Market Structure. Monopolistic Oligopoly. By Asst. Prof. Kessara Thanyalakpark, Ph.D.

Transcription

1 Market Structure Monopolistic Oligopoly By Asst. Prof. Kessara Thanyalakpark, Ph.D.

2 Monopolistic Competition

3 Monopolistic Characteristics A hybrid market between competitive and monopoly market Large numbers of relatively small firms Firms sell similar but differentiated products Firms have market power No significant barriers to entry 3

4 General background Each firms output is so small -- > price and output decisions go unnoticed by others in the same market -- > each firm act independently (differ from oligopoly) In a short-run, no difference between monopolistic and monopoly. In the long-run, no significant barriers to entry - resembles competitive market 4

5 More on Monopolistic Although, profits are compete away in the long run. But firms can enjoy economic profit ( as in the short-run) by an advertising and changing product quality. Similar to monopoly pricing, profit maximization condition is at MR = MC 5

6 Monopolistic competitor in the long run 6

7 What s next? To keep one step ahead of competitors and keep profit firm develop strategies to give Sustainable Competitive Advantage 7

8 Sustainable Competitive Advantage Warrant Buffett was once asked what is the most important thing he looks for when evaluating a company. Without hesitation, he replied Sustainable Competitive Advantage 8

9 Sustainable Competitive Advantage A) deliver the same product or service benefits as their competitors but at a lower cost B) deliver superior product or service benefits at a similar cost 9

10 Profitability Difference Depend on Barrier to entry 10

11 HOW Value Capture Value created in each industry is distributed across supplies, industry rivals, buyers 11

12 Five Forces Model High barriers to entry Low buyer power Low supplier power Low threat from substitutes Low levels of rivalry between existing firms 12

13 Limitation of five forces viewpoint Industry is a zero- sum game However, In real life companies can also work with other participants (Supplies, Rivalry) to build a large pie As a complement to a five force analysis competition (cooperation competition) 13

14 14

15 Oligopoly

16 Characteristics of the Oligopoly 1. Few sellers produce most outputs 2. May or May not be Differentiated Products 3. Blocked entry and exit 4. Imperfect Information Asst. Prof. Kessara Thanyalakpark, Ph.D. 16

17 Modern Theory in Oligopoly Price and output decisions are interdependence. Price depends on competitors response Competitors are rational and maximizing their own- interest Consideration of competitors reaction is the key Asst. Prof. Kessara Thanyalakpark, Ph.D. 17

18 Economics of Strategy: Game Theory Game Theory is an analysis of strategic interaction Applying GT in managerial decision Complication arisen because your rivals also apply the same idea Asst. Prof. Kessara Thanyalakpark, Ph.D. 18

19 Managerial Decision Making Putting yourself behind your rivals desk Assuming rivals are rational and acting in their self-interest, what decisions are they likely to make and how they likely to response to your actions. Asst. Prof. Kessara Thanyalakpark, Ph.D. 19

20 Variety of Strategies Interactions 1. Simultaneous-Move, Non-repeated Interaction 2. Sequential Interaction 3. Repeated Strategic Interaction Asst. Prof. Kessara Thanyalakpark, Ph.D. 20

21 Nash Equilibrium Nash equilibrium exists when each firm is doing the best it can, given the actions of its rivals. At Nash, no incentive to deviate, it is a self enforcing equilibrium Nash equilibrium is not a maximizing joint profit outcome 21

22 Simultaneous-Move, Non-repeated Interaction Asst. Prof. Kessara Thanyalakpark, Ph.D.

23 Simultaneous-Move, Non Repeated Interaction Simultaneous move rivals make decision without knowledge of decision made by their competitors Non-repeated interaction occurs only once Good example : Bidding Example: Boeing and Airbus Competition Asst. Prof. Kessara Thanyalakpark, Ph.D. 23

24 Strategic form dominant strategy Asst. Prof. Kessara Thanyalakpark, Ph.D. 24

25 Prisoner Dilemma 25

26 26 Cartel Dilemma Profit Matrix 26 AV low output 500 Bea low output 500 Av- high output 600 Be- low output 150 Av- low output 150 Av- high output 200 Be- high output 600 Be- high output

27 Nash Equilibrium Firms do not always have dominant strategy For example, US force their airlines purchase planes from Boeing (side deals) at the high price Boeing and Airbus submit sealed bids as previous The lower bidder get the offer Asst. Prof. Kessara Thanyalakpark, Ph.D. 27

28 Nash Equilibrium Asst. Prof. Kessara Thanyalakpark, Ph.D. 28

29 Nash Equilibrium When dominant strategy not exist- nash useful in predicating outcome BC at Nash Equilibrium : neither firm wants to change its price given the price submitted by the other firm Boeing high; Airbus low : nash equilibrium Using arrow technique to identify Nash Equilibrium Asst. Prof. Kessara Thanyalakpark, Ph.D. 29

30 Management Implications Identify Nash Equilibrium predict other outcome Dominant strategy is most useful in predicting outcome always your best choice With Nash, your best choice contingent on what you expect your rival to do Nash likely to occur when NE is a natural focal point Next. See example of more than one NE Asst. Prof. Kessara Thanyalakpark, Ph.D. 30

31 Competition versus cooperation Boeing and Airbus make simultaneous choices of new communications systems two technologies: Alpha & Beta both benefit with same choice Results in two Nash equilibria benefits from pre-commitment communication Asst. Prof. Kessara Thanyalakpark, Ph.D. 31

32 Coordination game two Nash equilibria Asst. Prof. Kessara Thanyalakpark, Ph.D. 32

33 Coordination/Competition game Asst. Prof. Kessara Thanyalakpark, Ph.D. 33

34 Simultaneous and Non-repeated Decisions Potential examples are a large investment decision to enter a new market or industry, pricing a new product, or making an acquisition bid for a firm Asst. Prof. Kessara Thanyalakpark, Ph.D. 34

35 Managerial Implications Consider yourself as an owner of Boeing, You should apply game theory concept by 1. Estimate the payoffs given each of action and those of Airbus 2. Check for dominant strategy- if have one employ it 3. Identify best action, given actions of airbus Asst. Prof. Kessara Thanyalakpark, Ph.D. 35

36 Managerial Implications 4. Check whether results are Nash Equilibrium : Does the forecast action of Airbus appear optimal from their viewpoint? 5. If not, reexamine the underlying assumptions of your initial forecast. Asst. Prof. Kessara Thanyalakpark, Ph.D. 36

37 Sequential Interaction Asst. Prof. Kessara Thanyalakpark, Ph.D.

38 Coordination/Competition game Asst. Prof. Kessara Thanyalakpark, Ph.D. 38

39 Extensive form sequential game Asst. Prof. Kessara Thanyalakpark, Ph.D. 39

40 Sequential Interactions Use backward induction Equilibrium strategy consists of a sequence of its best actions, where the actions are taken at the corresponding nodes Asst. Prof. Kessara Thanyalakpark, Ph.D. 40

41 Noticeable Facts Sequential Interaction may reduce the number of NE Both firms have strong incentive to choose the same NE Strategic moves : actions taken to influence actions of the rival on favorable ways Move must be credible Talk is cheap you must act Asst. Prof. Kessara Thanyalakpark, Ph.D. 41