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ANALYSIS OF MARKET STRUCTURE (TECHNIQUES OF MARKET DEFINITION (PRICE…
ANALYSIS OF MARKET STRUCTURE
TYPES OF MARKET
TRADING MARKET
DEFINED BY
GEOGRAPHICAL AREAS
A SET OF PRODUCTS
SIMILAR PRICES SHOULD BE CHARGED TO SIMILAR PRODUCTS
TAKING INTO ACCOUNT
TRANSPORTATION COST
SLIGHT DIFFERENCE IN PRODUCTS
STRATEGIC MARKET
MARKET BOUNDARIES DEFINED BY PRODUCT OFFERINGS
COMPANIES
ADAPT TO MARKETS
CREATE OR SEGMENT MARKETS
to maximise profits
ANTI-TRUST MARKET
DEFINED BY THE LIKELIHOOD THE MARKET CAN BE MONOPOLIZED
by either a single firm or groups of firms
WHEN THE DEGREE OF MARKET COMPETITION CHANGES
following
MERGER
COLLUSION AGREEMENTS
YES VS. NO
YES
able to initiate small and significant increase in prices
NO
market power restricted by other closely related markets
TECHNIQUES OF MARKET DEFINITION
PRICE ELASTICITY OF DEMAND
OWN PRICE ELASTICITY (PED)
% change in sales following each % change in OWN price
HIGH (PED>1)
NOT PROFITABLE TO INCREASE PRICE
consumers responsive to price changes
LOW (PED<1)
PROFITABLE TO INCREASE PRICE SIGNIFICANTLY
consumers less responsive to price changes
CROSS PRICE ELASTICITY (CED)
% change in sales following each % change in RIVAL'S price
PROVIDE USEFUL INFORMATION ON
NATURE OF COMPETITION BETWEEN PRODUCTS
shows whether 2 goods are close substitutes
WHETHER 2 PRODUCTS ARE I THE SAME RELEVANT MARKET
yes, if CED is high as consumers can switch from one to another easily
WHAT DEFINES CED
SIGN
POSITIVE
SUBSTITUTE
NEGATIVE
COMPLEMENT
MAGNITUDE
HIGH
STRONG SUBSTITUTES/COMPLEMENTS
LOW
WEAK SUBSTITUTES/COMPLEMENTS
ZERO
PRODUCTS ARE INDEPENDENT OF EACH OTHER
PRICE CORRELATION ANALYSIS
prices of product within the same relevant market should follow a similar pattern over time
USED TO
EXAMINE WHETHER PRICE LEVELS MOVES TOGETHER
ASSESS THE EXTENT TO WHICH RELATIVE PRICES CHANGE OVER TIME
CORRELATION COEFFICIENT
SIGN
POSITIVE
PRICE MOVES IN SAME DIRECTION
if = 1, price moves perfectly together; STRATEGIC COMPLEMENTS
NEGATIVE
PRICE MOVES IN OPPOSITE DIRECTION
if = -1, prices move perfectly inverse to each another; STRATEGIC STRATEGY
MAGNITUDE
CLOSER TO 1
STRONGLY CORRELATED
thus likely to be in the same market
CLOSER TO 0
PRICES INDEPENDENT OF EACH OTHER
SPURIOUS CORRELATION
when price correlation analysis FALSELY suggests that 2 products are in the same market but in reality was affected by other factors
DUE TO
COMMON COST
2 products in unrelated markets may display high correlation as they share the same major input (thus affected by the same cost)
INFLATION
in countries with HIGH inflation rates, prices of products are likely to be correlated (all increasing)
EXCHANGE RATES
when price correlation are used to assess whether two countries lie in the same geographical area; in this caseprice data needs to be denominated in the same currency
SWITCHING/DIVERSION RATIO ANALYSIS
