MANAGERIAL ECONOMICS Examination structure 1 Exam duration 120

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MANAGERIAL ECONOMICS

MANAGERIAL ECONOMICS

Examination structure 1. Exam duration 120 minutes writing time 2. Reading time 10 minutes

Examination structure 1. Exam duration 120 minutes writing time 2. Reading time 10 minutes 3. Total number of questions 5 4. Students must attempt all questions 5. Use of calculators is permitted Please note, original hand written notes or computer printouts or photocopies are not permitted in the exam this year.

Examination structure Section 1. (Microeconomic theory from the Managerial Perspective) – attempt Q 1

Examination structure Section 1. (Microeconomic theory from the Managerial Perspective) – attempt Q 1 -4 Four theoretical questions. May include discussion of examples. Brief answers are expected including definitions and diagrams where approporiated and/or specifically asked for. Section 2. (Research Question) –attempt only one question 5 or 6 5. “Discuss possible impact of the introduction of carbon emission trading scheme in Australia on the following industries: Electricity generation Car manufacturing and import Tourism and hospitality Forestry 6. Apply question 5 to any country of your choice.

Structure Weeks 7 -8 Competition, market structures and business decisions Week 9 Pricing strategies

Structure Weeks 7 -8 Competition, market structures and business decisions Week 9 Pricing strategies and practices Week 10 Business and Government. Weeks 5 - 6 Production and Costs Weeks 3 -4 Demand analysis and estimation Week 2 Basic economics principles: demand supply. Managerial Economics Week 11 Capital budgeting Week. 12 Research question Business and current economic situation. Week 1 Introduction. The nature of managerial economic decision making

Competition, market structures and business decisions Learning objectives What is the market Structure How

Competition, market structures and business decisions Learning objectives What is the market Structure How does competition affect business decisions in different market structures? Perfect competition; monopoly; oligopoly; monopolistic competition Competitive strategies. Measurement of market structures Market strategies in different market structures. Non-price competition. Multinational companies. Vertical and horizontal coordination.

Competition, market structures and business decisions Reading Hirschey, Chapters 10, 12, 13, & 14

Competition, market structures and business decisions Reading Hirschey, Chapters 10, 12, 13, & 14

Table 10. 1 Characteristics of Market Types Market structure Perfect competition Examples Number of

Table 10. 1 Characteristics of Market Types Market structure Perfect competition Examples Number of producers Type of product Parts of agriculture are reasonably close Many Standardized Monopolistic competition Retail trade Many Differentiated Oligopoly Computers, oil, steel Few Standardized or differentiated Monopoly Public utilities One Unique product Power of Barriers firm over to entry price None Some Non-price competition Low None Low Advertising and product differentiation High Advertising and product differentiation Consider. Very high able Advertising 7

Competition, market structures and business decisions Market structures What is the market structure? •

Competition, market structures and business decisions Market structures What is the market structure? • The competitive environment in the market for any product is the market structure faced by the firm – Is measured in terms of • the number of the actual buyers and sellers plus potential entrants • Barriers to entry and exit • Capital requirements • Price vs Non-price competition • Etc – Potential entrants pose a sufficiently credible threat of entry to affect price/output decisions of incumbents

Competition, market structures and business decisions Market structures Factors that Shape the Competitive Environment

Competition, market structures and business decisions Market structures Factors that Shape the Competitive Environment • Product Differentiation – R&D, innovation, and advertising are important in many markets. • Production Methods – Economies of scale can preclude small-firm size. • Entry and Exit Conditions – Barriers to entry and exit can shelter incumbents from potential entrants. • Buyer Power – Powerful buyers can limit seller power.

