FIVE COMPETITIVE FORCES

SUPPLIERS:Competitive forces through bargaining and economic leverage

BUYERS:Competitive forces through bargaining and economic leverage

COMPETITORS:Competitive forces through rivalry of sellers in same market through price, advertising, lobbying etc.

PRODUCERSOF SUBSTITUTES:Competitive forces through rivalry of sellers in differentmarkets through price, advertising, lobbying etc.

POTENTIALCOMPETITORS:Competitive for cefrom threat of entry

UPSTREAM MARKETS

DOWNSTREAM MARKETS

VERTICAL

RELATIONS

HOR ZONTAL RELATIONSHIPS

MARKET BOUNDARIES

• BUYER POINT OF VIEW: No potential seller exists outside of the market boundaries (within a reasonable price range)

• SELLER POINT OF VIEW: No potential buyer exists outside of the market boundaries (within a reasonable price range)

• BOTH POINTS OF VIEW MUST HOLD

• CROSS PRICE ELASTICITY measures

MARKET BOUNDARIES

X

X

X

XX

O

O

O

X represents buyers

O represents sellers

TYPE OF MARKET PRD DIFF. SELLERS BUYERS

MONOPOLYOLIGOPOLYMONOPOLISTIC COMPETITIONCOMPETITIONMONOPSONYOLIGOPSONYBILATERAL MONOPOLYBILATERAL OLIGOPOLY

UNIQUE ONE MANY - FEW MANYPRD DIFF. MANY MANY

STANDARD MANY MANY- MANY ONE- MANY FEW

- ONE ONE ONE FEW- FEW ONE FEW FEW

TYPE OF MARKET OBJECTIVE P Q PRO- EFFI FIT CIENTMONOPOLYOLIGOPOLY InterdependenceMONOPOLISTIC COMPETITIONCOMPETITIONMONOPSONYOLIGOPSONYBILATERAL MONOPOLYBILATERAL OLIGOPOLY

S.Run Profit Large Not Mkt. Share Med. NotHorizontal W A RCustomer None Exc. Loyalty Cap.Min Cost Lowest HighestNone YesMin Price Yes NotMin Price Yes NotMax Share ? Vertical of Profit W A RMax Share ? Vertical of Profit W A R

CHARACTERISTIC MONO- OLIGO- MONO- COM- POLY POLY POLIS- PETI- TIC C. TION STRUCTURE # firms? differentiated? entry is: market power?CONDUCT: interdependece?Marginal Cost Pricing?PERFORMANCE: High prices? Economic Profits?Efficient capacity util? Efficient investment? Allocatively Efficient?

One Few Many ManyUnique ? Yes NoBlocked Impeded Easy EasyYES YES YES NO

NO YES NO NO NO NO NO YES

Yes Yes Yes No Yes Yes No No No No Under Yes No No No Yes No No No Yes

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8

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1 2

1 4

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Copiers per month (000’s)

Price ($/copier)4 COPIER PRODUCING PLANTS

LRAC(envelope)

#4#3#2

#1

Most EfficientInvestment(lowest point)

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Price ($/copier)4 COPIER PRODUCING PLANTS

LRAC

LRMC

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Copiers per month

Price ($/copier)

Copiers per month0 1 BILL 2 BILL 3BILL

Price ($/copier)

COMPETITION

DEMAND

LRAC

LRMCSUPPLY

MARKET FIRM POINT OF VIEW

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1 0

1 2

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1000s Copiers per month

Price ($/copier)

Copiers per month0 1 BILL 2 BILL 3BILL

Price ($/copier)

COMPETITION

DEMAND

SRAVC

SUPPLY

MARKET FIRM POINT OF VIEW

SRMC

SRACA

BSHUT DOWN PRICE

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Copiers per month

Price ($/copier)

Copiers per month0 1 BILL 2 BILL 3BILL

Price ($/copier)

COMPETITION

DEMAND

LRAC

LRMCSUPPLY

MARKET FIRM POINT OF VIEW

PROFIT

0

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8

1 0

1 2

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Copiers per month

Price ($/copier)

Copiers per month0 1 BILL 2 BILL 3BILL

Price ($/copier)

ENTRY DUE TO PROFIT

DEMAND

LRAC

LRMCSUPPLY

MARKET FIRM POINT OF VIEW

SHIFT

LOSS

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1 0

1 2

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1000s Copiers per month

Price ($/copier)

Copiers per month0 1 BILL 2 BILL 3BILL

Price ($/copier)

COMPETITIVE EQUILIBRIUM: THROUGH NATURAL MARKET FORCES

DEMAND

LRAC

LRMC

SUPPLY

MARKET FIRM POINT OF VIEW

PERFECT COMPETITION

• LOWEST PRICES (P= MIN SRAC)

• NO LONG RUN PROFITS (P=LRAC)

• EFFICIENT CAPACITY (SRAC THROUGH MIN OF LRAC)

• FULLY UTILIZED CAPACITY (AT SAME OUTPUT AS MIN SRAC)

• EFFICIENT ALLOCATION OF RESOURCES (P=MC)