MARKET

COMPETITIVE MARKETS

TANKER SERVICE MARKET, 2005

Impact of Increasing oil prices Increasing China imports More stringent tanker standards

PERFECTLY COMPETITIVE MARKET

homogeneous (identical) product

many small buyers

many small sellers

price takers (No influence on price)

free entry and exit (No barriers)

Both buyers and sellers share equal (symmetric) information

DIFFERENTIATED OR HOMOGENEOUS

In market where products are differentiated, competition is not as keen as that in a market where products are homogeneous.

Compare mineral water – differentiated gold – pure commodity

NO MARKET POWER Many small buyers Many small sellers Both buyers and sellers have no

market powers. Both buyers and sellers are price

takers. Note: buyer/seller with market power can

influence market conditions

NO BARRIERS Free entry and exit

No entry barriers to potential competitors No exit barriers to existing sellers

FREE ENTRY?Japanese Beer Market, pre-’94:

Ministry of Finance

production licenses for minimum of 2 million liters a year

sales licenses limited to small family-owned stores

SYMMETRIC OR ASYMMETRIC INFORMATION

Market with differences in information not as competitive as one where all buyers and sellers have equal information

Compare photocopying service medical treatment legal advice

MARKET EQUILIBRIUM, IPrice at which quantity demanded equals quantity supplied

when market out of equilibrium, market forces push price towards equilibrium

0

20

22

8 10 11

supply

demand

a

b

c

equilibrium

excess supply

Quantity (Million ton-miles a year)

Pri

ce (

$ p

er

ton

-mil

e)

MARKET EQUILIBRIUM, II

MARKET EQUILIBRIUM, III

excess supply = excess of quantity supplied over quantity demandedtriggers price decrease

excess demand = excess of qty demanded over qty supplied triggers price increase

SUPPLY SHIFT, Isupply shifts down (right) -> lower price, larger quantity

supply shifts up (left) -> higher price, smaller quantity

final equilibrium depends on elasticities of demand and supply

0

19.60

20

10 10.4

original supply

new supply

demand60 cents

60 cents

c e

b

d

Quantity (Million ton-miles a year)

Pri

ce (

$ p

er

ton

-mil

e)

a

SUPPLY SHIFT, II

0 10

19.40

20

original supply

new supply

demand

60 cents

60 centsc

b

0 10 10.6

20 new supply

original supply

demand

60 cents

60 centsb

c

Extremely inelastic demand Extremely elastic demand

Quantity (Million ton-miles a year) Quantity (Million ton-miles a year)

Pri

ce (

$ p

er

ton

-mil

e)

Pri

ce (

$ p

er

ton

-mil

e)

e e

PRICE ELASTICITIES OF DEMAND

0

20

10

demand

a

b

original and new supply

0 10 11

19.40

20 60 cents 60 cents

a

b original supply

new supply

demand

Pri

ce (

$ p

er

ton

-mil

e)

Pri

ce (

$ p

er

ton

-mil

e)

Quantity (Million ton-miles a year) Quantity (Million ton-miles a year)

Extremely inelastic supply Extremely elastic supply

PRICE ELASTICITIES OF SUPPLY

SUPPLY SHIFT: PRICE IMPACT

price change no more than amount of the supply shift

price change smaller if demand is more elastic than supply

larger if supply is more elastic than demand

0

1.50

1

retail supply

a

Quantity (Million units a year)

Pri

ce (

$ p

er

unit

)

after wholesale price cut

retail demand

b

PROMOTING RETAIL SALES

Q

DEMAND SHIFT, Idemand shifts down (left) -> lower price, lower quantity

demand shifts up (right) -> higher price, larger quantity

final equilibrium depends on elasticities of demand and supply

0

20

10 10.8

supply

new demand

original demand

1 million

af

b

c

1 million

Quantity (Million ton-miles a year)

Pri

ce (

$ p

er

ton

-mil

e)

DEMAND SHIFT, II

TANKER SERVICES, 2005 Increasing oil prices

Higher costs for tanker services supply curve up

Increasing China imports Higher demand for tanker services

More stringent tanker standards Non-complying tankers scrapped supply

curve shifted to left

VALENTINE’S DAYNearing Valentine’s Day, price of roses always rises much more than the price of greeting cards. Why?

CALCULATING EQUILIBRIUM, I

How would 3% increase in income affect price and sales of gasoline?

demandprice elasticity -.23

income elasticity 0.39

supplyprice elasticity 0.62

CALCULATING EQUILIBRIUM, II

1. % change in qty demanded = -0.23 %p + 0.39 x 3

2. % change in qty supplied = 0.62 %p

3. equate and solve: %p = 1.38%

4. % change in qty = 0.87%

0

20

22

100105

0

2021

100

SHORT/LONG-RUN IMPACT

If demand/supply shifts,

market price is more volatile in the short run than long run

greater change in market quantity over the long run than short run

DEMAND INCREASE

DEMAND REDUCTION

PRICING AND FREIGHT COST, I

cost and freight

ex-works pricing

How does pricing policy affect sales?

0

1.50

1

CF supply

a

Quantity (Million pounds a year)

Pri

ce (

$ p

er

pou

nd

)

ex-works supply

CF demand

ex-works demand

b

25 cents

25 cents

PRICING AND FREIGHT COST, II