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Installment 5: COMPETITORS AND COMPETITION - Coggle Diagram
Installment 5: COMPETITORS AND COMPETITION
Identifying Competition
Market Definition :
Product
Substitutes
Same or similar product performance characteristics
Same or similar occasions for use
Same geographic market
Geographical area
Catchment Area - Where :silhouettes: live
Flow analysis -> travel patterns
Demand & Supply Substitutability
Search for products that constraint $
SSNIP TEST
Hypothetical monopoly test
Small but significant non-transitory increase in price test
Small - >5%
At least one year
:silhouette: is still willing to pay :question:
YES
No other products - Market of their own
NO
Substitutes in the market
Fails when is already a monopoly
Producers from other areas might constraint $ of the product.
Implementation
Own-price-elasticity
% change of qty demanded caused by 1% change in the
price
OPE < 1 => 1% price increase leads to less than 1% drop in demand = PROFIT INCREASE :check:
Shows if there are constraints
Cross-Price-Elasticity
% change of qty demanded caused by 1% change in
price of another product
CPE > 1 = Close substitutes, <1 = no strong substitutes
Price-correlation test
$ change over time between different products
High = $ in the same market had the same movement
Low = Products do not belong to the same market
Product characteristics
Physical
Usage of the product
Consumer preferences
Survey -> ask what consumer has done
Firms whose strategic choices affect one another
Firms compete in input & output
Types of Markets
Temporal / Seasonal / Multuple
Secondary Markets
Market Structure
Monopoly
Single firm - high barriers to entry
Monopolistic Competition
Many Sellers
Differentiated Products
Easy entry & exit
Short run -> Make profit
Long run -> 0 profit as many firms in the market
Close substitutes
Power is very low
Costumers
Loyals
Choose competitive products, not only the $
Others decisions might not affect production & pricing decisions
Differentiation
Vertical
Superior in at least one relevant characteristic
Horizontal
Holding price -> Branding, location, preferences, etc.
Perfect Competition
Price = Marginal cost
Down prices
Many Sellers
Homogeneous Products
Excess capacity
Oligopoly
Small number of firms
Barriers to entry
Competition
On Price for identical products
Price or Quality for differentiated products
Response to competitors´s activities
Models
Cournot Qty Competition
Competition on Qty produced
Qtys are strategies
Simultaneously & independently
Joint Output
High level = low price
Determines the market price
Lower level = Higher Price
Price
Below Monopoly
Above Perfect C.
Falls with the # of firms
Enables both firms to sell all their output
Equilibrium
Firms choose a qty that is the best response to the competitors qty
Revenue Destruction Effect
if A expands output -> price falls --> Lower revenue for all
Smaller firms more likely disrupt $ stability
Smaller share of revenue
Bertrand Price Competition
Company choose a $
Demand at that $, determine Qty supplied
Ends when Price = Marginal Cost
Identical products -> 2 firms for competition
Differentiated products -> Different prices
The lower price will win the market & supply demand
Each firm consider the expected price of the others.
Firm selects a price to maximinze own profit, given the believed price of the other firm.
Capacity is sufficiently flexible
Measuring
N-firm CR
Concentration Ratio of combined market share of the N largest firms
5-firm CR = 0.75
Top 5 firms control 75% of market
Ratio is specific product within area
Use sales revenue, production capacity, etc.
Invariant to changes in the sizes of the firms
Herfindahl index
Sum of the squared market shares of all the firms in the market
Herfindahl = Σi(Si)^2.
2 firms with 50% each = 0.5^2 + 0.5^2 = 0.5
S = market share of firm
In a market with N equial-size firms
H = 1 / N
Numbers-equivalent of firms
If H= 0.20 --> N = 5
Range
Perfect Competition = usually below 0.2
Monopolistic competition = Usually below 0.2
Oligopoly = 0.20 to 0.60
Monopoly = 0.6 and above
Number & distribution of firms in a Market
How firms conduct within a market
