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CH3B: Firms and how they opperate: spectrum of market competition Part 1…

- - - - at the profit-maximising equilibrium, the firm may be making normal/subnormal/supernormal profit.
        
        normal profit
        just sufficient to induce the firm to stay in the industry
        如图所示，在MC=MR（D）时，所对应的P（AR）是等于AC的。
        
        subnormal profit
        less than what is necessary to induce it to remain in the industry
        如图所示，在MC=MR（D）时，所对应的P（AR）是小于AC的。
        
        supernormal profit
        in excess of what is necessary to induce it to remain in the industry
        如图所示，在MC=MR（D）时，所对应的P（AR）是大于AC的。
      - shut down condition
        when making a loss in the short run, whether to cease production immediately depends on whether it can cover its variable costs.
        
        when total revenue is equal to the total variable costs, the firm is indifferent as to the loss of ceasing production and continued production is the same (total fixed costs)
        if temporary period (which will soon pick up), no need to cease production. because ceasing production may lead to loss of labour and goodwill of the customers. training and advertising may cause greater loss.
        
        when total revenue exceeds total variable costs, it means that the firm's revenue is able to cover the total variable cost and part of the fixed costs. In this case, it may pay the firm to continue production since its loss is only part of fixed costs. ceasing production means the loss is equal to the total fixed cost.
        
        condition for proudtcion to continue:
        TR≥TVC or AR≥AVC
      - long run equilibrium of PC
        in long run:
        
        the established firms can alter their plant size
        
        can shut down, leave or enter
        
        making normal profit
        
        change in tastes and preference of consumers increase market demand, D1 → D2
        
        P1 → P2, existing firms are earning supernormal profits
        
        New firms will be attracted to the industry.
        
        Supply curve will shift to the right, S1 → S2
        
        P2 → P1, lowering each firm's horizontal demand curve (=AR=MR)
        
        Price falls and economic profit tends to 0, but the quantity increase to Q3.
        -
        
        existing firms are making normal profit
        
        existing firms have no incentives to exit, new firms have no incentive to enter
        
        existing firms produce ar the minimum point on their long-run average cost curve
        
        P = MR = LRMC = LRAC
        
        consumers pay a price no higher than is required to cover all costs of production, thereby obtaining products at as low a price as is economically feasible.
        efficient.
  - - - price setter
        
        high degree of market share
        
        no competition, relative price inelastic
      - barriers to entry
        
        a. structual or natural barriers
        
        technological superiority
        
        possesses technology that is far ahead of its rivals
        
        technological knowledge
        e.g. Microsoft
        
        economies of scale
        
        MES of production occurs at a high level of output. have to produce at a vast scale to produce at a low average cost
        
        new entrants do not have a high level of production, have to produce at a higher average cost.
        
        one firm may be able to supply all that the market demands at a lower average cost than if there were two firms in the market. It may be possible for for a single firm to earn a supernormal profit, but if 2 large firms were to supply to the market, they might both make the loss
        This is called natural monopoly e.g. electricity transmission
        
        control of essential resources/access to markets
        
        monopolist may enjoy the exclusive ownership or control of raw materials which are essential in making a product
        
        prevent other firms from entering
        
        resources found only in few locations which are owned by the monopolist.
        e.g. diamond firm De Beers
        
        b. artifical or stragetic barriers
        
        limiting price
        
        charging a price low enough to make it unprofitable for the new entrant
        
        incumbent firms have certain cost advantages that are not available for the new entrants.
        
        legal or statutory（法定的） barriers
        
        government gave firms exclusive rights to sell some good or service. The monopoly position is protected by various government licensing.
        
        other trade restrictions to keep out foreign competitors
        
        some firms benefit from legal protection called patents. which is a privilege granted to an inventor that prohibited anyone else from producing or using the invention without the permission of the patent holder.
        
        patent encourages innovation
        e.g. Xerox corporation - patent on photocopier
        
        contrived barriers/deliberately erected barriers
        
        prevent entry, preserve its dominant position
        
        advertising, branding, increase the uniqueness of the product
        
        R&D, the new entrants don't have the same technological knowledge and technological expertise to keep up with the incumbent firms
        
        network effect
        
        occur when the value of a good or service increase as more and more people use it. The value individuals derive from the use of the good by other users.
        
