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CH3B: Firms and how they opperate: spectrum of market competition Part 2…
CH3B: Firms and how they opperate:
spectrum of market competition
Part 2
price discrimination
occur when a producer sells a specific commodity to different buyers at two or more different prices for reasons not associated with differences in costs
time
he may charge a different price at different times of the day or week
place
he may vary prices according to the location of the buyers
income
he may be able to split up consumers into income groups, charging a high price to those with higher incomes and a low price to those with lower incomes
taste and preference
he may charge a higher price to those who value the good more or have a stronger preference for his product
why profitable?
Some people are
willing and able to buy the good at a price that is higher
than the market price. A firm can sell each unit of good at the price they are willing to pay, so to capture part of or the entire consumer surplus as additional revenue
A group of potential consumers may
not be willing and able to pay for a good at the prevailing market price
, the firm can charge these consumers a price they are willing and able to pay, they are brought into the market, and hence total revenue for the firm increase.
Conditions:
(need some monopoly power, the greater the market power a firm possesses, the more effective is its ability to price discriminate)
must be able to set its price
must be able to separate the market, prevent reselling
the seller faces different price elasticity of demand
Third-degree price discrimination:
consumers are grouped into 2 or more independent markets, a separate price is charged in each market.
economic effects of price discrimination
positive effects
consumers' persfective
those paying a lower price: be able to obtain a good / service they could not otherwise afford. essential service can be provided to those with lower ability to pay, increase welfare
society's perspective
allow production which would otherwise unprofitable. eliminate loss, able to supply the good and service to the market.
allow for the continues innovation and R&D to produce better and more effctive good and services
firms' perspective
higher profit
negative efefcts
society's and consumer's perspective
loss of consumer surplus:
the firms increase profit at the expense of consumers who end up paying a higher price
lower equity:
undesirable redistribution of income from consumers to capitalists (owners of the firms)
overall fall in welfare
non-price competition
product differentiation:
imaginary (labels, brands etc.)
real (nature or quality of a product e.g. flavour, design)
a. innovation
developing and introducing new ideas, products, methods of doing things
product innovation:
new products, improved version of existing products, better features.
process innovation:
improvement in the production methods or process which result in an increase in efficiency, reduce the average cost
b. product development
designing, marketing and creating new products or services
c. branding
sign, logo, name and label of a product
distinguish ti from the other firms
perception and value by consumers
d. advertising
inform the consumer of the existence and availability, persuading the consumers to buy the good
change taste and preference, increases demand
for
provide information, allow comsumers to make ratinal choices. contribute to dynamic economy, new products are constantly produced
promote competition. information on variety of products diminishes monopoly power.
sucessful advertising, increasing demand, firm being able to expand and capture internal economies of scale. the increased cost offset the cost usef for adevrtisement, lower prices, consumer being able to save money
against
advertisement persuade consumer not to inform. Change their preference in favour of the advertiser's product, such as advertising may give misleading information or persuade the consumer to pay more
successful advertising can lead to expansion fo some firms at the expense of others, promoting monopoly. larger firms hae greater resources and can have more successful advertisement
self-cancelling. advertisement of one firm is offset by advertisement of rival's firm. demand curve is ultimately unchanged. inefficient allocation of resources at the society level
the theory of contestable market
what is crucial in determining a firm's behaviour, is not whether an industry is actually a monopoly or competitive, but whether there is the real
threat
of competition
no threat? charge a high price. threat? forced to behave like a competitive firm
factors determining contestability of markets:
free entry and exit of firms
- no consumer loyalty, no branding or product development. enter when supernormal and leave when normal/subnormal profit
no sunk cost
(expenditure incurred that can't be recruited) - deterrent to enter
access to same technology
- incumbents have no advantage in technology over new entrants
-
government should devise ways to make an industry contestable so that firms that dominate the industry will have an incentive to behave competitively, face pressure to be efficient in operating.
performance of firms
b. productive efficiency
is achieved when the firms in an economy are producing the maximum output for the given amount of inputs, or producing a given output with the least cost combination of inputs.
This occurs at
any point on the long-run average cost curve
（只要在LRAC上，就是productively efficient的）
对于profit maximisation作为目标的firms，会有incentive to produce on the LRAC（大部分是PC）。 但是有的时候会有其他的alternative objectives。
For PC:
under PC, in the long run, competition forces perfectly competitive firms to produce at the point of the minimum average total cost of production and to charge a price that is just consistent with these costs.