Competition, market structures and business decisions Market structures The firm in competitive markets Perfect

Competition, market structures and business decisions Market structures The firm in competitive markets Perfect competition Non-perfect competition Monopoly Oligopoly Monopolistic competition

Competition, market structures and business decisions Market structures v v v v v “Perfect

Competition, market structures and business decisions Market structures v v v v v “Perfect competition” – competitive markets Profit maximiser Identical product Very small share of the market Price-taker Produces a homogeneous product Perfect information No barriers to entry (legal, technological, or resource) No technical progress No investment lag - Immediate implementation of production decisions) Homogeneous goals of the owners and managerial staff

Competition, market structures and business decisions Market structures “Perfect competition” – competitive markets •

Competition, market structures and business decisions Market structures “Perfect competition” – competitive markets • Examples of Competitive Markets – Agricultural commodities. – Some prominent markets for intermediate goods and services. – Unskilled labor market.

Competition, market structures and business decisions Market structures “Perfect competition” – competitive markets •

Competition, market structures and business decisions Market structures “Perfect competition” – competitive markets • Profit Maximization Imperative – Normal profit is return necessary to attract and maintain capital investment. – Efficient firms can earn normal profit. – Inefficient firms suffer losses. • Role of Marginal Analysis – Set Mπ = MR – MC = 0 to maximize profits. – MR=MC when profits are maximized.

Profit maximization in a perfectly competitive market • (see book) • P = MC

Profit maximization in a perfectly competitive market • (see book) • P = MC • Marginal cost curve left of shutdown level (min. variable cost) is supply curve • P = MR = MC = AC • Firm produces at minimum of average costs! (optimal outcome for industry) • In a constant-cost industry increase in supply will lead in the long term to constant prices (i. e. horizontal supply curve) 14

Competition, market structures and business decisions Market structures “Perfect competition” – competitive markets Marginal

Competition, market structures and business decisions Market structures “Perfect competition” – competitive markets Marginal Cost and Firm Supply Short-run Firm Supply – Competitive market price (P) is shown as a horizontal line because P=MR. – Firm’s marginal-cost curve shows the amount of output the firm would be willing to supply at any market price. – Marginal cost curve is the short-run supply curve so long as P > AVC.

Competition, market structures and business decisions Market structures “Perfect competition” – competitive markets Long-run

Competition, market structures and business decisions Market structures “Perfect competition” – competitive markets Long-run Firm Supply Marginal cost curve is the long-run supply curve so long as P > ATC. In long run, firm must cover all necessary costs of production and earn a normal profit.

Competition, market structures and business decisions Market structures “Perfect competition” – competitive markets Long

Competition, market structures and business decisions Market structures “Perfect competition” – competitive markets Long Run Normal Profit Equilibrium With a horizontal market demand curve, MR=P. P=MR=MC=ATC. There are no economic profits. All firms earn a normal rate of return.

Competition, market structures and business decisions Perfect competition Market structures Breakeven point Price, cost

Competition, market structures and business decisions Perfect competition Market structures Breakeven point Price, cost per unit MC Ppeak D B Poff peak Q peak 0 Qoff peak Output per time period Poff peak – break even price off peak. At this ATC price the firm expects AVC to return only variable costs and can produce quantity Qoff peak Ppeak- break even price at peak. This is when the firm expects to return both fixed and variable costs producing quantity Qpeak

Competition, market structures and business decisions Market structures “Perfect competition” – competitive markets Competitive

Competition, market structures and business decisions Market structures “Perfect competition” – competitive markets Competitive Market Supply Curve Market Supply With a Fixed Number of Competitors Supply is the sum of competitor output. Market Supply With Entry and Exit Entry results in more firms, increased output, a rightward shift in the supply curve, and drives down prices and profits. Exit reduces the number of firms, decreases the quantity of output, shifts the supply curve leftward, and allows prices and profits to rise for remaining competitors.

