Chapter 3B: Firms' Strategies
Market Characteristics
Price discrimination: Third degree
Structure + Conduct of Firms
Government intervention: for when firms become too dangerous to be left alone !!!!
Price discrimination
Number/Size of Sellers/Firms
Nature of Product - Homogeneous vs Differentiated
Ease of entry/exit into Industry (restricted/unrestricted)
Knowledge of market conditions - Perfect vs Imperfect
Market Structures (pg6)
Perfect competition
Monopolistic competition
Oligopoly
Monopoly
Perfect Competition
Imperfect Competition
Characteristics
Large number of buyers + sellers
Freedom of entry of new firms into, or existing firms from industry NO BARRIERS, NOT LOW
Products are homogeneous
Producers and consumers have perfect knowledge of market. (neither has advantages of tech/adverts over one another)
Demand
Individual firm: perfectly price elastic (horz. line). If price increases, they lose all their business.
Market demand: downward sloping to the right. To attract more consumers, price must be lowered.
How to maximise profit? Produce to a level of output where MR=MC when MC is rising (pt where demand curve cuts MC a second time)
When the two graphs first cut, that is the maximum loss of the firm. After that, MC<MR, and profit will slowly increase,
Perfect equilibrium competition
Profit is illustrated by Q(AR-AC) (pg13)
Supernormal profit: profit which is more than needed to remain in industry
Normal profit: profit just sufficient to induce firm to stay in industry
Subnormal profit: less profit than necessary to induce it to remain in industry
Monopoly
Monopolistic competition
Oligopoly
Characteristics:
Sole seller - no direct competition (influences price of good)
High barriers to entry/exit - firms cannot freely enter/exit (natural or man-made - made due to cost efficiency or the government)
Unique product - demand is relatively price inelastic
Imperfect knowledge of market
Prevents new firms from competing on an equal basis with existing firms in an industry
Natural barriers
Control of essential resources/Access to markets - monopolists enjoy exclusive ownership of materials essential in making a product - prevents potential rivals from gaining consumer access
Technological superiority - far ahead of its rivals
Economies of Scale - MES occurs at high output. Firms which enter the industry first can operate on a vast scale and produce at a low avg cost - deters new entrants which would have higher avg costs
Structural
Deliberately erected barriers - making entry difficult e.g money spent on R&D to improve products is hard for potential entrants to do so as they do not have the resources
Limit pricing - firms charging a price low enough to make it unprofitable for the new firm to enter (below AC of new firms)
Legal/Statutory barriers - firm's monopoly may be directly protected by government licensing, tariffs and trade restrictions
Network effects - when value of G&S increases as more people use the G&S. Substantial NE creates effective barrier to entry (current firm has extensive network alr)
Demand curve (pg26)
Pricing policies
MC pricing
AC pricing
Anti-trust policies
Lump sum tax
Used to reduce the excessive monopolistic profit a firm may have. Irrespective of output or revenue level
AC curve shifts up, MC stays the same. Transfers economic profit from firm to government, which can be redistributed to reduce the income gaps
Per unit tax
Both AC and MC curve shifts up. Qe decreases, and Pe increases.
Prevents firms from engaging in anti-competitive practices
When accused to be colluding with other firms like through pred. pricing, they will be accused of anti-comp behaviour, and may be forced to cease operation
In a natural monopoly, IEoS is so substantial that AC continues to fall across entire range of market demand, such that price charged by monopolies would be lower than that charged by two or more firms.
Unregulated monopolist would charge at a price where MR=MC. Inefficient allocation of resources and opp cost for consumers
Hence, government introduces pricing policy where monopolists must produce at the point when P=MC (when MC=AR)
HOWEVER: at that point, AC>AR. Government will have to subsidise losses to keep monopolist in industry. If they do, monopoly will have no incentive to improve efficiency
Firm charges at price where AR=AC. However at that point, P>MC, and AE is not achieved.