assess the degree of substitutability between 2 products; involves the evaluation of closeness between 2 products by analyzing CONSUMER BEHAVIOUR
DIVERSION RATIO
shows the fraction of sales loss from Brand A to Brand B following an increase in the price of Brand A by a certain amount
Higher the ratio, the higher the substitutability
close substitutes
CAN BE USED IN EARLY STAGES OF MERGER
to check whether the merger will run into anti-trust issues
SHOCK ANALYSIS
the closeness of 2 products can be assessed by the reaction(of consumers/firms) to a SHOCK; 2 products in similar related market will have similar reactions to the same shock
IMPORTANT IN
DEFINING RELEVANT PRODUCT OR GEOGRAPHICAL MARKETS
ASSESS THE EXTENT TO WHICH 2 MERGING FIRMS ARE IN THE CLOSE COMPETITORS
NATURE OF COMPETITION IN THE MARKET
SHOCKS
EXAMPLES OF SHOCKS
TECHNOLOGICAL CHANGE
PROMOTION AND ADVERTISING ACTIVITY
REGULATORY INTERVENTION
ENTRY OF NEW PRODUCT
CAN AFFECT EITHER
A RANGE OF INDUSTRIES
SPECIFIC MARKET/FIRM
BIDDING STUDIES
when competition takes the form of bidding for individual contracts
CAN HELP TO IDENTIFY
HOW MANY FIRMS ARE REQUIRED FOR BIDDING TO PRODUCE A COMPETITIVE OUTCOME
THE EXTENT TO WHICH 2 MERGING FIRMS ARE CLOSE COMPETITORS
if 2 merging firms have competed frequently in the past, the merger will likely raise more concerns in the future.
MARKET ANALYSIS
is the market a competitive one?
TO JUDGE
ATTRACTIVENESS OF MARKET IN THE NEAR FUTURE
LIKELIHOOD FOR ANTITRUST ACTION TO TAKE PLACE
WHETHER ENTRY/EXIT OF RIVALS CAN BE EXPECTED
METHODS TO MEASURE COMPETITIVENESS AND CONCENTRATION IN AN INDUSTRY
in ascending order (least preferred to most preferred)
1. NO OF FIRMS
C= 1/n
THE LARGER THE NUMBER OF FIRMS, THE MORE COMPETITIVE IT IS
THE LESS LIKELY A SINGLE FIRM WILL HAVE A SIGNIFICANT AMT OF MARKET POWER
LOWER ENTRY BARRIERS
WEAKNESS
SOME FIRMS DO HAVE SIGNIFICANTLY HIGHER MARKET POWER THAN OTHERS FIRMS IN THE SAME INDUSTRY
2. Cn-RATIO
SUM OF MARKET SHARES OF THE N LARGEST FIRMS IN THE MARKET (N MOSTLY =4/5/8)
ON ESTIMATION, AN INDUSTRY IS CLASSIFIED AS
Monopoly if C1 > 90%
Perfectly competitive when C4 < 40%
Monopolistic competition and Oligopolistic competition correspond to C4 > 40%.
WEAKNESS
DISREGARD THE DISTRIBUTION OF MARKET SHARES (AMONG THE 4/5/8 FIRMS)
FOR C4 RATIO, IT WILL ALWAYS BE 100% IF THERE ARE ONLY 4 FIRMS
3. THE HERFINDAHL-HIRSCHMAN INDEX (HHI)
takes market shares of all firms into account and sums their eqn
STRENGTH
TAKES ALL FIRMS INTO ACCOUNT
LARGER FIRMS FEATURE ORE PROMINENTLY IN THE INDEX
TOOL FOR ANTI-TRUST ECONOMIST
CONCENTRATED (HHI ABOVE 1800)
MODERATELY CONCENTRATED (HHI BETWEEN 1000 AND 1800)
MERGERS IN CONCENTRATED MARKET THAT INCREASES HHI BY 100 WILL RAISE CONCERNS OF ANTI TRUST BODIES
WEAKNESS
DOES NOT ASSESS THE INTENSITY COMPETITION
4. LERNER INDEX
looks at firm's profit margins an weigh them by the firm's market share