Competition, market structures and business decisions Perfect competition Market structures Market price determination •

Competition, market structures and business decisions Perfect competition Market structures Market price determination • • Negatively sloped demand curve Positively sloped supply Price per unit ($) 10 curve 8 Supply P = –$0. 254 + $0. 000025 Q 6 4 P = $40 –$0. 0001 Q 2 Demand 0 50 100150200250300350400 Quantity per time period (millions)

Competition, market structures and business decisions Monopoly Market structures Basic Properties • • One

Competition, market structures and business decisions Monopoly Market structures Basic Properties • • One firm in industry Profit-maximiser Faces market demand curve One product No close substitutes Price-maker No restrictions on resources • Blockaded entry and/or exit • Imperfect dissemination of information • Opportunity for economic profits in long-run equilibrium.

Competition, market structures and business decisions Monopoly Market structures • Examples of Monopoly –

Competition, market structures and business decisions Monopoly Market structures • Examples of Monopoly – Electricity utilities, – Gas – Water – Public Tramsport – Telecommunications

Monopoly graph 23

Monopoly graph 23

Competition, market structures and business decisions Monopoly Market structures Profit Maximization in Monopoly Markets

Competition, market structures and business decisions Monopoly Market structures Profit Maximization in Monopoly Markets • Price/Output Decisions • A monopoly firm is the market. • Market and firm demand curve slopes downward. • Monopoly demand curve is always above the marginal revenue curve, P = AR > MR. • Monopoly position allows above-normal profits. P > AC in long-run equilibrium. • Set Mπ = MR - MC = 0 to maximize profits. • MR=MC at optimal output.

Competition, market structures and business decisions Monopoly Market structures Social Costs of Monopoly •

Competition, market structures and business decisions Monopoly Market structures Social Costs of Monopoly • Monopoly Underproduction Monopolists produce too little output. Monopolists charge prices that are too high. • Deadweight Loss from Monopoly markets creates a loss in social welfare due to the decline in mutually beneficial trade activity. There is also a wealth transfer problem associated with monopoly. Under monopoly, consumer surplus is transferred to producer surplus.

Competition, market structures and business decisions Monopoly Market structures Social Benefits From Monopoly •

Competition, market structures and business decisions Monopoly Market structures Social Benefits From Monopoly • Economies of Scale Monopoly is sometimes the natural result of vigorous competitive forces. In natural monopoly, LRAC declines continuously and one firm is most efficient. Some real-world monopolies are government-created or government-maintained. • Invention and Innovation Public policy sometimes confers explicit monopoly rights to spur productivity.

Competition, market structures and business decisions Monopoly Market structures Monopoly Regulation • Dilemma of

Competition, market structures and business decisions Monopoly Market structures Monopoly Regulation • Dilemma of Natural Monopoly has the potential for efficiency. Unregulated monopoly can lead to economic profits and underproduction. ECW 3830 COMPETITION AND REGULATION

Monopolists produce less, price higher than firms in competitive equilibrium MR = P(1 +

Monopolists produce less, price higher than firms in competitive equilibrium MR = P(1 + 1/h) • Situation is inefficient, insofar as the sum of consumer and producer surplus is concerned – What is producer and consumer surplus? • Monopolist has to take demand conditions explicitly into account • Why is no other firm entering the market? ? ? 28

Other aspects of monopoly • “Natural monopoly” if minimum of average cost occurs only

Other aspects of monopoly • “Natural monopoly” if minimum of average cost occurs only at very high output level (minimum efficient scale) ==> there is only place for one firm in the market! • Measure of monopoly power (markup of price over cost): 29

Sources of monopoly power • Natural monopoly (public utilities best example, railway tracks), economies

Sources of monopoly power • Natural monopoly (public utilities best example, railway tracks), economies of scale, • Capital requirements on production or big sunk costs on entry • Patents (17 years), trade secrets (Coke) • Exclusive or unique assets (minerals, talent) • Locational advantage (popcorn shop in cinema – but in general you pay rent for these advantages) • Regulation (TV, taxi, telephone in the past) • Collusion by competitors 30

Competition, market structures and business decisions In the “real life” Market structures A “real”

