Applied Competitive Analysis

7/21/2019 Applied Competitive Analysis

http://slidepdf.com/reader/full/applied-competitive-analysis 1/47

APPLIED COMPETITIVE

ANALYSISManagerial Economics



Economic Efciency and Wel areAnalysis

• T e area !e"#een " e demand and" e s$%%ly c$r&e re%resen"s " e s$mo cons$mer and %rod$cer s$r%l$s

• T is area is ma'imi(ed a" " ecom%e"i"i&e mar)e" e*$ili!ri$m




Quantity

Price

P *

Q *

S

D

Cons$mer s$r%l$s is " earea a!o&e %rice and !elo#demand

Prod$cer s$r%l$s is " earea !elo# %rice anda!o&e s$%%ly



A" o$"%$" Q +, "o"al s$r%l$s#ill !e smaller


Quantity

Price

P *

Q *

S

D

Q 1

A" o$"%$"s !e"#een Q + andQ -, demanders #o$ld &al$ean addi"ional $ni" more " ani" #o$ld cos" s$%%liers "o

%rod$ce




• Ma" ema"ically, #e #is "oma'imi(e

cons$mer s$r%l$s . %rod$cer s$r%l$s / ∫ ∫ −=−+−Q Q

dQQP QU dQQP PQPQQU 0 0

)()(])([])([

•

0or " e e*$ili!ria along " e long1r$ns$%%ly c$r&e, P2Q 3/ AC / MC




• Ma'imi(ing "o"al s$r%l$s #i"res%ec" "o Q yields

U42Q 3/ P2Q 3/ AC / MC• T is im%lies " a" ma'imi(a"ion

occ$rs # ere " e marginal &al$e o

Q "o " e re%resen"a"i&e cons$meris e*$al "o mar)e" %rice – " is occ$rs a" " e mar)e" e*$ili!ri$m



Wel are Loss Com%$"a"ions

• 5se o cons$mer and %rod$cers$r%l$s no"ions ma)es %ossi!le " ee'%lici" calc$la"ion o #el are lossesca$sed !y res"ric"ions on &ol$n"ary"ransac"ions – in " e case o linear demand and s$%%ly

c$r&es, " e calc$la"ion is sim%le!eca$se " e areas o loss are o "en"riang$lar




• S$%%ose " a" " e demand is gi&en!y

Q D / +6 1 P

and s$%%ly is gi&en !yQ

S /P

1 7• Mar)e" e*$ili!ri$m occ$rs # ere

P -/8 and Q -/9




• :es"ric"ion o o$"%$" "o Q 6 /; #o$ldcrea"e a ga% !e"#een # a"

demanders are #illing "o %ay 2 P D3and # a" s$%%liers re*$ire 2 P S3

P D / +6 1 ; / <

P S / 7 . ; / =



T e #el are loss rom res"ric"ing o$"%$""o ; is " e area o a "riangle


Quantity

Price

S

D

6

4

7

5

3

T e loss / 26>=32732+3 / +




• T e #el are loss #ill !e s ared !y%rod$cers and cons$mers

• In general, i" #ill de%end on " e%rice elas"ici"y o demand and " e%rice elas"ici"y o s$%%ly "o

de"ermine # o !ears " e larger%or"ion o " e loss – " e side o " e mar)e" #i" " e

smalles" %rice elas"ici"y 2in a!sol$"e&al$e3



Price Con"rols

• Some"imes " e go&ernmen" maysee) "o con"rol %rices a" !elo#

e*$ili!ri$m le&els – #ill lead "o a s or"age• We can loo) a" " e c anges in

%rod$cer and cons$mer s$r%l$srom " is %olicy "o analy(e i"sim%ac" on #el are



Price Con"rols

Quantity

Price SS

D

LS

P 1

Q 1

Ini"ially, " e mar)e" isin long1r$n e*$ili!ri$ma" P +, Q +

Demand increases "o D 4

D ’



Price Con"rols

Quantity

Price SS

D

LS

P 1

Q 1

D ’

0irms #o$ld !egin "oen"er " e ind$s"ry

In " e s or" r$n, %ricerises "o P 7

P 2

T e %rice #o$ld end$% a" P ;

P 3



Price Con"rols

Quantity

Price SS

D

LS

P 1

Q 1

D ’

P 3

T ere #ill !e as or"age e*$al "oQ 7 1 Q +

Q 2

S$%%ose " a" " ego&ernmen" im%osesa %rice ceiling a" P +



T is gain in cons$mers$r%l$s is " e s adedrec"angle

Price Con"rols

Quantity

Price SS

D

LS

P 1

Q 1

D ’

P 3

Q 2

Some !$yers #ill gain!eca$se " ey can%$rc ase " e good or alo#er %rice



T e s aded rec"angle" ere ore re%resen"s a%$re "rans er rom%rod$cers "o cons$mers

Price Con"rols

Quantity

Price SS

D

LS

P 1

Q 1

D ’

P 3

Q 2

T e gain "o cons$mers isalso a loss "o %rod$cers# o no# recei&e a lo#er%rice

No #el are loss " ere



T is s aded "rianglere%resen"s " e &al$e o

addi"ional cons$mers$r%l$s " a" #o$ld a&e!een a""ained #i" o$"" e %rice con"rol

Price Con"rols

Quantity

Price SS

D

LS

P 1

Q 1

D ’

P 3

Q 2



T is s aded "rianglere%resen"s " e &al$e o

addi"ional %rod$cers$r%l$s " a" #o$ld a&e!een a""ained #i" o$"" e %rice con"rol

Price Con"rols

Quantity

Price SS

D

LS

P 1

Q 1

D ’

