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Customer, markets and firm strategy > Lecture unit 4: Markets and competitive analysis (1/2) > Flashcards

Lecture unit 4: Markets and competitive analysis (1/2) Flashcards

1
Q

When are firms competitors?

A

If one firm’s strategic choice adversely affects the performance of another

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2
Q

Where (market) can competitors of a company be?

A

A firm may have competitors in several input markets and output markets at the same time

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3
Q

What are direct and indirect competitors?

A
  • Direct competitors: strategic choices of one firm directly affect the performance of the other
  • Indirect competitors: strategic choices of one firm affect the performance of the other because of a strategic reaction by a third firm
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4
Q

What are the “practice” saying about competitors?

A

In practice, anyone who produces a substitute product is a competitor

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5
Q

What is the SSNIP?

A

= Merger with all the competitors should lead to a small but significant non-transitory increase in price (SSNIP)

–>Small: at least 5%
- non-transitory: at least for one year

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6
Q

When are two products close substitutes?

A

Two products tend to be close substitutes when
- they have similar performance characteristics,
- they have similar occasion for use, and
- hey are sold in the same geographic area

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7
Q

What are “performance characteristics”?

A

Performance characteristics describe what the product does to the customer:

Example from the automobile industry: seating capacity, curb appeal, power and handling, reliability

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8
Q

What is menat with Occasion for use? Substitute characteristic

A

Products may share characteristics but may differ in the way they are used.

Examples:
* Orange juice and cola are beverages but used in different
occasions.
* Hiking shoes versus court shoes

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9
Q

What is cross price elastiticty of demand?

A

Cross price elasticity of demand:

When nyx is positive, it indicates that consumers increase their purchase of good Y as the price of good X increases

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10
Q

What are the two steps in identifying competitors in geographical areas?

A

Step 1: locate the catchment area (where the customers come from)

Step 2: find out where the residents of the catchment area shop

With some products like books and drugs being sold over the internet identifying geographic competition becomes more
difficult

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11
Q

What does market structure refers to?

A

Market structure refers to the number and distribution of firms in a market

  • Monopoly is one extreme with the highest concentration (one seller)
  • Perfect competition is the other extreme with innumerable sellers.
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12
Q

How are markets usually described?

A

markets are often described by the degree of concentration

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13
Q

What is the “Structure, conduct, Performance paradigm”?

A

= it stats that the structure of a market can profoundly affect the conduct and financial performance of its firms;

–>the causal connection is known as the Structure, Conduct, Performance paradigm.

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14
Q

What are the four classes of market structure? Defined in Herfindahl index

A
  • Perfect competition: Herfindals < 0.2
  • Monopolistic competition: <0.2
  • Oligopoly: 0.2 to 0.6
  • Monopoly: >0.6
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15
Q

What is the intensity of price competition for the 4 classes of market structure?

A
  1. Perfect competition: fierce
  2. Monopolistic competiton: depends on the degree of product differentiation
  3. Oligopoly: depends on inter-firm rivalry
  4. Monopoly: light unless there is threat to entry
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16
Q

Characteristics of perfect competition?

A
  • Many sellers who sell a homogenous good
  • Many well informed buyers
  • Consumers can costlessly shop around
  • Sellers can enter and exit costlessly
  • Each firm faces infinitely elastic demand
  • With perfect competition economic profits go to zero (zero profit condition)
  • When profits are maximized percentage contribution margin
    PCM = 1/η = 0 (η is the elasticity of demand & = infinity)
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17
Q

What are the conditions for “fierce price competition”? ( how many conditions need to be fulfilled?]

A

when two or more conditions are met:

  • there are many sellers
  • customer perceive the product to be homogenous
  • There is excess capacity
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18
Q

Why might a low-cost producer set a low price even in a profitable industry?

A
  • A low-cost producer may prefer to set a low price to maintain competitiveness
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19
Q

What makes it harder to create and sustain cartels and collusive agreements?

A

The presence of many sellers

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20
Q

What might small players do in perfect competition market?

A
  • Small players will be tempted to cheat and small cheaters may go
    undetected
21
Q

Perfect competiton: What are three sources of increased revenue when price is lowered?

A
  • customers buy more
  • New customers buy
  • Customers switch from the competitors
22
Q

What does “homogeneous products and excess capacity” imply in perfect competition?

A
  • Products are indistinguishable between firms, and
  • excess capacity means more supply is available than the demand at current prices, often leading to lower prices
23
Q

Why might a firm price below average cost in perfect competition?

A

When firms operate below their full capacity:

  • they can afford to lower prices temporarily below their average total cost
  • To cover only variable costs when operating below full capacity

Only if they are operating below full capacity – otherwise they are not able to satisfy the increased demand by the lower prices

24
Q

What happens when there is industry-wide excess capacity? (Perfect competition)

A

Prices may fall below average costs,

  • leading some firms to exit the market if they continuously incur losses
  • if exit is not an option, excess capacity and losses will persist for a while
25
Q

What are the characteristics of a monopoly? (Competion, demand curve, price setting)

A
  • A monopolist faces little or no competition in the output market.
  • If some fringe firms exist, their decisions do not materially affect the monopolist’s profits.
  • A monopolist faces a downward sloping demand curve (can set prices with little regard to how other firms will respond).
  • The monopolist sets the price so that marginal revenue equals marginal costs.
  • Thus the monopolist’s price is above the marginal costs and the output is below the competitive level
26
Q

How might a monopolist succeed and benefit consumers?