Competition, market structures and business decisions In the “real life” Market structures A “real” firm in a market place (compare to the “ideal” one): • A typical firm, if it is not a small one, is not owner-managed • Separation of ownership, long-term strategic and short-run current control (shareholders, board of directors, brunch managers) implies the segregation of objectives; • Natural, economic and legal barriers • Diversification (non-homogenous product, more than one kind of activity) • Technical progress • Different criteria for different time horizons (short-run operation vs long-run planning. • Price-making • Price/marketing strategies • Imperfect information • Investment lag

Sources of monopoly power • Natural monopoly (public utilities best example, railway tracks), economies

Sources of monopoly power • Natural monopoly (public utilities best example, railway tracks), economies of scale, • Capital requirements on production or big sunk costs on entry • Patents (17 years), trade secrets (Coke) • Exclusive or unique assets (minerals, talent) • Locational advantage (popcorn shop in cinema – but in general you pay rent for these advantages) • Regulation (TV, taxi, telephone in the past) • Collusion by competitors 34

What can a monopolist do? Erect strategic entry barriers • Excessive patenting and copyright

What can a monopolist do? Erect strategic entry barriers • Excessive patenting and copyright • Limit pricing (set price below monopoly price) • Extensive advertising to create brand name to raise cost of entry • Create intentionally excess capacity as a warning for a price war 35

Franchising „Mc. Food“ • A Franchiser (mother company) gets a fixed percentage of sales,

Franchising „Mc. Food“ • A Franchiser (mother company) gets a fixed percentage of sales, • The franchisee is the residual claimant • What are the incentives for the two partners? • Other problems like number of shops in a region… • Other examples? ? 36

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Competition, market structures and business decisions Market structures Oligopoly and Monopolistic Competition Contrast Between

Competition, market structures and business decisions Market structures Oligopoly and Monopolistic Competition Contrast Between Monopolistic Competition and Oligopoly • Monopolistic Competition • Large number of sellers that offer differentiated products. • Normal profit opportunity in long-run equilibrium. • Oligopoly • Few sellers. • Economic profits are possible in long-run equilibrium. • Dynamic Nature of Competition • Timely market structure information is required for managerial investment decisions

Competition, market structures and business decisions Market structures Мonopolistic competition • The market consists

Competition, market structures and business decisions Market structures Мonopolistic competition • The market consists of n mono-product firms; • The products are viewed by the buyers as close though not perfect substitutes for one another; • Therefore, each of the sellers is a monopolist of its particular product variant with a limited degree of monopoly power. • Such a monopolist is enjoying a monopoly power and making economic profit during only a short period of time • from the introduction of an unique product or technology • until such a technology becomes available to rivals, or • until a new “more innovative” product is introduced by a rival.

Competition, market structures and business decisions Market structures Мonopolistic competition Price Costs MC AC

Competition, market structures and business decisions Market structures Мonopolistic competition Price Costs MC AC Pmc MR Demand Q Qmc Quantity Short-run Monopoly Equilibrium Monopolistically competitive firms take full advantage of short-run monopoly.

Competition, market structures and business decisions Market structures Price Costs MC Мonopolistic competition Price

Competition, market structures and business decisions Market structures Price Costs MC Мonopolistic competition Price Costs AC MC AC Pmc D 2 MR 1 D Quantity Entry of new firms offering product substitutes shifts the demand MR Qmc Quantity Long-run equilibrium same costs, lower demand excess capacity – low output high price decision With differentiated products, P=AC at a point above minimum LRAC. P > MR = MC.

Competition, market structures and business decisions Market structures Price Costs MC AC Мonopolistic competition

Competition, market structures and business decisions Market structures Price Costs MC AC Мonopolistic competition Price Costs MC AC Pmc Pac D 2 MR 1 D 1 Quantity Long-run equilibrium same costs, lower demand excess capacity – low output high price decision With differentiated products, P=AC at a point above minimum LRAC. MR Qmc Qac D Quantity Long-run equilibrium– high output low price decision (corresponds to perfect Competition) With homogenous products, P=AC at minimum LRAC. This is a competitive market equilibrium with homogeneous production.

