Market Structures and Pricing Essay

Market structures and pricingRevenuesConsumers* backward choose draw in gives allowingingness-to-pay* Benefit consumer(s) derive(s) from additional good* Area under inverse lease curve measures total willingness-to-pay, total benefit or total surplus. * supreme harm I can charge as producer refractory by inverse bespeak break * Marginal grosss revenue of near unit I sellStrategies* Profit maximation* Marginal gelt equal to 0 (MR=MC)* Classic economic theory entrepreneurial capitalist economy* Owner makes strategic decisions* Managerial capitalism* Ownership changed* Control changed* latent conflicts between sh beholders and prudence * Firms got bigger coordinate difficulties* Revenues maximization* Decreasing revenues bighearted for image* Financial institutions essential certainty* Low revenues mean relatively high risk for suppliers * Low revenues may lead to bud assume cuts, including management * Bonus* MR=0* Marketing effort* Managerial utility maximization* M anagers maximize own satisf performance* Growth maximization* Long status strategy* Behavioral theories* Different groups, satisfy all groups to survive grateful * Altruistic objectives public interest* Welfare maximization* What strategy is relevant?* Autonomy and income advancement* Successful business is most important individual(prenominal) objective * Growth objective* Profit maximization* Model* frugal profit accounting profitMarket structures* Perfect competition* noncompetitive competition* Oligopoly* MonopolyPerfect competition* Many (small) suppliers and buyers expense takes* pick out function for individual company* Products are perfect substitutes* Free entry and devolve* Information is perfect (available to all no cost)* Free movement of products supply responsive to market forces * Innovation exogenous producers reactive rather than proactive.* benchmark Welfare is maximized (p=mc)* Efficiency* Productive aptitude AC cannot be cut back* MC curve passes tho ugh minimum of AC* Allocative efficiency resources are distributed and used as preferred by consumers P=MC * Pareto efficiency no one can be made better collide with without making anyone else worse off.MonopolyOne seller can influence price (output)Price marginal cost economic inefficiency (although the unwavering itself may beefficient) * Barriers to entry* Initial costs* Sunk costs* Brand allegiance* 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 sold* 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 whole sustain 1 producer* Competition (P=MC) all competitors make a loss* PMC loss when P help to sustain monopoly or oligopoly * presidential term policy regulation* Spatial pre-emption new entrants do not have access to necessary inputs * Co st barriers* Reputation customer loyalty, natural rubber* Exit barriers shrinking a firm is expensive (labor, capacity) * Entry-deterring strategies pricing, spare-capacity, corporate deals (price disagreement)Oligopoly non-corporate behavior* Competition based on output (quantity) or price.* Two fundamental 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 indeed 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* conceptualisation 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 secretion* Conditions* Market power* Different groups of consumers (based on willingness-to-pay, demand elasticity etc.) - segmentation * Resale is not possible* Cost of distinction may not exceed additional profits * Market should be transparent.* Charge different (groups of) consumers different prices to maximize profits - price contrariety * First, second and third degreeFirst degree pricing discrimi nation* Perfect discrimination individually unit of output sold at different price * Price opinionated by inverse demand curve* What is the optimal output?Second degree price discrimination* Non-linear pricing price depends on how much you buy* Fundamentals* covering* Consumer decides on how much to buy* Self selection 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* numerate an individual demand function (for convenience, marginal costs are 0) * Monopolists want to supply X1 at a total price of A* knock over twain 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 cons umer 1* Offering little of X2 (loss of monopolist) allows for higher profits from X1.Third degree price discrimination* readiness 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* high profits* Market power