Concepts of Competition for Managers My essay, on moodle.
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Transcript of Concepts of Competition for Managers My essay, on moodle.
![Page 1: Concepts of Competition for Managers My essay, on moodle.](https://reader030.fdocuments.us/reader030/viewer/2022032605/56649e7c5503460f94b7d760/html5/thumbnails/1.jpg)
Concepts of Competition for Managers
My essay, on moodle
![Page 2: Concepts of Competition for Managers My essay, on moodle.](https://reader030.fdocuments.us/reader030/viewer/2022032605/56649e7c5503460f94b7d760/html5/thumbnails/2.jpg)
Three Sections
• The textbook model which we have already discussed.
• A model of competition is not THE model of competition
• Alchian’s natural selection model of the firm
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Three Sections
• The textbook model which we have already discussed.
• A model of competition is not THE model of competition
• Alchian’s natural selection model of the firm
![Page 4: Concepts of Competition for Managers My essay, on moodle.](https://reader030.fdocuments.us/reader030/viewer/2022032605/56649e7c5503460f94b7d760/html5/thumbnails/4.jpg)
Three Sections
• The textbook model which we have already discussed.
• A model of competition is not THE model of competition
• Alchian’s natural selection model of the firm
![Page 5: Concepts of Competition for Managers My essay, on moodle.](https://reader030.fdocuments.us/reader030/viewer/2022032605/56649e7c5503460f94b7d760/html5/thumbnails/5.jpg)
A model of competition is not THE model
• Our usual model
• Large numbers• Perfect information • Homogeneous products• Free entry and exit
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This model has been very successful in its intended purpose
• A theoretical foundation for ordinary supply
• Existence of general equilibrium• Efficiency of general equilibrium– Any competitive equilibrium is a Pareto optimum– Any Pareto optimum is a competitive equilibrium (Under restricted conditions)
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But a model that is good for one purpose may not be good for other purposes
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Demsetz interest is was public policy.
• The model is a dramatic simplification
• Though successful, the things that it excludes may be important in the real world
• And their importance may not merely be that they make the model less accurate.
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Particularly antitrust
• In the standard model, when we see advertising, we might conclude the presence of monopoly power.
• In the standard model, if we see firms engaged in price calculation, we might conclude monopoly power.
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In fact, much of antitrust policy and other industrial policy has done just that.
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However, these conditions may not reflect industrial concentration
• Imperfect information, rather than monopoly power, explains much of advertising.
• Imperfect information, rather than monopoly is a likely explanation of price calculation
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Our purpose in this course is not antitrust policy, but rather is understanding the competitive environment of firms.
More specifically, what is the competitive environment of my firm?
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So, while the formal competitive model is successful, it may be misleading for our purposes
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New products, new contracts, new approaches in general
• These are a vital part of any real economy. The standard model does not accommodate these very well.
• Competition is a process of discovery– of prices– of new products– of new kinds of relationships, business models,
etc.
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Demsetz quotes Hayek
The formal model of competition deprives the verb “compete” of any real meaning.
Perfect competition, like monopoly, is a quiet life.
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Continuing our theme:
• What kind of a market are we in?
• In real-world competitive markets, there is a lot of real competing going on.
• And yet true monopoly power may be scarce and fleeting.
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Connections
• To Porter and Koch
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A few things about Armen Alchian’s Uncertainty, Evolution and Economic Theory
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Key Ideas
• In the presence of uncertainty, firms face a very difficult problem
• There is not a best think to do, but there will be a best think to have done.
• Profits are the selection mechanism. Positive profits are necessary for survival
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Adoption versus adaptation
• Firms can adapt to the world, but ultimately, the economy adopts some (they survive) and rejects others.
• Yet even in a world of pure adoption (no conscious adaptation) economic models will predict.
• Those whose behavior is consistent with efficient responses are more likely to survive
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Which is not to say…
…….That there is no role for adaptation.
Efficient methods of various sorts can improve performance, just don’t expect them all to work.
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Reproduction and variation
• Evolutionary models incorporate survival, reproduction and variation.
• Profits determine survival• Imitation is corresponds to reproduction
• Variation? – Deliberate innovation– Unintended innovation: Imperfect immitation
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Continuity is provided by
• Firms have policies, practices, rules of thumb that define the firm. (An RBV notion)
• Personnel practices including recruitment, training and development also play a role
• Enhanced standing for rules of thumb
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And yet…
• Long term survival may not demonstrate insight or wisdom
• Borel trial: Two million Frenchmen flipping coins. Eight hours a day….etc. If they could transfer their position in the game to their heirs, a few dozen are still playing after a thousand years.