Competition, market structures and business decisions Market structures Oligipoly • Oligopoly Market Characteristics •

Competition, market structures and business decisions Market structures Oligipoly • Oligopoly Market Characteristics • Few sellers. • Homogenous or unique products. • Blockaded entry and exit. • Imperfect dissemination of information. • Opportunity for above-normal (economic) profits in long-run equilibrium. • Examples of Oligopoly • National markets for aluminum, cigarettes, electrical equipment, filmed entertainment, ready-to-eat cereals, etc. • Local retail markets for gasoline, food, specialized services, etc.

Competition, market structures and business decisions Market structures Oligipoly Cartels and Collusion • Overt

Competition, market structures and business decisions Market structures Oligipoly Cartels and Collusion • Overt and Covert Agreements • Cartels operate under formal agreements. • Powerful cartels function as a monopoly. • Collusion exists when firms reach secret, covert agreements. • Enforcement Problem • Cartels are typically rather short-lived because coordination problems often lead to cheating. • Cartel subversion can be extremely profitable. • Detecting the source of secret price concessions can be extremely difficult.

Competition, market structures and business decisions Market structures Oligipoly Cartels and Collusion

Competition, market structures and business decisions Market structures Oligipoly Cartels and Collusion

Competition, market structures and business decisions Market structures Oligipoly Oligopoly Output-Setting Models • Cournot

Competition, market structures and business decisions Market structures Oligipoly Oligopoly Output-Setting Models • Cournot Oligopoly • Cournot equilibrium output is found by simultaneously solving output-reaction curves for both competitors. • Cournot equilibrium output exceeds monopoly output but is less than competitive output.

Competition, market structures and business decisions Market structures Oligipoly Stackelberg Oligopoly • Stackelberg model

Competition, market structures and business decisions Market structures Oligipoly Stackelberg Oligopoly • Stackelberg model posits a first-mover advantage. • Price wars severely undermine profitability for both leading and following firms. • Price signaling can reduce uncertainty in oligopoly markets. • Price leadership occurs when firms follow the industry leader’s pricing policy.

Competition, market structures and business decisions Market structures Oligipoly Stackelberg Oligopoly • Price leader

Competition, market structures and business decisions Market structures Oligipoly Stackelberg Oligopoly • Price leader sets the price at P 2 • Profit is maximised at Q 1. • The follower(s) will supply the combined output of Q 4 -Q 1 • At P 3 - Follows will supply everything At P 1 – the leader will supply everything at no economic profit

Competition, market structures and business decisions Market structures Oligipoly Oligopoly Price-Setting Models • Bertrand

Competition, market structures and business decisions Market structures Oligipoly Oligopoly Price-Setting Models • Bertrand Oligopoly: Identical Products – The Bertrand model focuses upon the price reactions. – The Bertrand model predicts a competitive market price/output solution in oligopoly markets with identical products.

Competition, market structures and business decisions Market structures Oligipoly Oligopoly Price-Setting Models • Bertrand

Competition, market structures and business decisions Market structures Oligipoly Oligopoly Price-Setting Models • Bertrand Oligopoly: Identical Products – The Bertrand model focuses upon the price reactions. – The Bertrand model predicts a competitive market price/output solution in oligopoly markets with identical products.

