Market Structures and Pricing Essay

Market structures and pricingRevenuesConsumers* backward request curve gives entrustingness-to-pay* Benefit consumer(s) derive(s) from additional good* Area beneath inverse demand curve measures total willingness-to-pay, total benefit or total surplus. * Maximum price I support charge as manufacturing business determined by inverse demand function * Marginal revenues revenue of next unit I sellStrategies* reach maximisation* Marginal clams equal to 0 (MR=MC)* Classic economic theory entrepreneurial capitalism* Owner makes strategic decisions* Managerial capitalism* Ownership changed* Control changed* Potential conflicts mingled with sh atomic number 18holders and management * Firms got bigger coordinate difficulties* Revenues maximization* Decreasing revenues bad for image* Financial institutions want certainty* Low revenues mean relatively high lay on the line for suppliers * Low revenues may lead to bud hail cuts, including management * Bonus* MR=0* Marketing effort* Manag erial utility maximization* Managers maximize own triumph* Growth maximization* Long term strategy* Behavioral theories* Different groups, satisfy all groups to survive satisfying * Altruistic objectives public interest* wellbeing maximization* What strategy is relevant?* Autonomy and income advancement* Successful business is most important personal objective * Growth objective* Profit maximization* Model* Economic profit accounting profitMarket structures* Perfect competition* Monopolistic competition* Oligopoly* MonopolyPerfect competition* Many (small) suppliers and buyers price takes* solicit function for individual company* Products are perfect substitutes* Free entry and exit* Information is perfect (available to all no price)* Free movement of products sum up responsive to market forces * Innovation exogenous producers reactive rather than proactive.* Benchmark Welfare is maximized (p=mc)* Efficiency* Productive efficiency AC cannot be lower* MC curve passes though min imum of AC* Allocative efficiency resources are distributed and used as preferred by consumers P=MC * Pareto efficiency no one(a) can be made better off without making anyone else worse off.MonopolyOne seller can influence price ( sidetrack)Price marginal cost economic inefficiency (although the firm itself may beefficient) * Barriers to entry* Initial costs* Sunk costs* Brand loyalty* Economies of scale* Patents and licenses* Anti-competitive behaviorRevenues* Demand Q* Inverse demand P=a/b-1/b*Q* Revenues R = P*Q = Q*a/b-1/b*Q* Marginal revenue R/Q* Additional revenues from next unit exchange* R/Q = a/b-2/b*Q* Twice as steep as inverse demand* Positive if -1* Demand is elastic (point-elastic)Natural monopoly* Market can only sustain 1 producer* Competition (P=MC) all competitors make a loss* PMC loss when P help to sustain monopoly or oligopoly * establishment policy regulation* Spatial pre-emption new entrants do not have access to necessary inputs * Cost barriers* Reputati on customer loyalty, safety* plump barriers shrinking a firm is expensive (labor, capacity) * Entry-deterring strategies pricing, spare-capacity, corporate deals (price discrimination)Oligopoly non-corporate behavior* Competition based on output (quantity) or price.* Two basic oligopoly models* Cournot (quantity competition)* Bertrand (price competition)* Cournot firms determine output simultaneously, and the bring this to the market * Bertrand firms announce prices. Demand is allocated to low-price firm(s), who then produce(s) demandCournot competition* Assumes that firms produce identical products* Demand Q=a-b*P* Inverse demand P=a/b-1/b*Q* Now we have 2 producers (duopoly) P=a/b-1/b*(Q1+Q2)* Profits maximized when MR=MC (Equivalent to monopolists), taking the competitors action as given. * Inverse demand P=a/b-1/b*(Q1+Q2)* Revenues firm 1 R1=Q1*a/b-1/b*(Q1+Q2)* Marginal revenues MR1=a/b-1/b*(2*Q1+Q2)* Equilibrium MR1=MC1* Expression in Q1 and Q2* Similar expression for company 2* MR1 R1/Q1 =* P*Q1/Q1 + Q1*P/Q1* P + P/Q1*Q1* 1 + (P/Q1*Q1/P)*P* (1+1/p)*P* MR1=MC1 (1+1/p)*P=MC1* P=MC1/(1+1/p)* Cournot oligopolist sets price above MC* Same for monopolyBertrand oligopoly* Price competition (again assume identical goods)* Firms announce prices. Demand is allocated to low-price firm(s), who then produces demand. * If a firm sets above its competitors price, clients will prefer the competitors (identical goods). * Bertrand equilibrium is therefore equivalent to competitive equilibrium price equals marginal cost.Price discrimination* Conditions* Market power* Different groups of consumers (based on willingness-to-pay, demand elasticity etc.) - segmentation * Resale is not possible* Cost of discrimination may not exceed additional boodle * Market should be transparent.* Charge diametric (groups of) consumers different prices to maximize profits - price discrimination * First, second and third degreeFirst degree pricing discrimination* Perfect discrimination for each one unit of output sold at different price * Price determined by inverse demand curve* What is the optimal output? split second degree price discrimination* Non-linear pricing price depends on how much you buy* Fundamentals* Application* Consumer decides on how much to buy* Self survival of the fittest constraints* 2 consumers each spends Ri to receive Xi* Buy Xi if benefitsi (Xi)-Ri 0* Benefits 1 (X1)-R1 benefits1 (X2)-r2* Benefits 2 (X2)-R2 benefits2 (X2)-r1* Consider an individual demand function (for convenience, marginal costs are 0) * Monopolists want to supply X1 at a total price of A* Consider two individual demand functions* Monopolist would like to supply X1 at A+B+C and X2 at A* But if consumer 1 also purchase X2 at a price of A, he/she will get surplus B (self selection) * If the monopolists would charge A+C for X1, consumer 1 gets surplus B and the monopolist higher profits. Can themonopolist get higher profits? * Make X2 unattractive for consumer 1* Offering les s of X2 (loss of monopolist) allows for higher profits from X1.Third degree price discrimination* Set prices for different groups of consumers examples?Summary* Profit maximization* Monopoly, perfect competition two extremes.* Regulation of monopoly incentives.* Cournot oligopoly* decide on production, then price determined in market * Cournot ologipolist has monopoly power (pmc)* Bertrand* decide on price, then output determined in market p = mc * Price discrimination* Higher profits* Market power