Lecture 7a Structure and Oligopoly Market Structure: Numbers of firms Two Models: Cournot and Dominant Firm

Transcription

1 Economics 245 Lecture 7a Structure and Oligopoly Structure: Numbers of firms Two Models: Cournot and Dominant Firm Lecture Outline Structure of the US economy concentration and its measurement Two Models dominant firm monopoly Cournot oligopoly University of North Carolina Chapel Hill Concentration Measures Concentration Curve & s Concentration Measures Concentration Ratio (CR4) = Sales Largest (4)/ Total Sales) = Sum of shares of largest (4) CR = = 73 Range: to 1 Herfindahl Index = sum of squared shares of all firms Firm A typical Concentration Curve Concentration Ratio & Herfindahl A comparison Number Equivalence of H 1,/H = the number of equal sized firms that would yield H H = Σ i (Si 2 ) = = Range to 1, (old version: - 1 scale) E245 (7a) Oligopoy.RZ 1-4 4/17/

2 roblems with concentration measures Data Census of Manufacturing in general hard to get market share data definition SIC codes (standard industrial classifications) products too broad or narrow geography (data is typically national) Conceptual what is it that you are really trying to measure? Sectoral Distribution Scherer p. 58 Corporations with $25 Million of Assets (circa 1982) Sector Num of Corps of GN Number Asset Non Financial Corporations 2,464,33 1, % Agriculture, Forestry 91,32 2.8% 6 5.6% Mining 36, % % Construction 282,345 4.% % Manufacturing 259, % Transportation 91, % Utilities 23, % % Wholesale & Retail 839, % % Services 819,76 14.% Real Estate 295, % Banking Finance Insurance 461,63 4.2% 1, % "Aggregate Concentration" of Largest 2 Manufacturing Corporation US, 1982 Value Added " Concentration" U.S. Manufacturing Concentration 1982 (4 digit SIC Industries) CR4 Range Number of Industries ercent of Industries ercent of Total Value Added % 21.7% Measure Employment Sales New Investment % 38.8% % 19.7% % 14.9% % 4.9% Scherer, p ercent E245 (7a) Oligopoy.RZ 5-8 4/17/

3 Examples of Dominant Firms: Modern Source: W.G. Shepherd, The Economics of Industrial Organizations 199, Table 3.4 Firm Barriers IBM mainframes 6 High AT&T long-distance 7 Moderate Eastman Kodak photographic film 8 Moderate rocter & Gamble detergents 5 Moderate Boeing Aircraft 55 High GE Aircraft engines 5 Moderate Campbell Soup canned soup 75 Moderate Gillette razors 55 Moderate Federal Express overnight delivery 6 High Washington ost D.C. area newspapers 84 High Examples of Dominant Firms: Historic Source: W.G. Shepherd, The Economics of Industrial Organizations 199, Table 4.4 US Steel American Can American Sugar GE Amer. Tobacco Standard Oil ullman Eastman Kodak Alcoa Western Electric Structure: one firm, no entry ure Monopoly rofit Maximizing output: MC(Q) = MR(Q) = (1-1/η) where η is the elasticity of demand faced by firms market elasticity in pure monopoly Inverse elasticity rule (Lerner Index) (-MC)/ = 1/η Structure: one large firm many small price takers short run, no entry Dominant Firm Monopoly Math solution: MRD (QD ) = MC(QD ) QD = Qmrkt - QFringe MRD (QD ) = (1+ (1/eD )) ed = e(1/s) + s(1-s)/s Where e is market elasticity of demand s is the fringe supply elasticity S is the dominant firms share in equilibrium. Conclusions: The degree of independent firm control depends on its market share, and very roughly speaking entry (of competing output in the form of competing supply). Q f Q d Dominant firm Demand Q m Fringe Supply Dominant firm MC Dominant firm MR Demand E245 (7a) Oligopoy.RZ /17/

4 Demand: (Q) = a - bq rofit: Π i = (a-bq)q i - cq i 1st order condition δπ i /δq i = (Q) + ( δ/ δq)q i - c = = a - 2bq i - bq j - c = Reaction function: q i = (a-c)/(2b) - (1/2) q j If both are identical, the equilibrium is q i = q j = (a-c)/(3b) Demand: (Q) = a - bq rofit: Π i = (a-bq)q i - cq i 1st order condition δπ i /δq i = (Q) + ( δ/ δq)q i - c = = a - 2bq i - b Σq j - c = Reaction function: q i = (a-c)/(2b) - (1/2)Σq j If have n identical firms: q = (a-c)/[(n+1)b] If have non-identical firms with different marginal costs ( MC i ) s i utting together the firm equilibrium as the weighted average margin can obtain. (H on -1 scale) where η is market demand elasticity and s is market share. ( j s i j MC i s i ) j s 2 i H It is important to note that in all of the Cournot type world, structure of markets (size distribution of sellers) is totally endogenous firm size is fully determined by firm difference in cost structure (number of firms is as the simplest level full exogenous). and if the costs are the same, each firm will have a share of 1/n so the above becomes 1/(nη ) E245 (7a) Oligopoy.RZ /17/

5 Conjectural variations: Cournot assumes that each player expects the other to maintain output level δq i /δq j = in extreme case δq i /δq j = -1 =MC, erfect competition δq i /δq i = (1-s i )/s i perfect joint profit maximization Conclusions? In most theories firm share makes a difference in outcome market concentration makes a difference Additional observations one shot game theory can give a variety of results repeated games tend toward "cooperative" outcomes Conjectural variations: Cournot assumes that each player expects the other to maintain output level δq i /δq j = in extreme case δq i /δq j = -1 =MC, erfect competition δq i /δq i = (1-s i )/s i perfect joint profit maximization In general if conjectural variation is proportional to relative production levels δq i /δq j = A(q i /q j ) then ( MC) H (A (1 A)H) E245 (7a) Oligopoy.RZ /17/