Chapter 5 Flashcards
(40 cards)
What idea does competitor identification start with
What are competitors?
Competitors are the firms whose strategic choices directly affect one another
What does SSNIP stand for
A small but significant nontransitory increase in price
Where is SSNIP used for
The SSNIP is used as a conceptual guideline for market definition. This is used for mergers and follows the following criteria:
Small is useally defined as 5 procent and non transistory is usually defined to be at least one year
What is SSNIP based on?
The economic concept of substitutes
What are substitutes
In general, two products X and Y are substitutes if, when the price of X increases and the price of Y stays the same, purchases of X go down and purchases of Y go up. When asked to identify competitors, most managers would probably name substitutes
Which three conditions do close substitutes hold
- They have the same or similar product performance characteristics
- They have the same or similar occasions for use
- They are sold in the same geographic market
What does market structure refer to
The number and distribution of firms in a market
What is the N-firm ratio
This give the combined market structure of the N largest firms in the market. ( F1+F2+F3+etc)
What is the problem with the N-firm ratio
it is invariant to changes in the sizes of the largest firms
What is the Herfindahl index
The Herfindahl index equals the sum of the squared market shares of all firms in the market.
Why is the Herfindahl index better than the N-firm ratio
It conveys more information. If one believes that the relative size of the largest firms is an important determinant of conduct and performance.
What are the types of market structure
Perfect competition
Monopolistic competition
Oligopoly
Monopoly
Perfect competition herfindahl index:
Usually below .2, Fierce competition
Monopolistic competition herfindahl index:
Usually below .2, May be fierce or light competition, depending on product differentiation
Oligopoly herfindahl index:
.2 to .6, may be fierce or light competition, depending on interfirm rivalry
Monopoly herfindahl index:
.6 and above, usually light, unless threatened by entry
In a perfect competition market conditions will tend to drive down prices toward marginal costs when at least two of the following conditions are met:
- There are many sellers
- Consumers percieve the product to be homogenous
- There is excess capacity
Regarding many sellers what are reasons they drive down prices
- A diversity of pricing preferences, even if the industry is profitable, a seller may prefer a lower price
- When sellers maintain high prices, consumers make fewer purchases, this will cause the cutting of production and prices will fall
- Related to the second point, some seller will cheat when the production is lowered by lowering price and increasing production
Regarding homogenous products what are the reasons they drive down prices
When a firm lowers it price; it expects to increase it sales; they may come from the following sources
1. Increased sales to the firm’s existing customers
2. Sales to customers of a competing firm
3. Sales to individuals who were not planning purchase from any firm at the prevailing price
Regarding excess capacity what are the reasons they drive down prices
For production processes that entail high fixed costs, marginal costs can be well below average cost over a wide range of output. Only when production nears capacity - the point at which average cost begins to rise sharply - does marginal cost begin to exceed average cost.
How is monopoly power described?
the ability to act in an unconstrained way
What are the two main features that characterize monopolistic competition
- There are many sellers
- Each seller offers a differentiated product
What is vertical differentiation
A product is vertically differentiated when it is unambiguously better or worse than competing products. Example: a clothing manufacturer engages in vertical differentiation when it uses stronger stitching to enhance durability.
What is horizontal differentiation
A product is horizontally differentiated when only some consumers prefer it to competing products (holding price equal) Example: the popularity of many different brands of blue jeans, at different price points, is a testament to widely diverging consumer tastes for fashion.
