NS4960
Spring Term 2017
Markets and Competition
Spectrum of Competition
2
Aspects of Competition
3
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
4
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
5
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
6
Firm Cost Structure
7
Plot of Cost Structure
8
Dynamic Adjustent I
9
Dynamic Adjustment II
10
Monopoly: Cost and Revenue
11
Monopoly Optimization
12
Monopoly Price Discrimination
13
Regulating Monopolies
14
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
15
Oligopolistic Industries
16
Example of Oligopoly
17
Oligopoly Game Theory
18
Constant Sum Game: Minimize Losses
19
First Oligopoly Model I
20
First Oligopoly Model II
21
First Oligopoly Model III
22
Colusive Oligopoly
23
Problem of Potential Entry
24
Dominant Firm Model
25
Sales Maximization Model
26