of firms, product differentiation, barriers to entry, government involvement, cost conditions, supply and demand conditions, global,etc
• CONDUCT: Analysis of competitive behavior, interdependence, industry strategies,
• PERFORMANCE: Price, Profitability, Efficiency, Quality, etc.
FIRM’S STRATEGY COVERS:
• COST REDUCTION
• RATE OF SUBSTITUTION (switching cost, segmentation, complements)
• VERTICAL STRATEGIES: buyers, sellers
• HORIZONTAL STRATEGIES: entry deterrence, competitor analysis,
• INFORMATION & SIGNALLING STRATEGIES
• GAME THEORETIC STRATEGY.
STRATEGIC INSTRUMENTS (LONG RUN)
• CAPACITY EXPANSION- domestic, global• VERTICAL INTEGRATION• ENTRY • SPINOFFS (DIVESTMENT)• COALITIONS (TRADE ASSNS., ETC.)• JOINT VENTURES & OTHER
COOPERATIVE VENTURES.
TACTICAL INSTRUMENTS (SHORT RUN)
• RATE OF PRODUCTION (eg shut down)
• PRICING
• PURCHASING MANAGEMENT (inventories, labor contracting, etc.)
• ADVERTISING & MARKETING
• FINANCIAL & ACCOUNTING MANAGEMENT
DATA SOURCESProduct Lines Buyers and their behaviorComplementary productsSubstitute productsGrowth (rate, patterns)Technology (Pdcn Fcn.)- substitutability, Economies, marginal productivity- technological changeMarkets (segments, practices)SuppliersCompetitors
SocialPoliticalEconomicStakeholders
Environment
NUMBER OF FIRMS0 1 2 3 4 5 10 20 N
PRICE MONOPOLY PRICE
COMPETITIVEPRICE
COURNOT
CHAMBERLAIN
BERTRAND
PAYOFF MATRIX FOR THE PRISONER’S DILEMMA
DON’T TELLTELL
DON’TTELL
TELL
BOTH Hunt-jailFREE Liddy-free & write bkLiddy-jail BOTH INHunt-free JAIL& writes bk
HUNT
LIDDY
SOLUTION TO PRISONER’S DILEMMA
• EXCHANGE INFORMATION
• ENFORCEMENT (ALTER PAYOFF MATRIX)
• REPETITION
PAYOFF MATRIX FOR THE PRISONER’S DILEMMA: LOWERING PRICES
FIRM IFIRM
II
DON’T LOWERCHANGE PRICE
DON’TCHANGELOWERPRICE
Both gain II brokeprofits I gains monopolyI broke II gains No Profitmonopoly
PAYOFF MATRIX FOR THE PRISONER’S DILEMMA: RAISING PRICES
FIRM IFIRM
II
RAISE DON’TPRICE CHANGE
RAISEPRICEDON’TCHANGE
Both gain II brokeprofits I gains monopolyI broke II gains No Profitmonopoly
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