Chapter 5 - competitors and competition Flashcards
competitors
competitors are firms whose strategic choices directly affect one another
SSNIP
small but significant non transitory increase in price
SSNIP criterion
according to DOJ, a market is well defined and all of the competitors within are identified, if a merge among them would lead to a small (+5%) but significant non transitory (+ 1 year) increase in price
substitutes
two products x and y are substitutes if, when the price of x increases and the price of y stays the same, purchases of x go down and purchases of y go up
products tend to be close substitutes when three conditions hold
- same/similar product performance characteristics (what it does for consumers)
- same/similar occasions for use (when, where and how it is used)
- sold in the same geographic market
products are sold in different geographical markets if
- sold in different locations
- costly to transport the goods
- costly for consumers to travel to buy the goods
empirical approaches to competitor identification
- cross-price elasticity of demand
- regression analysis
- diversion ratio analysis
- ad hoc product market definition
degree to which products substitute is measured by the
cross-price elasticity of demand
cross-price elasticity of demand
the percentage change in demand for good y that results in a 1% change in the price of good x
regression analysis
uses statistical algorithms to isolate the effects of price changes on purchase pattern, while holding constant other demand-side factors
diversion ratio analysis
another way to identify competitors
ad hoc product market definition
SIC identifies products/services by a seven-digit identifier, with each digit representing a finer degree of classification
geographic competitor identification
- flow analysis
- survey customers
flow analysis
examining data on consumer travel patterns
catchment area
contiguous area from which firm draws most of its customers
measuring market structure
- N-firm concentration ratio (CR)
- Herfindahl index
- number-equivalent of firms
market structure
the number and distribution of firms in a market
N-firm concentration ratio (CR)
gives the combined market share of the N largest firms in the market, usually based on sales revenue
(invariant to changes in the sizes of the largest firms)
herfindahl index
the sum of the squared market shares of all the firms in the market
(sufficient to restrict to firms with market shares of .01 or larger)
number-equivalent of firms
the reciprocal of the herfindahl index. thus, a market whose herfindahl index = 0.2 has a numbers equivalent of 5
Perfect competition
Range of herfindahls:
usually below .2
Intensity of price competition:
fierce
monopolistic competition
Range of herfindahls:
usually below .2
Intensity of price competition:
May be fierce or light, depending on product differentiation
oligopoly
Range of herfindahls:
.2 to .6
Intensity of price competition:
May be fierce or light, depending on interfirm rivalry
monopoly
Range of herfindahls:
.6 and above
Intensity of price competition:
usually light, unless threatened by entry
perfect competition
- many sellers
- homogeneous products
monopoly power
the ability to act in an unconstrained way (e.g., increase price/reduce quality)
monopolist
firm that faces little or no competition in its output market
monopsonist
firm that faces little or no competition in its input markets
cartel
several firms acting in concert to mimic behavior of a monopolist
monopolistic competition
- many sellers, its actions will not materially affect others
- each seller offers a differentiated product. there is some price at which consumers prefer to purchase a particular product
vertical differentiation
a product that is unambiguously better/worse than competing products, all consumers will value this enhancement, although willing to pay different prices
horizontal differentiation
a product that only some consumers prefer over competing products
idiosyncratic preferences
if tastes differ markedly from one person to the next
search costs
how easy/hard it is for consumers to learn about alternatives
oligopoly
a market where actions of individual firms materially affect the overall market
cournot quantity competition
- only 2 firms
- produce identical goods
- forced to charge the same prices –> how much to produce each?
cournot equilibrium
a pair of outputs Q1* and Q2, a market price P that satisfy three conditions:
C1. P* is the price that clears the market given the firms’ production levels
C2. Q1* is firm 1’s profit-max. output given that it guesses firm 2 will choose Q2*.
C3. Q2* is firm 2’s profit-max. output given that it guesses firm 1 will choose Q1*.
reaction function
calculate each firm’s profits and solve for the value of Q that maximizes its profits to find the market equilibrium choices of Q1 and Q2
revenue destruction effect
when one firm expands its output, it reduces the market price –> reduces revenues from all customers who would have purchased the product at a higher price
Bertrand price competition
each firm selects a price to maximize its own profits, given the price it believes the other firm will select
only possible equilibrium: P1 = P2 = MC
