How firms competeEasy as PIE: Presenting in English09/03/2011

Plan of the lecture Approaches, definitions

Market structures

Antitrust regulation, competition policy

Types of competition

• Price reduction P→MC• Price warsprice

• Product differentiationnon-price

Types of competition

perfect

imperfect• Monopolistic competition• Oligopoly

No competition

• Monopoly

Market structureThe 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 differentiationThe 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? (1st deg. – perfect, 2nd deg. – quantity, 3rd 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

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!