A
  • A monopolist often becomes dominant by producing more efficiently or better meeting consumer needs than competitors,
  • potentially making consumers net beneficiaries as they receive superior products or services
27
Q

Why are monopoly more innovative than in perfect competition and what’s the impact on consumers?

A

Monopolists are likely more innovative than firms in perfect competition because

  • they can retain a significant portion of the profits from their innovations
  • This innovation benefits consumers,
  • who might suffer in the long run if these profits are excessively restricted, potentially discouraging further innovation.
28
Q

What are the 2 imporant features important to understand pricing in monopolistic competition ?

A

Monopolistic competition is marked by

  • many sellers who
  • they believe that their actions will not materially affect their competitors
29
Q

How do consumers choose products in monopolistic competition and what is the slope of the demand curve?

A
  • Each firm offers a differentiated product, leading consumers to choose based on more than just price (on the basis of other factors)
  • This differentiation results in each firm having a downward-sloping demand curve unlike the flat demand curve in perfect competition, allowing some pricing power.
30
Q

What is vertical and horizontal differentiation?

A
  • Vertically differentiated products unambiguously differ in quality
  • Horizontally differentiated products vary in certain product characteristics to appeal to different consumer groups

An important source of horizontal differentiation is geographical
location

31
Q

What is the situation if you have 2 grocery stores that are located at different locations: On which bases do consumers choose the stores? And what is it?

A
  • Consumers choose the store based on “transportation costs”
  • Transportation costs prevent switching for small differences in price
32
Q

What does transportation cost do? (horizontal differentiation)

A

Transportation costs prevent switching for small differences in price

33
Q

What is idiosyncartic preferences, also in context of horizontal differentiation?

A

=refer to the unique, individual tastes and preferences that vary widely from person to person

–>Horizontal differentiation is possible with idiosyncratic preferences

34
Q

What are important sources for idiosyncratic preferences?

A

–>Location and Taste are important sources of idiosyncratic preferences

–>Horizontal differentiation is possible with idiosyncratic preferences

35
Q

On what does the degree of horizontal differentiation depend upon? and what is it?

A

depends on the magnitude of consumers’ search costs

Search costs: costs of finding information about alternatives

36
Q

What do low cost sellers try to do ? (monopolistic competition)

A
  • Low cost sellers try to lower the search costs to boost their market shares (example: advertising)
37
Q

What happens when there is low search costs? (Effect on Differentiation, prices)

Example market with high search cost?

A
  • Low search costs reduce horizontal differentiation leading to lower prices and lower profits to all firms
  • Market with high search costs: physiciations have high search costs
38
Q

At which level is pricing typically set in monopolistic competition?

A

since each firm faces a downward-sloping demand curve,

  • the price will be set above marginal costs
  • allowing for potential economic profits if price also exceeds average costs
39
Q

Monopolistic competition: How cann a firm earn economic profit, if the price is above marginal costs?

A

if price also exceeds average costs

–>it allows firms to earn economic profit

40
Q

What effect does economic profit have on market entry in monopolistic competition?

A

Economic profits attract new entrants into the market,

–>continuing until economic profits for existing firms are eroded to zero

41
Q

How does new entry affect incumbents in a market characterized by monopolistic competition?

A
  • New entrants decrease market share for incumbents,
  • reducing their revenue and economic profit, regardless of whether or not entry affects prices directly

—>if highly differentiated products: than entry does not lower prices

42
Q

Monopolistic competition: When does the entry of new firms not lower prices?

A

if the products are highly differentiated

43
Q

Under which circumstances is the economic profit erosion aquicker in monopolistic competition with market entry?

A

Generally: the drop in revenue caused by entry will reduce the economic profit:

If there is price competiton -> less differentiated products, the erosion will be quicker

44
Q

How does market exit affect remaining firms in monopolistic competition?

A
  • Exit by some firms can help restore profitability for the remaining firms
45
Q

How does customer loyalty influence pricing and market entry in monopolistic competition?

A
  • Customer loyalty allows prices to exceed marginal costs, and
  • this encourages market entry
46
Q

When is entry considered excessive in monopolistic competition?

A

Entry is considered excessive:
- when it leads to increased fixed costs
- without a corresponding reduction in prices

47
Q

When is the entry in monopolisti markets not excessive?

A

If entry increases the variety of products that is valued by customers

48
Q

What is the difference between the demand curves of monopolistic competition and perfect competition

A
  • This differentiation results in each firm having a downward-sloping demand curve unlike the flat demand curve in perfect competition, allowing some pricing power.

Customer, markets and firm strategy (20 decks)

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