16 CHAPTER D YNAMIC P OWER P OINT ™ S LIDES BY S OLINA L INDAHL Competing for Monopoly: The...
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Transcript of 16 CHAPTER D YNAMIC P OWER P OINT ™ S LIDES BY S OLINA L INDAHL Competing for Monopoly: The...
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DYNAMIC POWERPOINT™ SLIDES BY SOLINA LINDAHL
Competing for Monopoly: Competing for Monopoly: The Economics of Network The Economics of Network
GoodsGoods
CHAPTER OUTLINE
Network Goods Are Usually Sold by Monopolies and Oligopolies
The “Best” Products May Not Always Win
Standard Wars Are Common
Competition Is “For the Market” Instead of “In the Market”
Contestable Markets
Antitrust and Network Goods
Music Is a Network Good
For applications, click hereTo Try it! To Try it! questionquestion
ss
Some good blogs and other sites to get the juices flowing:
Food for Food for Thought….Thought….
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Network Goods
A Network GoodNetwork Good is a good whose value to one consumer increases the more that other consumers use the good.
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Network Goods
Features of network goods:1. Network goods are usually sold by
monopolies or oligopolies;2. When networks are important the
“best” product may not always win;3. Standard wars are common in
establishing network goods;4. Competition in the market for
network goods is for the market instead of in the market.
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Monopolies and Oligopolies Sell Network Goods
Network goods typically involve one firm providing a dominant standard at a high price.
These markets usually include a number of other firms offering a slightly different product.
These firms tend to service niche areas in the market.
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The “Best” Product May Not Always Win
It’s possible for the market to “lock in” to the “wrong” product.A Nash EquilibriumNash Equilibrium is a situation in which no player has an incentive to change their strategy unilaterally.Tyler
Apple Microsoft
AlexApple (11, 11) (3, 3)
Microsoft (3, 3) (10, 10)
Both (Apple, Apple) and (Microsoft, Microsoft) are Nash Equilibria depending on who chooses what first.If Alex chooses Apple, Tyler faces a better payoff if he also chooses Apple (11) or a lower payoff if he chooses Microsoft (3) and vice versa.
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Standard Wars are Common
Both companies prefer a standard to none…Two Nash equilibria exist…
Postscript: The Sony group won the standard war when Blu-Ray technology was imbedded into the Sony PlayStation 3 and increased the audience for Blu-Ray
Sony
HD-DVD Blu-Ray
ToshibaHD-DVD (10, 8) (0, 0)
Blu-Ray (0, 0) (8,10)
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Competition is “For the Market” instead of “In the Market”
Once there is a winning standard, the loser can disappear quite rapidly.Winners are not guaranteed their victory for long.
1988: Lotus 1-2-3 dominates the market.1998? Excel dominates.
It’s normal for just a few firms to dominate some markets. Does this make us worse off?
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Nash Equilibrium
Cell Phone DuopolyP Q
$0 140
5 130
10 120
15 110
20 100
25 90
30 80
35 70
40 60
45 50
Smalltown has 140 residents
The “good”: cell phone service with unlimited anytime minutes and free phone
Smalltown’s demand schedule
Two firms: T-Mobile, Verizon(duopoly: an oligopoly with two firms)
Each firm’s costs: FC = $0, MC = $10
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Nash Equilibrium
5045
6040
7035
8030
9025
10020
11015
12010
1305
140$0
QP
1,750
1,800
1,750
1,600
1,350
1,000
550
0
–650
–1,400
Profit
500
600
700
800
900
1,000
1,100
1,200
1,300
$1,400
Cost
2,250
2,400
2,450
2,400
2,250
2,000
1,650
1,200
650
$0
Revenue Competitive outcome:
P = MC = $10Q = 120
Profit = $0
Competitive outcome:
P = MC = $10Q = 120
Profit = $0
Monopoly outcome:P = $40Q = 60
Profit = $1,800
Monopoly outcome:P = $40Q = 60
Profit = $1,800
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Nash Equilibrium
T-Mobile and Verizon could agree to each produce half of the monopoly output:
For each firm: Q = 30, P = $40, profits = $900
Does anyone have an incentive to cheat?What if Verizon increases Q to 40?Market demand curve now has Q = 70 and P = $35Verizon profit = Revs – Costs
= 40*$35 - ($10* 40) = $1000T-Mobile profit = (30*$35) – ($10*30) = 750Verizon gains profit, T-Mobile loses profit
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Nash Equilibrium
Will Verizon cheat? Why wouldn’t they?What will T-Mobile do?Will it gain if it cheats?Suppose T-Mobile increases its Q to 40Now market Q = 80 and market price = $30What is T-Mobile’s profit?
