1. Market structures and conduct Competition and contestability

2. Detailed course schedule
Day no
Topic
Textbook ch.
1 (24 Nov; 3 hrs)
1. Introduction. Decision making process and its elements. The scope of economic decision making. Application of marginal analysis
Chs. 1-2
2 (25 Nov; 3 hrs)
2. Demand analysis and demand elasticities
Ch. 3
3 (26 Nov; 3 hrs)
3. Buyer product valuation and choices. Consumer surplus. Buyer pricing decisions
Ch. 4
4 (27 Nov; 2 hrs)
4. Production/transformation process. Production technologies and input-output structure
Ch. 5
5 (28 Nov; 2 hrs)
5. Cost structure and cost drivers of producer pricing strategies. Production scale and scope.
Chs. 5 and 7
6 (1 Dec; 3 hrs)
6. Structure-conduct-performance . Market structures: competition and contestability. Pricing strategies of buyers and sellers
Ch. 8
7 (2 Dec; 3 hrs)
7. Market structures: monopoly/monopsony, monopolistic competition and oligopoly. Pricing strategies and strategic behaviour
Chs. 9-10
8 (3 Dec; 3 hrs)
8. Input sourcing and investment. Pricing and market power
Chs. 6 and 11
9 (4 Dec; 2 hrs)
9. Decision making under conditions of uncertainty. Informational asymmetries and risk management
Ch. 12
10 (5 Dec; 2 hrs)
10. Market research and market analysis. Auction and rings. Strategic behaviour
Ch. 13
11 (8 Dec; 2 hrs )
11. Public sector perspective
Ch. 14
12 (9 Dec; 2 hrs)
12. Revision
13. Examination
13 (11 Dec; 2 hrs)
Examination

3. Topic 6: Structure-conduct-performance Market structures: competition and monopoly/monopsony Pricing strategies of buyers and sellers Topic Contents
6.1 Managerial perspective 6.2 Market exchange - supply and demand model 6.3 Competitive market and efficient market exchange 6.4 Distorted market exchange 6.5 Make or buy decision - Vertical integration
6.6 Alternatives to vertical integration
6.7 Transfer pricing
6.8 Competition and contestability
6.9 Further reading

4. 6.1 Managerial Perspective
Market - any collection of buyers and sellers trading outputs produced for sale and inputs purchased for use in production. Markets facilitate multilateral forms of exchange
The firm is an organisation in which centralised management replaces the decentralised, impersonal forces of the market. A crucial issue is whether firms have market power
Price makers have a degree of market power and make use of it
Many firms act strategically to increase their market power by trying to change the environment in which they and their rivals are competing

5. 6.1 Managerial Perspective
Different market structures are a stylised way of framing the mechanics of market interactions between buyers and sellers
What is emphasised here is the distribution of market power between buyers and sellers, which drives their business conduct and outcomes/preformance
Market power should not be confused with the number of active market participants
The benchmark of economic efficiency is the competitive market structure where neither buyers nor sellers can exercise market power to influence the market price

6. 6.3 Market exchange: Supply and demand model
The supply-demand model is perhaps the most powerful of all tools/models used by economists
The interaction between the demand and supply curves determines a unique (equilibrium) price- quantity combination at which there is neither excess demand nor excess supply

7. 6.3 Market exchange: Supply and demand model
Price
Market Demand Market Supply
Excess Supply
P(high)
P(equilibrium)
P(low) Excess Demand
Q(eq) Quantity

8. 6.3 Market exchange: Supply and demand model
Predictions of price-quantity adjustments
Shift in demand
Price
Market Demand Market Supply Pb Pa
Qa Qb Quantity

9. 6.3 Market exchange: Supply and demand model
Predictions of price-quantity adjustments
Shift in supply
Price
Market Demand Market Supply Pa Pb
Qa Qb Quantity

10. 6.3 Market exchange: Supply and demand model
Market fluctuations
Price
Market Demand Market Supply Pb Pa
Qa Quantity

11. 6.3 Market exchange: Supply and demand model
Market fluctuations and stabilising speculation
(also Price stabilisation scheme)
Price
Market Demand Market Supply
PH b PS
PL a
QL QH Quantity
In the absence of speculation quantities supplied fluctuate between QL and QH and market prices between PH and PL . Speculator buys low (a) sells high (b). This lowers the amplitude of price fluctuations if it is profitable

12. 6.4 Competitive market and efficient market exchange
An efficient market exchange is one that maximises the sum of consumer and producer surpluses
This is achieved in highly competitive markets through trade (the invisible hand of impersonal market forces) so that goods and services are:
allocated to buyers who value them most highly (as shown by their willingness to pay)
produced by/sourced from the least cost sellers (as indicated by the size of producer surplus)

13. 6.5 Distorted market exchange
Impediments to free market exchange prevent buyers and sellers from realising the full potential of market interaction
Examples:
producer subsidy
tariffs
government price regulation

14. 6.5 Distorted market exchange
Producer Subsidy
Price
Home supply before subsidy
Home Market Demand Home supply with subsidy
Costhome
Subsidy
Pworld World Supply
Imports
Qa Qb Quantity
World price paid at home by consumers but subsidized producers produce more and replace imports of more efficiently produced world products. Net loss of national resources

15. 6.5 Distorted market exchange
Tariff
Price
Home Market Demand Home Supply
Phome
Pworld World Supply
Imports
Qa Qb Qc Quantity

16. 6.5 Distorted market exchange
Price regulation: Price Ceiling
Price
Market Demand Market Supply
Free market price
Price ceiling
Excess demand
Qs Qeq Qd Quantity

17. 6.6 Make or buy decision: Vertical integration
Vertical integration - the consolidation of the production process/value adding chain under the control of a single corporate entity
Firms integrate vertically because
they seek more market power in input and/or output markets
or the cost of in-house production is less than that of sourcing similar inputs/components from suppliers
Firms may increase their market power by foreclosing the market through merger (a barrier to entry for competitors)
Vertical integration may
reduce their transaction cost of doing business with suppliers
or reduce the scope for opportunistic behaviour by suppliers
Quasi-vertical integration: contractual arrangements but no formal merger

18. 6.7 Alternatives to vertical integration
exclusive territories (may be combined with price ceilings and quotas)
exclusive dealerships (may be reinforced by warranties or after-sale support)
retail price maintenance (often illegal)
franchising

19. 6.8 Transfer pricing
A vertically-integrated firm may adopt rules for internal resource allocation
Transfer pricing involves setting prices (in transfers between cost centres) for products which a firm produces for in-house use
Transfer pricing decisions where:
there is an external, competitive market for the in-house traded product
there is a market but it is not competitive
there is no external market for the product

20. 6.9 Competition and contestability
Competitive market is a market where there are many atomistic buyers and sellers and none of these has market power to influence the market price or the volume of products traded
Perfectly competitive market - very large numbers of atomistic buyers and sellers, each buyer/seller operating as a utility/profit maximising price taker
A contestable market is a market where there are no significant barriers to entry and exit (no significant sunk costs) so that newcomers may enter and incumbents exit at a low cost
Decision rule MR = AR = P = MC s.t AC < AR

21. 6.9 Competition and contestability
Perfect Competition
Representative Seller in the Long Run
Price/Cost MC AC
P MR=AR=P
Q Quantity

22. 6.10 Further reading
Baye (2010): chs. 7-8 and 11