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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?

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Presentation on theme: "CHARACTERISTIC MONO- OLIGO- MONO- COM- POLY POLY POLIS- PETI- TIC C. TION STRUCTURE # firms? differentiated? entry is: market power? CONDUCT: interdependece?"— Presentation transcript:

1 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 Many Unique ? Yes No Blocked Impeded Easy Easy YES 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

2 Copiers per month (000’s) Price ($/copier) 4 COPIER PRODUCING PLANTS LRAC (envelope) #4 #3 #2 #1 Most Efficient Investment (lowest point)

3 Copiers per month Price ($/copier) 4 COPIER PRODUCING PLANTS LRAC LRMC

4 1000s Copiers per month Price ($/copier) LRAC LRMC DEMAND MR MR=MC PROFIT MAXIMIZATION

5 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 Many Unique ? Yes No Blocked Impeded Easy Easy YES 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

6 Copiers per month Price ($/copier) LRAC LRMC DEMAND MR MR=MC PROFIT MAXIMIZATION TC TOTAL COST

7 Copiers per month Price ($/copier) LRAC LRMC DEMAND MR MR=MC PROFIT MAXIMIZATION TR

8 Copiers per month Price ($/copier) LRAC LRMC DEMAND MR MR=MC PROFIT MAXIMIZATION TC TOTAL COST PRO- FIT

9 Copiers per month Price ($/copier) DEMAND MR MR=MC OTHER EFFICIENCIES? MIN SRAC MIN LRAC P=LRMC

10 Copiers per month Price ($/copier) DEMAND MR MR=MC OTHER EFFICIENCIES? MIN SRAC MIN LRAC P=LRMC NOT EFFICIENT INVESTING INEFFICIENT CAPACITY UTILIZATION (ALLOCATIVELY INEFFICIENT) NONE!!

11 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)

12 1000s Copiers per month Price ($/copier) OLIGOPOLY MODELS 4X 3X { { { { { { { { { 1X Average Explicit Cost Long Run Average Cost Demand american choice european choice japanese choice

13 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)

14 Copiers per month (000s) Price ($/copier) LRMC MONOPOLISTIC COMPETITION MR Demand LRAC Long Run Profit Maximizing Output

15 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)

16 Copiers per month Price ($/copier) Copiers per month 0 1 BILL 2 BILL 3BILL Price ($/copier) COMPETITION DEMAND LRAC LRMC SUPPLY MARKET FIRM POINT OF VIEW

17 1000s Copiers per month Price ($/copier) Copiers per month 0 1 BILL 2 BILL 3BILL Price ($/copier) COMPETITION DEMAND SRAVC SUPPLY MARKET FIRM POINT OF VIEW SRMC SRAC A B SHUT DOWN PRICE

18 Copiers per month Price ($/copier) Copiers per month 0 1 BILL 2 BILL 3BILL Price ($/copier) COMPETITION DEMAND LRAC LRMC SUPPLY MARKET FIRM POINT OF VIEW PROFIT

19 Copiers per month Price ($/copier) Copiers per month 0 1 BILL 2 BILL 3BILL Price ($/copier) ENTRY DUE TO PROFIT DEMAND LRAC LRMC SUPPLY MARKET FIRM POINT OF VIEW SHIFT LOSS

20 1000s Copiers per month Price ($/copier) Copiers per month 0 1 BILL 2 BILL 3BILL Price ($/copier) COMPETITIVE EQUILIBRIUM: THROUGH NATURAL MARKET FORCES DEMAND LRAC LRMC SUP PLY MARKET FIRM POINT OF VIEW

21 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)

22 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.

23 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.

24 STRATEGIC INSTRUMENTS (LONG RUN) CAPACITY EXPANSION- domestic, global VERTICAL INTEGRATION ENTRY SPINOFFS (DIVESTMENT) COALITIONS (TRADE ASSNS., ETC.) JOINT VENTURES & OTHER COOPERATIVE VENTURES.

25 TACTICAL INSTRUMENTS (SHORT RUN) RATE OF PRODUCTION (eg shut down) PRICING PURCHASING MANAGEMENT (inventories, labor contracting, etc.) ADVERTISING & MARKETING FINANCIAL & ACCOUNTING MANAGEMENT

26 DATA SOURCES Product Lines Buyers and their behavior Complementary products Substitute products Growth (rate, patterns) Technology (Pdcn Fcn.) - substitutability, Economies, marginal productivity - technological change Markets (segments, practices) Suppliers Competitors Social Political Economic Stakeholders Environment

27 NUMBER OF FIRMS N PRICE MONOPOLY PRICE COMPETITIVE PRICE COURNOT CHAMBERLAIN BERTRAND

28 PAYOFF MATRIX FOR THE PRISONER’S DILEMMA DON’T TELL TELL DON’T TELL BOTH Hunt-jail FREE Liddy-free & write bk Liddy-jail BOTH IN Hunt-free JAIL & writes bk HUNTHUNT LIDDY

29 SOLUTION TO PRISONER’S DILEMMA EXCHANGE INFORMATION ENFORCEMENT (ALTER PAYOFF MATRIX) REPETITION

30 PAYOFF MATRIX FOR THE PRISONER’S DILEMMA: LOWERING PRICES FIRM I F I R M II DON’T LOWER CHANGE PRICE DON’T CHANGE LOWER PRICE Both gain II broke profits I gains monopoly I broke II gains No Profit monopoly

31 PAYOFF MATRIX FOR THE PRISONER’S DILEMMA: RAISING PRICES FIRM I F I R M II RAISE DON’T PRICE CHANGE RAISE PRICE DON’T CHANGE Both gain II broke profits I gains monopoly I broke II gains No Profit monopoly

32 Copiers per month Price ($/copier) Copiers per month 0 1 BILL 2 BILL 3BILL Price ($/copier) COMPETITION DEMAND LRAC LRMC SUPPLY MARKET FIRM POINT OF VIEW


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