Competition, market structures and business decisions Market structures Game Theory Basics • Types of

Competition, market structures and business decisions Market structures Game Theory Basics • Types of Games – – Zero-sum game: offsetting gains/losses. Positive sum game: potential for mutual gain. Negative-sum game: potential for mutual loss. Cooperative games: joint action is favored. • Role of Interdependence – Sequential games: moves in succession. – Simultaneous-move game: coincident moves. • Strategic Considerations

Competition, market structures and business decisions Market structures Game Theory Basics Prisoner’s Dilemma •

Competition, market structures and business decisions Market structures Game Theory Basics Prisoner’s Dilemma • Classic Riddle – Rational behavior can give suboptimal result. – Rationality can hamper beneficial cooperation. • Business Application – Dominant strategy gives best result regardless of moves by other players. – Secure strategy gives best result assuming the worst possible scenario. • Broad Implications

Competition, market structures and business decisions Market structures Game Theory Basics Nash Equilibrium •

Competition, market structures and business decisions Market structures Game Theory Basics Nash Equilibrium • Nash Equilibrium Concept – Neither player can improve their payoff through a unilateral change in strategy. – Nash equilibrium concept is broader than the concept of a dominant strategy equilibrium. – Every dominant strategy equilibrium is also a Nash equilibrium. – Nash equilibrium can exist where there is no dominant strategy equilibrium. • Nash Bargaining

Competition, market structures and business decisions Market structures Game Theory Basics Infinitely Repeated Games

Competition, market structures and business decisions Market structures Game Theory Basics Infinitely Repeated Games • Role of Reputation – Infinitely repeated games occur over and over again without boundary or limit. – Firms receive sequential payoffs that shape current and future strategies. – Reputations for high quality give consumers confidence for repeat transactions. • Product Quality Games – In a one-shot game, poor quality can fool customers. – In an infinitely repeated game, poor quality is shunned by customers.

Competition, market structures and business decisions Market structures Game Theory Basics Finitely Repeated Games

Competition, market structures and business decisions Market structures Game Theory Basics Finitely Repeated Games • Uncertain Final Period – Finitely repeated games have limited duration. – With end point uncertainty, a finitely repeated game mirrors an infinitely repeated game. • End-of-game Problem – Enforcing end-of-game performance is difficult. – Solution: simply extend the game! • First-mover Advantages – Benefits earned by the player able to make the initial move in a sequential move or multistage game.

Competition, market structures and business decisions Competitive strategies in Imperfectly competitive markets n n

Competition, market structures and business decisions Competitive strategies in Imperfectly competitive markets n n n Not all industries offer the same potential for sustained profitability; Not all firms are equally capable of exploring the profit potential that is available. An effective competitive strategy in imperfectly competitive markets must be founded on the firms competitive advantage.

Competition, market structures and business decisions Competitive strategies in Imperfectly competitive markets n n

Competition, market structures and business decisions Competitive strategies in Imperfectly competitive markets n n A competitive advantage is a unique or rare ability to create, distribute or service valued by customers. It is a business-world analogue to what economists call comparative advantage or when one nation or region of the country is better suited to the production of one product than to the production of some other product Above-normal rate of return require a competitive advantage that cannot easily be copied In production; In distribution; or In marketing

Competition, market structures and business decisions Competitive strategies in Imperfectly competitive markets n Reasons

Competition, market structures and business decisions Competitive strategies in Imperfectly competitive markets n Reasons for competitive advantage: n Access to a unique resource n (Exclusive) Access to a mineral deposit n (Exclusive) Access to a material n n n Efficient energy source Unique climatic condition Unique technology Unique (specially qualified or very talented) labour force; or Access to a unique market n n n A university bookshop The rice market in Japan etc

Competition, market structures and business decisions Non-price competition. Product differentiation refers to the increase

Competition, market structures and business decisions Non-price competition. Product differentiation refers to the increase in time of the number of product categories suppled and the number of items in each category n Historically, a step from oligopolistic to monopolistic competition

Competition, market structures and business decisions Non-price competition. Product differentiation A simple model of

Competition, market structures and business decisions Non-price competition. Product differentiation A simple model of the reason for product differentiation • Considers constant quantity as well as nonchanging AC and MC corresponding to this quantity Price P* P • Producing a little bit different product a firm might hope to charge a higher price Q Quantity