Advantage is that price is still lower, and quantity is larger.
Characteristics
Imperfect knowledge of the market
restricted BTE
Product either homogeneous or differentiated
Few dominant sellers (mutual interdependence, leading to kinked demand curve) firm-concentration ratio
Behaviours of NON-COLLUSIVE OLIGOPOLIES: Price Rigidity
Stable (Kinked Demand Curve; when price increase, elastic. price decrease, inelastic)
High: Good is relatively price inelastic ➡ price can be set higher than if it were a homogeneous good
Price competition
Price wars - sacrificing SR profits for LR profit maxing, over a short period of time. ineffective
Predatory pricing (when dominant firm has cost advantages)
Mergers and acquisition (growth)
COLLUSIVE OLIGOPOLIES
Adopted to increase market power. Diagram will look like monopoly curve.
Collusion: firms work together through advertising and pricing etc to reduce uncertainty/fear of competitive price cutting
Cartel/Formal collusions
Tacit collusions
Firm sells the same product to two or more buyers for reasons not associated with differences in cost.
occurs in MC, O, or M (anywhere with market power)
Discriminated by: time, place, income, T&P
Conditions:
Seller has market power and some control over price - can set price
Seller can separate the market. preventing those from paying lower price to resell at a higher price
different PED for separate groups of buyers
Cost of production per unit is the same
Features
click to edit
Behaviours
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Performances: PVICE
Non-price strategies
Conditions to fulfil
cost of production per unit is the same
Sellers must have some form of control over price (has market power)
Ensure that the good cannot be resold to another group at a different price (due to what reason?)
Different consumer groups having different PED
When firm sells same product to two different buyers at two different prices for reasons not associated with cost
Positive effects
Negative effects: on consumer and society
some consumers pay the expense of the higher price ➡ Loss of consumer surplus and lower equity (increased monopoly profits at consumers' expense)
For firms: higher profit. Increasing price for more price inelastic groups ..... Qd, leading to increase in TR
For consumers: cross subsidisation, being able to afford a product they were previously unable to afford (e.g concessionary bus fares for elderly)
For society: otherwise unprofitable production is allowed. Makes it possible to supply a good
Based off consumers' cognitive biases
Sunk cost fallacy
Saliency bias
Loss aversion
Innovation
Product development: R&D to improve an existing product
Marketing
Branding: shaping brand in consumers' minds, creating brand loyalty and unwillingness to change to a different firm
Advertising: influences consumers about quality/desirability of product
Product: introduces new products with better features
Process: improvements in production methods improving allocative efficiency
Characteristics
Products are differentiated (either real or perceived)
Imperfect knowledge of the market
Low BTE
Many sellers in the market, each with a small amount of market share
Shut down conditions: When TVC>TR/AVC>AR) (costs more to keep producing than to just cease production entirely
Impact of firms' decisions and strategies in different markets (Performances)
FOCUS ON: PVICE (P then E then work backwards)
Innovation
Consumer surplus
Variety (of products)
Efficiency (PE, AE and DE)
Profit (TR-TC)
Efficiency!
Allocative efficiency: where the current combination of G&S produced and consumed in a society allows society to attain the greatest level of satisfaction
(P=MC) (to obtain AE, PE must be met first)
Productive efficiency: firms in economy are producing max output for given amt of inputs, or given output w least input.
Dynamic efficiency: firms are technologically progressive (through R&D) to reduce avg cost of production/meet changing wants of consumers over time
X-inefficiency!
For oligopoly and monopoly (PE may not be achieved)
no competitive pressure on profit margins -> firms may be lax about cost controls
Produce at point above LRAC and still make supernormal profit
For monopoly, MR is not equal to its AR because for every additional unit that a monopoly sells, the monopoly must accept that the price is reduced for all previous units sold. Hence, its MR curve is below its AR curve. In the case of a PC market, each PC firm can sell any level of output at the same market price thus its MR is equal to its AR.