 How firms compete Easy as PIE: Presenting in English 09/03/2011

Plan of the lecture  Approaches, definitions  Market structures  Antitrust regulation, competition policy

Types of competition Price reduction P→MC Price wars price Product differentiation non- price

Types of competition perfectimperfect Monopolistic competition Oligopoly No competition Monopoly

Market structure The state of the market with respect to the number and the power of buyers and sellers. Number of firms (buyers) Control over price Product differentiation Ease of entry (barriers to entry) Market power – the ability to affect the terms and conditions of exchange so that the price of the product is set by the firm (not imposed by the market)

Product differentiation The process of distinguishing a product or service from others to make it more attractive. Sources of differentiation:  Quality (e.g. longer warranty)  Functional features or design  Promotion activities, branding, advertising  Availability, e.g. timing and location (spatial differentiation) Goal: to make the product unique for the particular consumer

Barriers to entry obstacles on the way of potential new entrant to enter the market and compete with the incumbents  Structural barriers (industry conditions)  Costs, demand, economies of scale, network effects, etc.  Strategic barriers (incumbent firms’ actions)  Customer loyalty, switching barriers, exclusive agreements, predatory pricing, government regulation, intellectual property (patents, trademarks), vertical integration, etc.

Principal kinds of market structures  Perfect competition  Monopolistic competition  Oligopoly  Monopoly

Mind map

Perfect competition  Many Buyers and Sellers  Sellers - price takers  Homogenous products  Freedom of entry and exit  Perfect information  Long run normal profit

Monopolistic competition  Many Buyers and Sellers  Some control over price  Differentiated products  Tiny monopoly over product  Relatively free entry and exit

Oligopoly  Competition amongst the few  Interdependence between firms  Product differentiation  High Barriers to entry  Price stability? Collusion?  Abnormal Profits

Monopoly  Firm = Industry  Unique product  Control over price OR output  Price discrimination? (1 st deg. – perfect, 2 nd deg. – quantity, 3 rd deg. – segmentation)  High Barriers to Entry  Abnormal Profits

Monopolies  Pure monopoly – industry is the firm!  Actual monopoly – where firm has >25% market share  Natural Monopoly – high fixed costs – gas, electricity, water, telecommunications, rail  Legal (statutory monopoly) - a monopoly that is protected by law from competition

What’s wrong with monopoly?  Lower output, higher prices  Deadweight  Low incentives for development

Competition (Antitrust) law  US - antitrust law. Sherman Antitrust Act (1890), Clayton Antitrust Act (1914)  EU – competition law. Treaty of the European community (EC Treaty), Articles 81 and 82  Russia – antitrust authorities, but competition law (1991, 2006) law that promotes or maintains market competition by regulating anti-competitive conduct

Main issues  Prohibiting collusion and cartels  Banning abuse of dominant position (predatory pricing, tying, refusal to deal, etc.)  Controlling M&A mergers vertical conglomerate horizontal acquisitions friendly hostile

Why does competition policy matter? Competition policy is about applying rules to make sure that businesses and companies compete fairly with each other. It has many positive effects:  encouraging enterprise and efficiency  widening consumer choice  helping deliver lower prices and higher quality.

Thank you for your attention!