        create a bandwagon effect, increase the use of goods, attract more users, resulting in a positive feedback loop.
        
        existing firms tend to have an extensive network with many users, make a lock-in effect so it's difficult for new entrants to draw the consumers away from the incumbent firms.
        e.g. Microsoft office software
      - a monopolists's demand curve
        
        relatively price inelastic since there's no competition/substitutes
        
        but the actual price elasticity also depends on if there are substitutes in other industries (e.g. rail service is price elastic because there are bus services to the same destination)
        
        downward sloping
        
        通过计算可以得知 MR = 1/2 AR (Demand curve)
      - equilibrium
        
        short run equilibrium
        
        long-run equilibrium
        
        due to the formidable barriers, the short-run equilibrium can continue even into the long run. If the firm continues to make a loss in long run, it would be advisable to shut down and reallocate resources to other more profitable industries
    - - mutually interdependence
        
        firms that produce homogenous products will have the incentive to engage in mergers and collusion. If differentiated, have the incentive to engage in nonprice competition to increase market share.
        
        mutually interdependence means that each firm is affected by its rival's decision. likewise, its deicisons will affect it rivals.
        
        collusive oligopolies
        oligopolies may from a cartel（垄断联盟）as a single monopolist
        
        collusion
        
        occurs when oligopolistic firms agree to limit competition amongst themselves. Agree on a price, market share and advertising expenditure.
        
        reduce fear of competitive price-cutting
        
        formal collusion and cartel
        
        group of firms agree to cooperate and act jointly, fix the price of their products
        
        products are homogenous in nature (P37)
        
        tacit collusion and price leadership
        
        oligopolistic firms follow the pricing behaviour of a dominant firm without a formal agreement, or informal price-fixing
        
        mergers and acquisition
        
        try to act like monopolies to increased monopoly power
        
        larger and fewer firms reduce uncertainty, no need to spend massively on advertising and the pressures faced in trying to stay ahead of other competitors.
        
        more price inelastic
        
        non-pirce competition & price competition
        
        see below (similar to that of non-collusive one )
        
        non-collusive oligopolies
        oligopolies may compete so fiercely that price war break out (short duration though)
        
        a. price rigidity and the kinked demand curve
        
        price is rigid.
        
        if a firm lowers its price, all other firms are likely to match this price fall rather than risk losing a share of the market. the quantity demanded will thus only increase less than proportionately.
        the demand curve is relatively price inelastic
        
        if a firm raises its price and no one follows, its sales will fall rapidly. the quantity demanded will thus fall more than proportionately and the demand curve facing the firm if it raises its prices is relatively price elastic.
        
        both will result in a fall in total revenue, as a result, kinked demand curve:
        
        when MC=MR, the MC curve can be anywhere between MC1 and MC2.
        
        price rigid at point X (P1)
        
        b. non-price competition
        
        advertising, product development, offering additional services
        
        intend to capture market share
        
        c. price competition
        
        1. price war
        
        calculate that it will be able to maintain lower prices for a longer period of time than others due to greater resources being available (calculation can be incorrect though)
        
        last for a very short time, ineffective, no net gain of market share
        
        2. predatory price
        
        deliberately lower its price below the short-run average cost.
        
        causing loss to smaller competitors and drive the rivals out of the industry
        
        happen when the dominant firm has a certain cost advantage
    - - sells products that are slightly different, imperfect substitutes to each other
        
        some degree of monopoly power and have the incentive to engage in non-price competition to increase market share
        
        demand curve
        downward sloping, relatively price elastic due to a large amount of relatively close substitutes
        
        equilibrium
        
        short-run (same diagram of the monopoly short-run equilibrium)
        if the firm is making a subnormal profit, it will have to decide whether to shut down or continue production depending on whether the total revenue is at least able to cover total variable cost
        
        long run
        
        supernormal profit will attract new firms since there are no barriers to entry
        
        the demand curve will fall and become more price elastic (because of a smaller share of total market demand and an increasing number of close substitutes)
        
        supernormal profit is competed away
        
        demand curve will continue to fall as new firms enter until making normal profit
        
        industry suffer short-run losses, some firm will exit the industry, surviving firms will see their demand increase as each firm now have a larger share of the market
        
        subnormal profit disappear and give away to normal profit
        
        in long run, normal profit