Location and Entry Deterrence Flashcards
What were the barriers to entry the Office of Fair Trading found in the Supermarket industry in 2006?
- shortage of land around town centres
- complex and time consuming to obtain planning permission
- large supermarkets acted strategically when purchasing undeveloped land (sometimes the big firms were just buying this land to keep competitors out, not to actually build supermarkets)
What is a market study?
A short, sharp look into a market to work out if there are any competition concerns going on. These can last about 6 months.
What is a market investigation?
If there is competition concerns going on, the market authorities can pour more resources in and come up with remedies to fix the problem. These can last 2 years.
What did the competition commission report in 2008?
There were 2 of 4 major recommendations:
- prevent land agreements that restrict entry by competitors
- the inclusion of a ‘competition test’ in planning decisions
The test was for a firm which already owns a store in a local market:
-the firm can only open a new store if:
–when there are 3>= firms in the town, when its market share <60%
–when there are 4 or more firms in the town
Federal Trade Commission complaint for Ready-to-Eat cereal market (1972)
Firms included: Kellogg’s (45%), Gen Mills (21%), Gen Foods (16%), Quaker Oats (9%)
1950-1972: biggest firms had introduced 80 new brands, none from entrants
- “These practices of proliferating brands, differentiating similar products and promoting trademarks… result in high barriers to entry”
- Proposed structural remedy; create 5 new firms from divestments of big 3
- The case was dismissed in 1982 due to no conspiracy to deter entry through brand proliferation since it can occur naturally from competition
Hotelling Model
- Assume a beach of length 1
- Number of sunbathers, M = 1
- Each sunbather demands at most 1 ice cream from sellers
What is the utility of a consumer in the Hotelling Model?
- The utility of a consumer located at 0(theta) who purchases from firm i (located at 0i) is U(0,0i) = V - T(Di) - pi
- -where V is the benefit from consuming the ice cream, T(Di) is the cost of travelling distance Di (0-0i), pi is the price of the ice cream
How do we draw a diminishing utility graph for customers as they get further from 0 or 1?
Fixed Simultaneous Entry assumptions
- 2 firms, A&B, setting p>=0
- Prices are exogenous (firms don’t control them) & at a level consumers will purchase ( V-k>=p)
- Marginal costs c
What are firm i’s profits in fixed simultaneous entry?
profit = (p-c)q = q
because p-c=1
What is firm i’s demand if it is the furthest firm to the left?
(θi+θj)/2
What is firm i’s demand if it is the furthest to the right?
1 - (0i+0j)/2
What is the marginal consumer?
The marginal consumer is the consumer who is indifferent between firms i and j based on their location
This implies they are located at (θA+θB)/2
When will the marginal consumer visit firm A?
When they are offered greater utility from firm A
i.e. V-T(DA)-p>V-T(DB)-p
or T(DB)>T(DA)
Random graphs I’ll figure out later
another one
another one
What is the principle of minimum differentiation?
Firms tend to locate close to each other
What is the socially optimal location for a market with two firms?
θi = 0.25 or θj = 0.75
Why is this socially optimal?
This is because moving the firm from 0.5 to 0.25 reduces the total travel cost
Consumers located at 0.25 don’t need to travel, consumers at 0 only need to travel 0.25 instead of 0.5
Issues with Harold Hotelling’s Model
- Ice cream sellers aren’t located in the same place, they are dotted around everywhere
- This is because prices aren’t exogenous; firms do control their price
- While ice cream vans may be able to move around, other firms generally are stuck where they locate themselves
Assumptions of Endogenous Sequential Entry
- Any number of firms can enter the market at fixed cost f>0
- Prices still exogenous where p-c=1
- All consumers will purchase V-k>=p
What is the timing on sequential entry?
When will a firm N+1 enter the market?
profit > f
