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Karten in diesem Stapel (23)
- 1Structure-conduct-performance paradigm (Market-based view)Market structure influences firm behavior, which in turn affects firm performance
- 2Qualitative identification of substitutes: (Competitors (market based view))‒ Similar product characteristics
‒ Similar occasions for use
‒ Same geographic market - 3Quantitative identification of substitutes: (Competitors / Market-Based)‒ Two products are substitutes if an increase in price of one product leads to an increase in demand for the other product (positive cross-price elasticity)
- 4What is the seller concentration? + Common measures of market structure:Seller concentration refers to the number and distribution of firms in a market
‒ n-firm ratio: Market share of the n largest firms ‒ Herfindahl index: H = Σ(Si)² - 5Four ideal-typical market structuresPerfect competition
Monopolistic Competition
Oligopoly
Monopoly - 6Characteristics of Perfect Competition• Herfindahl< 0.2
Many sellers
Homogenous products (perfect substitutes)
Free market access (no entry or exit barriers)
Perfect information
Excess capacity (easy to increase capacity)
-> Firms are only price takers (price elasticity of demand is high) - 7Characteristics Monopolistic CompetitionHerfindahl< 0.2
Many sellers
Free market access
Products are no perfect substitutes (differentiated products)
Imperfect information
--> Price elasticity of demand is not infinitely high
--> Intensity of price competition depends on the degree of differentiation - 8Characteristics Oligopoly- 0.2 < Herfindahl< 0.6
- Few sellers
- Intensity of competitive rivalry depends on the type of competition (Cournot quantity competition versus Bertrand price competition) and the degree of differentiation between the competitors - 9Characteristics Cournot Quantity Competition- Substantial set-up investments
- High fixed costs
- Once set-up investments have been made, production capacity is inflexible
- Limited storekeeping possibilities: voluminous, dangerous, and volatile products
- Examples: Steel production, energy sector - 10Firm behavior in a Cournot quantity competition with homogeneous products• Firms know that price cuts are inefficient
• Competitors will immediately imitate price cuts to utilize the capacity
• Firms in a Cournotcompetition select the output level they choose to produce
• Once the firms are committed to certain production output, they set whatever price is necessary to “clear the market” - 11Characteristics Bertrand Price Competition• No capacity restriction
• Easy storekeeping possibilities
Example: Soft drinks (Coke vs. Pepsi), media products - 12Behavior in the Bertrand price competition:• Firms first choose the price and stand ready to meet all the demand for their products at that price
• Because capacity is unrestricted, firms have incentives to steal market share by decreasing prices
• The more homogenous the products, the tougher the price competition
• With perfectly homogenous products, price competition decreases prices so that firms earn zero profit - 13Characteristics Stackelberg Quantity Competition• Substantial set-up investments • High fixed costs
• Once set-up investments have been made, production capacity is inflexible
• Limited storekeeping possibilities: voluminous, dangerous, and volatile products
• Unlike in the Cournot Competition, firms do not determine their quantity simultaneously
• The Stackelbergleader makes a strategic commitment and determines its quantity first, the Stackelbergfollower determines its quantity considering the quantity of the Stackelberg leader - 14Characteristics Monopoly• Herfindahl> 0.6
• One large and dominant seller
- Few or no competition - 15The higher the threat of entrants, the less attractive is the market: (WHY)• Entrants “steal“ market share, if overall market demand remains the same. Market share generally decreases with the number of firms in a market
• Entrants reduce market concentration, which intensifies price competition - 16A risk-neutral profit-maximizing firm decides to enter a market if the following condition holds:
- 17Bain‘s (1956) Typology of Entry Conditions
- 18StructuralEntry BarriersControl of essential resources (e.g. a Diamond Company Needs to have Access to a Diamond mine to sell to the customers
e.g. specific Knowledge to to a certain Service (Patentiertes Wissen)
e.g. a specific Access to a specific product deliverer
if These ressources are not available --> a firm can not enter the market) • High sunk costs (high sunk Costs imply that you have high economies of scale
= average total cost decreases until a high Output Level and then they increase again
e.g. a product that Costs (R&D) very much to produce and the higher the Sales afterwards, the lower the Costs for a unit e.g. in pharmabranche
in consultancy you just Need a Computer and a space and some contacts (no high fix Costs) --> here economies of scale are less relevant)
‒-High economies of scale ‒
Network effects (the higher the number of consumers, the higher the Utility
1. great availabiltiy of compelemtnary products
2. higher interconnectiveness
e.g. Smartphone Systems (Androit,IOS); if Androit has Access to a high number of customers, the Software engineer for Androit Apps likes to - 19Sunk costs act as entry (and exit) barrier:
- 20Entry-DeterringStrategiesIn the absence of structural entry barriers, incumbents may wish to engage strategically in predatory acts to deliberately deter entry Incumbent firms generally earn higher profits in a concentrated market than in an unconcentrated market Entry-deterring strategies are aimed at changing entrants‘ expectations about the intensity of post-entry competition
Entry-deterring strategies: • Limit pricing • Predatory pricing • Excess capacity - 21Limit Pricing:Limit pricing refers to the practice whereby an incumbent firm charges a low price to discourage new firms from entering • Potential new entrants assume that post-entry price will be equally low or even lower • Potential entrants conclude that entry is not profitable
- 22Is limit pricing rational?Intuitive explanation: Entrant sees the low incumbent price and reasons that it cannot prosper by entering. The incumbent can again charge the monopoly price in the next period • A closer look reveals some problems with this intuition: An entrant may hang around infinitely, forcing the incumbent to set the limit price in each period • Depending on costs and demand, the incumbent may be better off as a duopolistthan as a perpetual monopoly limit pricer Ø Limit pricing only works if potential entrants are not informed about the incumbent‘s costs and demand
- 23Predatory Pricing:Predatory pricing refers to the practice of setting a low price in order to drive other firms out of business • The predatory firm expects that whatever losses it incurs while driving competitors from the market can be made up later through the exercise of market power • Whereas limit pricing is directed at firms that have not yet entered the market, predatory pricing is aimed at firms that have already entered the market
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- Karteikarten am mv, erstellt von Joanna M am 19/06/2020.
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- Joanna M
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