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FIVE COMPETITIVE FORCES

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Presentation on theme: "FIVE COMPETITIVE FORCES"— Presentation transcript:

1 FIVE COMPETITIVE FORCES
UPSTREAM MARKETS SUPPLIERS: Competitive forces through bargaining and economic leverage V E R T I C A L O N S HOR ZONTAL RELATIONSHIPS PRODUCERS OF SUBSTITUTES: Competitive forces through rivalry of sellers in different markets through price, advertising, lobbying etc. COMPETITORS: Competitive forces through rivalry of sellers in same market through price, advertising, lobbying etc. POTENTIAL COMPETITORS: Competitive for ce from threat of entry BUYERS: Competitive forces through bargaining and economic leverage DOWNSTREAM MARKETS

2 MARKET BOUNDARIES BUYER POINT OF VIEW: No potential seller exists outside of the market boundaries (within a reasonable price range) SELLER POINT OF VIEW: No potential buyer exists outside of the market boundaries (within a reasonable price range) BOTH POINTS OF VIEW MUST HOLD CROSS PRICE ELASTICITY measures

3 MARKET BOUNDARIES X represents buyers O represents sellers X X O O X X

4 MONOPOLY UNIQUE ONE MANY OLIGOPOLY - FEW MANY MONOPOLISTIC
TYPE OF MARKET PRD DIFF. SELLERS BUYERS MONOPOLY OLIGOPOLY MONOPOLISTIC COMPETITION MONOPSONY OLIGOPSONY BILATERAL UNIQUE ONE MANY FEW MANY PRD DIFF. MANY MANY STANDARD MANY MANY MANY ONE MANY FEW ONE ONE ONE FEW FEW ONE FEW FEW

5 Min Cost Lowest HighestNone Yes Min Price Yes Not Min Price Yes Not
TYPE OF MARKET OBJECTIVE P Q PRO- EFFI FIT CIENT MONOPOLY OLIGOPOLY Interdependence MONOPOLISTIC COMPETITION MONOPSONY OLIGOPSONY BILATERAL S.Run Profit Large Not Mkt. Share Med. Not Horizontal W A R Customer None Exc. Loyalty Cap. Min Cost Lowest HighestNone Yes Min Price Yes Not Min Price Yes Not Max Share ? Vertical of Profit W A R of Profit W A R

6 Blocked Impeded Easy Easy YES YES YES NO
CHARACTERISTIC MONO- OLIGO- MONO- COM- POLY POLY POLIS- PETI- TIC C. TION One Few Many Many Unique ? Yes No Blocked Impeded Easy Easy YES YES YES NO STRUCTURE # firms? differentiated? entry is: market power? CONDUCT: interdependece? Marginal Cost Pricing? PERFORMANCE: High prices? Economic Profits? Efficient capacity util? Efficient investment? Allocatively Efficient? NO YES NO NO NO NO NO YES Yes Yes Yes No Yes Yes No No No No Under Yes No No No Yes

7 4 COPIER PRODUCING PLANTS Price ($/copier) Most Efficient Investment
#3 #4 #1 #2 Most Efficient Investment (lowest point) LRAC (envelope) Copiers per month (000’s)

8 4 COPIER PRODUCING PLANTS Price ($/copier) LRMC LRAC Copiers per month

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

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

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

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

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

14 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)


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