Microeconomics and Corporate Analysis Microeconomic Foundations for the Analisys of Market Structure Lecture Slides Rui Baptista

Consumer Theory Budget Constraint Showing Increase in Income

Consumer Theory Budget Constraint Showing Increase in Price

Consumer Theory: Indifference Curves

Consumer Theory Optimal Choice

Consumer Theory The Consumer Problem Max U(Q 1, Q 2 ) subject toP 1.Q 1 + P 2.Q 2 = M leads to the First Order Conditions: MU 1 / MU 2 = MRS = P 1 / P 2 P 1.Q 1 + P 2.Q 2 = M thus deriving: Q 1 = Q 1 (M, P 1, P 2 )-P 1 = Q 1 (P 1 ) Q 2 = Q 2 (M, P 1, P 2 )-P 2 = Q 2 (P 2 ) Inverse Demand Funcions

Technology and Costs Internal Efficiency MinC = w.L + r.Ksubject to Q = Q(L, K) Leads to: C = C(Q, w, r) = C(Q) Average Cost:AC = C(Q) / Q Marginal CostMC = dC(Q) / dQ Short Run:C SR = r.K + w.L(Q) = FC + VC(Q) AC SR = FC / Q + VC(Q) / Q MC SR = dVC(Q) / dQ

Technology and Costs Fixed and Variable costs

Technology and Costs Short Run Average Costs

Technology and Costs Long Run Average Costs

Technology and Costs Marginal Costs and Firm Supply

Perfect Competition Short Run Market Equilibrium D S S’ MC i AC i Q (Market) QQ’ Q (Firm i) QiQi’ P P’

Monopoly Market Equilibrium

Welfare Loss from Monopoly

Oligopoly: Reaction Curves and Isoprofit Lines

Oligopoly: Stackelberg Equilibrium

Oligopoly: Cournot Equilibrium

Oligopoly: Quantity Games Stackelberg Equilibrium Follower’s Problem:Max  2 = P(Q 1 +Q 2 ).Q 2 -C 2 (Q 2 ) yielding the Reaction Function:Q 2 = f 2 (Q 1 ) Leader’s Problem:Max  1 = P(Q 1 + f 2 (Q 2 )).Q 1 - C 1 (Q 1 ) Equilibrium: dQ 2 / dQ 1 = df 2 / dQ 1 Cournot Equilibrium Max  1 = P (Q 1 + Q 2 ).Q 1 - C 1 (Q 1 )yields Q 1 = f 1 (Q 2 ) Max  2 = P (Q 2 + Q 1 ).Q 2 - C 2 (Q 2 )yields Q 2 = f 2 (Q 1 ) Equilibrium:f 1 (Q 2 ) = f 2 (Q 1 )

Oligopoly: Collusion Cartel’s Problem: Max P(Q 1 +Q 2 ).(Q 1 +Q 2 ) - C 1 (Q 1 ) - C 2 (Q 2 ) yielding: MR = P + (dP / dQ).Q = MC 1 = MC 2 with Q = Q 1 + Q 2 and: d  1 / dQ 1 = P + (dP / dQ).Q 1 - MC 1 = - (dP / dQ).Q 2 > 0 d  2 / dQ 2 = P + (dP / dQ).Q 2 - MC 2 = - (dP / dQ).Q 1 > 0 (incentive to break the agreement)

Corporate Analysis Firm Behaviour and the Determinants of Market Structure Lecture Slides Rui Baptista

Performance Efficiency in Production Efficiency in Resource Allocation Productivity and Quality Technological Progress Macroeconomic Stability and Employment Equity

Basic Conditions Technology Accessibility of Raw Materials Product Characteristics Price elasticity and Substitutes Life-Cycle Seasonality of Demand

Market Structure Concentration Cost Structures Barriers to Entry Vertical Integration Diversification Product Differentiation

Firm Conduct Pricing Competition (Rivalry vs. Collusion) Product Strategy and Advertising Research and Innovation Investment in Production Capacity

Public Policy Taxes and Subsidies Trade Policy Regulation and Price controls Anti-Trust Laws Public Ownership

Basic Conditions Determining Market Concentration Economies of Scale Indivisibilities Learning Economies Product Life-Cycle

Firm Strategies Leading to Concentration Rivalry and Co-operation R&D Strategies Product Differentiation Strategies Barriers to Entry Strategies

Government Strategies Leading to Concentration Trade Policy - Promoting Competitiveness Development Policy - Protecting Infant Industries Patents and Technology Policy Regulation of Natural Monopolies

Market structure and the Intensity of Price Competition

Vertical Integration: The Value Chain Primary Activities Inbound Logistics Manufacturing Activity Outbound Logistics Marketing and Sales Customer Service Support Activities Procurement Technology Development Human Resources Management Infrastructure Activities

Determinants of Vertical Integration Localised Economies of Scale Efficiency and Innovation Agency and Influence Costs Transaction Costs: –Co-ordination –Information –Market Imperfections

Determinants of Product Diversification Economies of Scope Scale Economies and Market Size Capital-Raising Economies Pricing Strategies Departmental Inefficiencies Agency and Influence Costs Managerial Diseconomies

Sources of Scale Economies Technological Indivisibilities Increases in the Productivity of Variable Inputs The Need for Inventories Physical Properties of the Processing Units Marketing, Purchasing and R&D Costs Experience and Learning Economies

Structural Conditions Facilitating Oligopolistic Co-ordination Environment and Business Attitudes Market Concentration Conditions Affecting the Speed of Detection and Reaction Asymmetries between Firms Multimarket Contact

Behavioural Conditions Facilitating Oligopolistic Co-ordination The Nature of The Adopted Strategies Price Leadership Practices Advance Public Announcements Most Favoured Customer Clauses Uniform Delivered Prices