(40*$30) – (40*10) = $800
Will T-Mobile increase its Q? Yes, since its profits increase from $750 to $800Note that Verizon’s profits fall from $1000 to $800
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Nash Equilibrium
Is there an incentive to cheat at this point? Suppose Verizon increases output to 50Market Q rises to 90 and market price falls to $25What is Verizon’s profit? (50 * $25) – (50 * $10) = $750Does Verizon have any incentive to cheat? No
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Nash Equilibrium
Verizon and T-Mobile have arrived at a Nash equilibriumDefinition:
A Nash equilibrium is a situation in which no player has an incentive to change their strategy unilaterally
By cooperating they could have made more profitNote that decreasing production yields no gainSo now they are both in a less profitable position
Try it!Try it!
Do you use Facebook? a)Yes b)NoIf so, how much would you REALLY be willing to pay per month for access to Facebook? (if not, use your best guess)a)$0b)$1.99c)$4.99d)$9.99e)$19.99
To next To next Try it! Try it!
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Contestable Markets
Contestable Market: when a competitor could credibly enter and take away business from the incumbent.Large market share does not necessarily mean the firm’s position is safe…
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Contestable Markets
Markets are more contestable when:
1. Fixed costs of market entry are low, relative to potential revenue.
2. There are few or no legal barriers to entry.
3. The incumbent has no unique, hard-to-replicate resource.
4. Consumers are open to the prospect of dealing with a new competitor.
SEE THE SEE THE INVISIBLEINVISIBLE HANDHAND
SEE THE SEE THE INVISIBLEINVISIBLE HANDHAND
City water: less contestable
Mineral water: more contestable
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Limiting Contestability with Switching Costs
Facebook hosts free photos: bad business decision? Or saavy?
If you are embedded with Facebook, are you less likely to switch to another network?
If switching costs rise, demand will be less elastic (and firms can charge more)
http://awkwardfamilyphotos.com/
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Antitrust and Network Goods
Bill Gates testifies before Congress, 1998. Microsoft intended to “smother” Netscape, went to court on antitrust violations and later settled. List three other web browsers that are now popular. Why and how are they thriving?
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Music can be considered a network good in the sense that
a)many people today listen to music online and over computer networks.b)the preferences of individual consumers are independent of what others like.c)music is produced by large networks of bands, record labels, and music stores.d)many consumers prefer to purchase music that others purchase as well. To next To next
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Music Is a Network Good
An ingenious experiment by Duncan J. Watts (Columbia University) demonstrated that tastes in music have a strong social component.
Watts discovered that the more downloads a song had, the more people wanted to download the song.
Try it!Try it!This is the philosopher Rousseau’s “stag hunt game”. He thought many social situations are like going hunting with a friend: If you both agree to hunt for a large male deer (a stag), then you each have to hold your positions near each end of a valley to prevent escape. If one hunter wanders off to hunt the easier-to-find rabbit, then the stag will almost surely get away.
What is the Nash equilibrium (or equilibria) of this game?•(Hunt Stag; Hunt Stag)•(Hunt Rabbit; Hunt Rabbit)•(Hunt Stag; Hunt Rabbit) and (Hunt Rabbit; Hunt Stag)•Both A and B To next To next
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In a “standard war:”
a)there are two good equilibria, but the players differ over which equilibrium is the best.b)there is only one good equilibrium, but players get locked into the “bad” equilibrium.c)the Nash equilibrium never dominates.d)both players would prefer to have no standard. To next To next
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All cartels and cartel-like behavior are illegal in the United Statesa)Trueb)False
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