Competition, market structures and business decisions Non-price competition. Barriers to entry Price Absolute cost

Competition, market structures and business decisions Non-price competition. Barriers to entry Price Absolute cost advantages: P* LAC* Ability of established firms to produce any given level of output at lower unit costs than potential entrants P LAC Q* Q Quantity

Competition, market structures and business decisions Non-price competition. Barriers to entry Economies of scale:

Competition, market structures and business decisions Non-price competition. Barriers to entry Economies of scale: Ability of established firms Price * To produce any given level of output greater than a certain level Q* at lower unit costs and * To restrict potential entrants who are not able to invest in that level of production LAC P D Q* Quantity

Competition, market structures and business decisions Non-price competition. Barriers to entry Product differentiation advantages:

Competition, market structures and business decisions Non-price competition. Barriers to entry Product differentiation advantages: Price Variety of demand curves and common LAC Some firms have advantage of technology or specialisation and are facing demand curves to the right of the critical one. P* D 1 D 2 Q* Quantity

Competition, market structures and business decisions Non-profit-maximising competition. Appear as the result of •

Competition, market structures and business decisions Non-profit-maximising competition. Appear as the result of • Ability to affect prices and • Separation of ownership and managerial control * Managers’ aim at stability and increase in salaries *Stability may be achieved through the increase in the scale of operations *Increase in sales (not in profit) affects manager’s remuneration * Banks and retailers would prefer to deal with firms increasing the volume of sales

Competition, market structures and business decisions Non-profit-maximising competition. P, Cost MC AC MR D

Competition, market structures and business decisions Non-profit-maximising competition. P, Cost MC AC MR D Q Profit maximising decision

Competition, market structures and business decisions Non-profit-maximising competition. P, Cost • • MR D

Competition, market structures and business decisions Non-profit-maximising competition. P, Cost • • MR D Q Profit maximising decision Sales maximising decision Increasing sales, the firm is moving to the right and downward the demand curve and, therefore, decreases price, The limitation is AC curve. Some profit should be earned anyway

Competition, market structures and business decisions Non-profit-maximising competition. P, Cost MC AC MR D

Competition, market structures and business decisions Non-profit-maximising competition. P, Cost MC AC MR D Q Profit maximising decision

Competition, market structures and business decisions Non-profit-maximising competition. P, Cost MC AC MR D

Competition, market structures and business decisions Non-profit-maximising competition. P, Cost MC AC MR D Q Old profit maximising decision New profit maximising decision Old sales maximising decision is a profit maximising decision at a new level of average cost

Competition, market structures and business decisions Measurement of market structures Seller concentration refers to

Competition, market structures and business decisions Measurement of market structures Seller concentration refers to the degree to which production for a particular market or or in a particular industry is concentrated in the hand of few large firms Measurement of concentration • number of firms in the market • size distribution of firms in the market

Competition, market structures and business decisions Measurement of market structures Seller concentration The Australian

Competition, market structures and business decisions Measurement of market structures Seller concentration The Australian Bureau of Statistics 8140. 0. 55. 001 Industry Concentration Statistics

Competition, market structures and business decisions Measurement of market structures Seller concentration C 2542

Competition, market structures and business decisions Measurement of market structures Seller concentration C 2542 - Paint Manufacturing in Australia KEY COMPETITORS (www. ibisworld. com. au/static/iwabout/Sam. Ind. Part. asp) MAJOR PLAYERS Table: Market Share Major Player Orica Limited Wattyl Limited Market Share Range 22. 00% - 25. 00% (2004) 17. 00% - 19. 00% (2004) Barloworld Australia Pty Limited 9. 00% - 11. 00% (2004) Akzo Nobel Industries Limited 7. 00% - 9. 00% (2003)

Competition, market structures and business decisions Measurement of market structures Seller concentration Measurement of

Competition, market structures and business decisions Measurement of market structures Seller concentration Measurement of concentration

