L4 - Location and Entry Deterrence Flashcards
1
Q
When and why did the authorities start looking at the UK groceries market?
A
- 2006: Office of Fair Trading market study Found evidence of significant barriers to entry
- ● shortage of land around town centres –> structural barrier to entry
- ● complex and time consuming to obtain planning permission –> not a big problem for larger players, but for new supermarket it was a significant barrier
- ● large supermarkets acted strategically when purchasing undeveloped land –> didn’t even put supermarkets on this land or developing on it even though they already have a supermarket close by
- 2008: Competition Commission market investigation final report –> Confirmed a lot of what the Office of Fair Trading had found
- Two of four major recommendations:
- ● prevent land agreements that can restrict entry by competitors
- ● the inclusion of a ‘competition test’ in planning decisions TEST: A firm that already has a store in a local market can only open a new store:
- ● when there are 3 or fewer firms in the town, if its market share < 60%
- ● when there are 4 or more firms in the town
- Two of four major recommendations:
2
Q
What did the UK competition authorities use as a basis for the competitive test for supermarkets in the groceries market?
A
1972: Federal Trade Commission issued a section 5 complaint for RTE (Ready to eat) cereal market
- ● Firms: Kellogg’s 45%, General Mills 21%, General Foods 16%, Quaker Oats 9%
- ● 1950-1972: biggest 6 firms had introduced 80 new brands, none from new entrants
- “These practices of proliferating brands, differentiating similar products and promoting trademarks … result in high barriers to entry”
- Proposed structural remedy: create 5 new firms through divestments from big 3
- 1982: Administrative law judge
- The case was dismissed:
- ● No conspiracy to deter entry through brand proliferation
- ● Strategic entry deterrence can occur naturally from competition
3
Q
What is the hotelling (1929) Framework?
A
- T –> transportation/travel cost to get to the store
4
Q
What does the hotelling framework look like on a graph when we also include the consumer’s utility?
A
- θA –> this is where consumer A is located exactly at the point of the firm
- Don’t have any transportation costs only the cost of the good
- The closer a consumer is to a store the higher their utility will be
- Slope of the line is determined by k
- The higher it is the less utility a consumer will get the further they are located from a store
5
Q
Fixed Simultaneous entry: Hotelling model (1929)?
A
- Second assumption isnt needed to imply that consumers will buy from the firm even if they are the maximum distance away from it
- qi(θi,θj) –> demand function of firm i which is a function of both firms locations
- Consumer located closer to store A will generate a higher utility from going there than store B further away (the utility function for A is above the function for B at this point)
- At the point of intersection –> the marginal consumer
- This person is indifferent from buying from either of the firms
- this person determines what the firms demand will be –> Anyone to the left will go with firm A, whereas anyone to the right will go with firm B
6
Q
Fixed Simultaneous entry: what can we learn from the marginal consumer?
A
- If V and p are the same for both consumers –> utility is based of transportation costs
- The marginal consumer is therefore located at the midpoint
7
Q
Fixed Simultaneous entry: demand and profits?
A
8
Q
Fixed Simultaneous entry: what happens to firm A’s profit when it moves location?
A
- say they moved to exactly the same place as the margin consumer was originally
- shift the whole graph of A right
- new marginal consumer
- Firm A has increased its demand by the difference between the two marginal consumer locations
- At the expense of its rival
9
Q
Fixed Simultaneous entry; How can we derive a firm’s best response function?
A
- 1st graph is looking at the profit of A against location (given we can move A’s location to figure out its respective profit levels)
- If it locates at the exact same point as firm B, it will receive 1/2 the demand
- At 0 it will get the marginal consumer between its location and Firm B’s location
- If it is located just to the left of Firm B, it will receive all the demand left of it
- From there we can derive the profit function as the average of the two locations
- Best response function
- Given that B locates anywhere of the 45 degree line
- Below –> firm A should locate slightly to the right of B
- Above –> firm A should locate slightly to the left of B
- As firms are symmetric Firm B’s best response function is a mirror of A’s
- NE is the intersection between these two BR functions (location = 1/2)
- Given that B locates anywhere of the 45 degree line
10
Q
Fixed Simultaneous entry: welfare problem?
A
- When firms enter simultaneously, they have incentives to provide minimum differentiation (or bunch at least)
- These locations are inefficient because they do not provide enough variety
11
Q
Endogenous Sequential Entry: Assumptions and entry timing?
A
12
Q
Endogenous Sequential Entry: Numerical Example of last entry?
A
- 0 profits from locating as a peripheral firm
- Use the same logic from locating left of 1 to determine that they wouldn’t like to locate to the right of 2
- What would happen if firm three then located in between the firms?
- We will end up with another utility function and marginal consumer
- But firm three isn’t going to located just anywhere in between –> given that its profits are greater than the sunk cost ‘f’ it will also what to strategically locate in a place that would deter firm 4 from locating
- Firm 3 wants to locate at the point that firm 4’s profits are zero or negative
13
Q
What is the general equilibrium conditions for free-entry Nash Equilibrium in locations?
A
14
Q
How can a firm setup multiple stores in the same area as a entry deterrent?
A
15
Q
Discuss the implications of store/brand proliferation?
A
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