How firms compete
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Transcript of How firms compete
How firms competeEasy as PIE: Presenting in English09/03/2011
Plan of the lecture Approaches, definitions
Market structures
Antitrust regulation, competition policy
Types of competition
• Price reduction P→MC• Price warsprice
• Product differentiationnon-price
Types of competition
perfect
imperfect• Monopolistic competition• Oligopoly
No competition
• Monopoly
Market structureThe state of the market with respect to the number and the power of buyers and sellers.
• Number of firms (buyers)
• Control over price
• Product differentiation
• Ease of entry (barriers to entry)
Market power – the ability to affect the terms and conditions of exchange so that the price of the product is set by the firm (not imposed by the market)
Product differentiationThe process of distinguishing a product or service from others to make it more attractive.
Sources of differentiation:
Quality (e.g. longer warranty)
Functional features or design
Promotion activities, branding, advertising
Availability, e.g. timing and location (spatial differentiation)
Goal: to make the product unique for the particular consumer
Barriers to entry
obstacles on the way of potential new entrant to enter the market and compete with the incumbents
Structural barriers (industry conditions) Costs, demand, economies of scale, network effects, etc.
Strategic barriers (incumbent firms’ actions) Customer loyalty, switching barriers, exclusive agreements,
predatory pricing, government regulation, intellectual property (patents, trademarks), vertical integration, etc.
Principal kinds of market structures
Perfect competition
Monopolistic competition
Oligopoly
Monopoly
Mind map
Perfect competition Many Buyers and Sellers
Sellers - price takers
Homogenous products
Freedom of entry and exit
Perfect information
Long run normal profit
Monopolistic competition Many Buyers and Sellers
Some control over price
Differentiated products
Tiny monopoly over product
Relatively free entry and exit
Oligopoly Competition amongst the few
Interdependence between firms
Product differentiation
High Barriers to entry
Price stability? Collusion?
Abnormal Profits
Monopoly Firm = Industry
Unique product
Control over price OR output
Price discrimination? (1st deg. – perfect, 2nd deg. – quantity, 3rd deg. – segmentation)
High Barriers to Entry
Abnormal Profits
Monopolies Pure monopoly – industry is the firm!
Actual monopoly – where firm has >25% market share
Natural Monopoly – high fixed costs – gas, electricity, water, telecommunications, rail
Legal (statutory monopoly) - a monopoly that is protected by law from competition
What’s wrong with monopoly? Lower output, higher prices Deadweight Low incentives for development
Competition (Antitrust) law
US - antitrust law. Sherman Antitrust Act (1890), Clayton Antitrust Act (1914)
EU – competition law. Treaty of the European community (EC Treaty), Articles 81 and 82
Russia – antitrust authorities, but competition law (1991, 2006)
law that promotes or maintains market competition by regulating anti-competitive conduct
Main issues Prohibiting collusion and cartels
Banning abuse of dominant position (predatory pricing, tying, refusal to deal, etc.)
Controlling M&A
acquisitions
friendly hostile
Why does competition policy matter?
Competition policy is about applying rules to make sure that businesses and companies compete fairly with each other. It has many positive effects:
encouraging enterprise and efficiency
widening consumer choice
helping deliver lower prices and higher quality.
Thank you for your attention!