NS4960 Spring Term 2017 Markets and Competition

Spectrum of Competition

Aspects of Competition

Business Motives I Firms can pursue a diverse set of motives. Profit Maximization Goal assumed by most theories – incremental revenues equal incremental costs Sales Volume Maximization Firm produces where total revenue equals total cost Market Share Common in oligopolies Survival Often found in highly competitive markets Shareholder value Equals remaining value of business after all debts paid Satisficing Attempting to take account number of objectives without maximizing any particular one

Business Motives II Factors that affect business motives Who owns the firm? Owners have different objectives than those appointed to manage operations Who manages the firm? Owners often try to maximize profits, professional manager often opt for maximizing sales revenue How large is the firm? Small firms often just attempt to survive, large firms maintain market share What are competitors doing? Degree of Competition Aggressive, cooperative? What is the time period? Short run survival may dominate. In long run, shareholder value or environmental goals may be factors

Perfect Competition Conditions for Pure Competition Composed of a large number of independent sellers The firms offer a standardized product This feature rules out non price competition – advertising, sales promotion No individual firm supplies enough of the product to influence its market price noticeably In a competitive industry, no artificial obstacles prevent new firms from entering or old firms from leaving the industry. Firms and the resources they employ are mobile In actual practice fairly rare – used in economics more to set a norm – this market structure produces the best result

Firm Cost Structure

Plot of Cost Structure

Dynamic Adjustent I

Dynamic Adjustment II

Monopoly: Cost and Revenue

Monopoly Optimization

Monopoly Price Discrimination

Regulating Monopolies

Evaluating Monopolies Short run vs long run Short run excess profits, higher prices, lower output levels than perfect competition Long run – more innovation, investment, higher wages Who are monopolists? Need to define market Are they natural monopolies? Issue of anti trust Cellophane Alcoa

Oligopolistic Industries

Example of Oligopoly

Oligopoly Game Theory

Constant Sum Game: Minimize Losses

First Oligopoly Model I

First Oligopoly Model II

First Oligopoly Model III

Colusive Oligopoly

Problem of Potential Entry

Dominant Firm Model

Sales Maximization Model