Census Measures of Market Concentration • Concentration Ratios – Group market share data are

Census Measures of Market Concentration • Concentration Ratios – Group market share data are called concentration ratios. – CRi = ∑ Xi, where Xi is market share of the ith leading firm. – CRi = 100 for monopoly. – CRi ≈ 0 for a perfectly competitive industry. • Herfindahl-Hirschmann Index – Calculated in percentage terms, the HHI is the sum of squared market shares for all competitors. – HHI = ∑ Xi 2, where Xi 2 is squared market share of the ith firm. – HHI = 10, 000 for monopoly. – HHI ≈ 0 for a perfectly competitive industry. • Limitations of Census Information – Slow reports hinder usefulness. – National statistics obscure local markets.

Competition, market structures and business decisions Measurement of market structures Seller concentration Measurement of

Competition, market structures and business decisions Measurement of market structures Seller concentration Measurement of concentration Diagrammatic approach Cumulative % of output 100% The curve of real (not equal distribution The curve of equal distribution of shares of the market among firms N This distance measures concentration No of firms cumulated from the largest

Competition, market structures and business decisions Multinational companies. Vertical and horizontal coordination. Diversification Vertical

Competition, market structures and business decisions Multinational companies. Vertical and horizontal coordination. Diversification Vertical coordination Multinational company

Competition, market structures and business decisions Multinational companies. Vertical and horizontal coordination. Diversification Invest

Competition, market structures and business decisions Multinational companies. Vertical and horizontal coordination. Diversification Invest in production facilities to produce a product D A firm X producing a good A Buys shares of a firm Y producing a good B Invents a new product C

Competition, market structures and business decisions Multinational companies. Vertical and horizontal coordination. Vertical coordination

Competition, market structures and business decisions Multinational companies. Vertical and horizontal coordination. Vertical coordination A firm X producing a good A

Competition, market structures and business decisions Multinational companies. Vertical and horizontal coordination. Vertical coordination

Competition, market structures and business decisions Multinational companies. Vertical and horizontal coordination. Vertical coordination A firm X producing a good A Invest in production facilities or buys shares of or coordinate activities with a firm producing an input D

Competition, market structures and business decisions Multinational companies. Vertical and horizontal coordination. Vertical coordination

Competition, market structures and business decisions Multinational companies. Vertical and horizontal coordination. Vertical coordination A firm X producing a good A Invest in production facilities or buys shares of or coordinate activities with a firm producing an input D Invest in facilities or buys shares of or coordinate activities with a firm providing professional training for employees

Competition, market structures and business decisions Multinational companies. Vertical and horizontal coordination. Vertical coordination

Competition, market structures and business decisions Multinational companies. Vertical and horizontal coordination. Vertical coordination Invest in production facilities or buys shares of or coordinate activities with a firm using A as an input A firm X producing a good A Invest in production facilities or buys shares of or coordinate activities with a firm producing an input D Invest in facilities or buys shares of or coordinate activities with a firm providing professional training for employees

Competition, market structures and business decisions Multinational companies. Vertical and horizontal coordination. Vertical coordination

Competition, market structures and business decisions Multinational companies. Vertical and horizontal coordination. Vertical coordination Invest in production facilities or buys shares of or coordinate activities with a firm using A as an input Invest in or buys shares of or coordinate activities with a firm specialising in the selling of product A A firm X producing a good A Invest in production facilities or buys shares of or coordinate activities with a firm producing an input D Invest in facilities or buys shares of or coordinate activities with a firm providing professional training for employees

Competition, market structures and business decisions Multinational companies. Vertical and horizontal coordination. Multinational company

Competition, market structures and business decisions Multinational companies. Vertical and horizontal coordination. Multinational company Undertake vertical coordination measures abroad A firm producing a good A in a home country Conduct diversification practices abroad Establishes branches in other countries Buys share of analogous firms in other countries