5 - Competitors And Competition

Question 1

Competitors

Answer 1

Are firms whose strategic choices directly affect one another.
Competition is on both inputs and outputs

Question 2

SSNIP criterion for market definition

Answer 2

A market is well defined and all the competitors within it are identified if a merger among them would lead to a small but significant non-transitory increase in price. (>5% and >1 year)

It is based on the concept of substitutes

Question 3

Substitutes

Answer 3

• Same or similar product performance and characteristics
• Same or similar occasion of use
• Same geographic market

Question 4

Different geographic markets if:

Answer 4

• products are sold in different locations
• it is costly to transport the goods
• it is costly for consumers to travel to buy the goods

Question 5

Empirical approaches of competitor identification

Answer 5

1- cross-price elasticity of demand (Q(y)/P(x))
2- régression analysis
3- Standard Industrial Classification (SIC) = 7 digit number

Question 6

Geographic competitor identification

Answer 6

1- ad hoc indicator: boundaries (city, country, state)

2- flow analysis: examines flow of good and services across geographic regions on consumer travel pattern.

Question 7

Measures of market structure

Answer 7

Number and distribution of firms:
1- N-firm concentration ratio: combined market share of the N largest firms
2- Herfindahl index: sum of squared market share

Question 8

Classes of market structure

Answer 8

1- perfect competition
2- Monopoly
3- monopolistic competition
4- ologopoly

Question 9

Perfect competition

Answer 9

Firms maximise profits by producing a volume of output at which MC=MR

Market conditions will tend to decrease prices when at least 2/3 conditions are met:

• many sellers: diversity of pricing preferences, high prices => lower demand => lower prices, cheat
• excess in capacity: struggle with FC and offer products below AC
• consumers perceive goods as homogeneous: lower prices => stealing competitors customers, acquiring new ones or increasing its own customer bass

Ex: apple

Question 10

Monopoly

Answer 10

Monopolist firm faces little or no competition in its OUTPUT market so it has the ability to act in an unconstrained way (increase prices, reduce quality).

If fringe firms account for 30%-40%, they can threaten the monopolist’s market share.

Monopsonist if little or no competition in INPUT market.

Characteristics:

• downward-sloping demand
• select prices so that the MR of producing the last unit sold = MC of producing it (little regard on competitors response)
• have more efficient techniques or a product that fulfil unmet consumer needs

=> taxes and antitrust laws to limit power

HI > 0.6

Question 11

Cartel

Answer 11

Group of firms acting aligned and mimicking the behaviour of a monopolist.

Question 12

Monopolistic competition

Answer 12

1- there are many selles and they suppose that their actions don’t materially affect others
2- each sellers offers a differentiated product

Ex: shampoo, toothpaste

Question 13

Différenciation between A and B

Answer 13

If there is some price at which some consumers prefer to purchase A and others B

Horizontal différenciation: individual taste (perfume at same price)-> depends on the magnitude of consumer search costs (advertising)

Vertical différenciation: when it’s better or worse (Chanel vs WC)

Question 14

Oligopoly

Answer 14

Market with few sellers so that actions of individual firms materially affect the overall market in regard to prices and output. (HI 0.2-0.6)

Question 15

Cournot quantity Equilibrium

Answer 15

2 sellers producing identical goods are forced to sell at the same price and their only influencing mechanism is the amount of goods the firm chooses to produce.

If either one is unable to sell all its outputs, it will lower the price until it is able to do so.

Cournot Equilibrium = each firm chooses output simultaneously and each other correctly guess it’s rival response (best response functions)

Question 16

Revenue Destruction effect

Answer 16

The pursuit of individual self interest by producing more output than demanded doesn’t maximise profits of the group as a whole. More output => lower price, reduces revenues from all customers who could have purchased the product at a higher price.

It depends on the market share and size of the firm. Explains why cournot equilibrium price falls as the number of firms in the market increases (bears a smaller share of the RDE)

Question 17

Bertrand Price Competition

Answer 17

Each firm select a price to maximise its own profit given the price that it believes the other firm will set assuming that that its pricing practices will not affect the pricing or its rivals and seeing rival price as fixed.

As long as both firms set prices that exceed marginal costs, one firm will always have the incentive to slightly undercut its competitors.

Question 18

Evidence on market structure and performance

Answer 18

• prices tend to be higher in concentrated markets

- once there are 3 competitors, price competition is as intense as it will get.