-因为是normal profit不多不少刚刚好，要是不在LRAC上生产就会亏钱！
又因为PC不能raise it price otherwise will lose all its business, 所以必须保证LRAC不能高。
For Monopoly:
does not face any competition, can produce above the LRAC and continue to make a supernormal profit due to the barrier to entry.
suffer from X-inefficiency.
higher AC at the profit-maximising output level
this is because monopolies may be lax about cost control. they could choose alternative objectives instead of profit maximisation (3A)
also in oligopoly but to a small extent.
excess capacity: produce below the minimum long-run average cost.
c. economies of scale
刚才上面那个Allocative efficiency是假设两者MC相同。但是如图所示的实际情况中是不一样的，所以说：
there are significant economies of scale to be reaped from large scale production
lower MC
monopoly and oligopoly could produce greater quantities of output, and charge lower prices compared to PC
a. allocative efficiency
is achieved when the current combination of goods and services produced and consumed allows the society to attain the greatest level of satisfaction
Society's welfare (producer surplus+consumer surplus is maximised)
achieved when the price of a good is exactly equal to the marginal cost of producing the good. i.e.
P=MC
一个东西的价格反映了consumer认为的价值。marginal cost=opportunity to produce it.
when P＜MC, the society can benefit more if it diverts more resources to the production of the alternative good forgone
when P＞MC, society can benefit more if more resources are diverted to produce this good.
当不处于均衡时，导致效率损失的原因就是：供求双方都还有进一步获得surplus的余地，这个余地就是无效率的。
PC equilibrium
when allocative efficiency is achieved, there is no DWL.
allocative efficiency is not attained in any other market structure than PC.
always P＞MC to maximise the firm's profit. Demand curve sloping downwards. (AR is not equal to MR)
in case of monopoly
M和PC的supply curve还有demand curve是一样的。
Marginal cost = Supply curve
Average revenue = Demand curve
对于PC来说，整个市场的Q和P由Supply和Demand的交点决定。所以价格为PC，数量为QC。
对于monopoly来说，MR是AR（DD）的一半，如图所示。按照profit maximisation，prouction应该在MR=MC的时候。
而monopoly可以随意定自己的价格，它会选择把价格尽量往高定，as long as consumers are both willing and able to pay（所以在demand curve上）
价格为PM，数量为QM。所以绿色小三角的部分就是DWL，产生的原因即是P＞MC，under-allocation of resources.
d. incentive to innovate/engage in research & development
Depend on willingness and ability
For PC: no incentive, no ability
deficient in resources to innovate
incentive is absent due to perfect information and the absence of barriers to entry. (innovate will result in others copying)
no barriers of entry and hence normal profit - no incentive to innovate
For oligopoly: have an incentive, have ability
maintain supernormal profit so need to innovate
can increase the demand for its product and make the product more unique (more price inelastic)
increase their market power, total revenue
For monopoly: maybe have an incentive, have ability
no incentive to innovate because there are no competitors and they are already the dominant producer in the industry
supernormal profit: have the ability to engage in innovation
sometimes they do innovate to increase the demand for their product or induce the existing consumers to replace the current products they already own.
For monopolistic competition: have incentives, no ability
e. dynamic efficiency
can be defined as the situation in which firms are technologically progressive (through investing in research and development for the purpose of product and process innovation) in order to reduce the average POC or meet the changing needs and wants of the consumers
occurs in a market over a period of time
can be boosted by:
① research and development spending and a faster pace of invention and innovation
② investment in the human capital of the workforce leading to gains in productivity
③ greater competition in markets and the transfer of knowledge and ideas across countries
not attained in PC
f. consumers' choice - variety
For PC
homogenous product due to lack of innovation and product development - no variety
For Monopoly
unique product - lack of variety
For oligopoly
product may be homogenous or differentiated - some variety
consumers' tastes and preferences are readily satisfied
For monopolistic competition
product differentiation - a greater variety of products for consumer choice
g. consumer welfare and equity in income and wealth distribution
monopolies and oligopolies contribute to the inequity in income distribution.
consumers are charged a higher price than PC, the good is underprovided and the consumer welfare is not maximised, results in DWL
high barriers to entry, supernormal profit, corporate stock ownership are usually concentrated in the hands of upper-income groups.
Monopolistic虽然也会收费很高（像monopoly）但是in long run whatever supernormal profits made are eroded in the long-run, so producers do not really gain at the expense of consumers, although there is still some welfare loss due to P＞MC
imperfect markets and government intervention
why?
firms with market power such as monopoly and oligopoly can exploit consumers by charging higher prices, producing less to the market than what perfectly competitive firms would
government will take actions to prevent firms from becoming too dominant, or restrict the behaviour of already dominant firms
a. anti-trust policies
prevent dominant firms from engaging in anti-competitive practices
prevent the deliberate creation of monopolies
no merge without regulatory approval.
firms may be accused if found colluding with others to prevent competition
or engaging in predatory pricing
firms have to modify or cease operation altogether if being accused (behave in a more competitive way)
b. regulation through taxes
greater inequity as ownership is concentrated in the hands of a few owners of the firm.
lump-sum tax
to reduce profit
lump-sum tax is a fixed cost to the firm and therefore shift the AV curve upwards, while the MC is not changed.
It is irrespective of its output and revenue, has no effect on the price or quantity produced
如图所示，这个税就是一个固定值，只会把AC向上移动，MC完全不会变。所以production还是在MC-MR的地方，唯一变了的东西就是现在的cost要高一点，所以profit要低一点了。阴影部分是对比之前少赚的钱。
as the lump-sum tax is a fixed amount, monopoly firms may make a loss when there is a decline in demand.
第二种情况是per unit tax，也就是specific tax，MC会往上变。所以P和Q都会随之变化。如图所示。
第三种情况是profit tax，也就是如果没有profit的话也不会suffer tax
c. regulation using pricing policies
for natural monopoly
large economies of scale, very low average cost, the price charged by them can be lower than that charged by firms if the market is shared by more than one such firms.
still need regulation, as they will maximise their price by producing where MR=MC
govenment can determine the prices the firm can charge consumers
i. MC pricing
forcing the monopoly firm to charge a price equal to its marginal cost of production
meaning they have to charge a lower price and produce a greater quantity
consumer benefit
如图所示，原本是Qm和Pm，现在P变低了Q变高了。同时也达成allocative efficiency 了 where P=MC 所以 consumer benefit。
however对于firm自己来说，他会making subnormal profit（如图中阴影部分所示）
unless the loss is made up by subsidy, they will shut and close down in long run.
but subsidy will make it has no incentive to reduce cost and improve efficiency.
alternative: two-part tariff (consists of a substantially fixed charge and a per-unit charge) to cover the marginal cost
ii. AC pricing
the firm charges the average cost
the firm making a normal profit (lowest feasible cost)
so it will continue production and consumer can continue to get to enjoy the good
however, P is still ＞ MC, allocative inefficient, though price is lower and output is higher.
如图所示，价格选在P（demand）=AC的时候，一点不赚一点不亏属于是。
ii. privatisation
the transfer of ownership and control of government-run firms to the private sector
private firms have an incentive to be productively efficient to lower cost (have profit motive), while governments do not
private sectors have an incentive to innovate
government got no pressure to be replaced or be fired, so they are highly inefficient
this will drain on the national budget, massive borrowing from the government
however: a state monopoly becoming a private monopoly - based on what we've learned about monopoly, this is not socially desirable
i.e. allocative inefficient
so a more socially desirable outcome is achieved when privatisation is accompanied by the deregulation
iii. liberalisation/deregulation
involves the relaxation or removal of government regulation to create a more competitive environment for private firms to compete with one another
creates an incentive for firms to reduce costs (achieve productive efficiency) to increase their profit.
also ensure the consumers' desires are met
the quality of goods and services are increased)
greater competition - allocative efficiency
identify the non-contestable segment in the industry and regulate it to allow for competition in the contestable segment
i. nationalisation
industry is taken over by the state from private firms
tackle the problem of monopoly power, especially for industries that are essential to public welfare (such as water and electricity.)
occurs when the private firms providing the good or services are found to be inefficient to excessively driven by profit to the extent that public welfare is severely impacted
protect the country's interests, prevent the abuse of monopoly power by private firms
ensure they are affordable
e.g. Singapore railways - partial nationalisation