P 3

Q 2



T is s aded areare%resen"s " e "o"al &al$eo m$"$ally !ene?cial"ransac"ions " a" are

%re&en"ed !y " ego&ernmen"

Price Con"rols

Quantity

Price SS

D

LS

P 1

Q 1

D ’

P 3

Q 2

T is is a meas$re o " e%$re #el are cos"s o " is%olicy



Dise*$ili!ri$m @e a&ior

• Ass$ming " a" o!ser&ed mar)e"o$"comes are genera"ed !y

Q 2P +3 / min Q D2P +3,Q S2P +3B

s$%%liers #ill !e con"en" #i" " e

o$"come !$" demanders #ill no"• T is co$ld lead "o !lac) mar)e"s



Ta' Incidence

• To disc$ss " e e ec"s o a %er1$ni""a' 2 t 3, #e need "o ma)e adis"inc"ion !e"#een " e %rice %aid!y !$yers 2 P D3 and " e %ricerecei&ed !y sellers 2 P S3

P D 1 P S / t • In "erms o small %rice c anges, #e

#is "o e'amine

dP D 1 dP S / dt



Ta' Incidence

• Main"enance o e*$ili!ri$m in " emar)e" re*$ires

dQ D = dQ S

orD PdP D = S PdP S

• S$!s"i"$"ing, #e ge"D PdP D = S PdP S = S P2dP D 1 dt 3



Ta' Incidence

• We can no# sol&e or " e e ec" o" e "a' on P D

DS

S

P P

P D

eee

DS S

dt dP −=−=

• Similarly,

DS

D

P P

P S

ee

e

DS

D

dt

dP

−=−=



Ta' Incidence

• @eca$se e D ≤ 6 and e S ≥ 6, dP D dt ≥ 6 and dP S dt ≤ 6

• I demand is %er ec"ly inelas"ic2e D/63, " e %er1$ni" "a' iscom%le"ely %aid !y demanders

• I demand is %er ec"ly elas"ic2e D/ ∞ 3, " e %er1$ni" "a' iscom%le"ely %aid !y s$%%liers



Ta' Incidence

• In general, " e ac"or #i" " e lesselas"ic res%onses 2in a!sol$"e &al$e3

#ill e'%erience mos" o " e %ricec ange ca$sed !y " e "a'

S

D

D

S

e

e

dt dP

dt dP

−=− /

/



Ta' Incidence

Quantity

PriceS

D

P *

Q *

P D

P S

A %er1$ni" "a' crea"es a

#edge !e"#een " e %rice" a" !$yers %ay 2 P D3 and" e %rice " a" sellersrecei&e 2 P S3t

Q **



@$yers inc$r a #el are losse*$al "o " e s aded area

Ta' Incidence

Quantity

PriceS

D

P *

Q *

P D

P S

Q **

@$" some o " is loss goes"o " e go&ernmen" in " e

orm o "a' re&en$e



Sellers also inc$r a #el areloss e*$al "o " e s aded area

Ta' Incidence

Quantity

PriceS

D

P *

Q *

P D

P S

Q **

@$" some o " is loss goes"o " e go&ernmen" in " e

orm o "a' re&en$e



T ere ore, " is is " e dead1#eig " loss rom " e "a'

Ta' Incidence

Quantity

PriceS

D

P *

Q *

P D

P S

Q **



Dead#eig " Loss andElas"ici"y

• All nonl$m%1s$m "a'es in&ol&edead#eig " losses

– " e si(e o " e losses #ill de%end on" e elas"ici"ies o s$%%ly and demand• A linear a%%ro'ima"ion "o " e

dead#eig " loss accom%anying asmall "a', dt , is gi&en !y

DW / 16>=2 dt 32dQ 3




• 0rom " e de?ni"ion o elas"ici"y, #e)no# " a"

dQ / e DdP D ⋅Q 6 P 6

• T is im%lies " a"dQ / e D e S 2e S 1 e D3B dt Q 6 P 6

• S$!s"i"$"ing, #e ge"

00

2

0

50 QP eeeeP

dt DW DS S D )]/([. −

−=




• Dead#eig " losses are (ero i ei" ere D or e S are (ero – " e "a' does no" al"er " e *$an"i"y o

" e good " a" is "raded• Dead#eig " losses are smaller in

si"$a"ions # ere e D or e S are small



Transac"ions Cos"s

• Transac"ions cos"s can also crea"e a#edge !e"#een " e %rice " e !$yer%ays and " e %rice " e sellerrecei&es – real es"a"e agen" ees – !ro)er ees or " e sale o s"oc)s

• I " e "ransac"ions cos"s are on a%er1$ni" !asis, " ese cos"s #ill !es ared !y " e !$yer and seller – de%ends on " e s%eci?c elas"ici"ies



ains rom In"erna"ional

Trade

Quantity

Price

S

D

Q *

P *

In " e a!sence o in"erna"ional "rade,

" e domes"ice*$ili!ri$m %rice#o$ld !e P - and" e domes"ice*$ili!ri$m *$an"i"y#o$ld !e Q -




Trade

Quantity

Price

Q *

P *

S

D

F$an"i"y demanded #illrise "o Q + and *$an"i"ys$%%lied #ill all "o Q 7

Q 1Q 2

I " e #orld %rice 2 P W 3is less " an " e domes"ic%rice, " e %rice #ill all"o P W

P W

Im%or"s / Q + 1 Q 7

imports



Cons$mer s$r%l$s rises

Prod$cer s$r%l$s alls

T ere is an $nam!ig$o$s#el are gain


Trade

Quantity

Price

Q *

P *

S

D

Q 2Q 1

P W



E ec"s o a Tari

Quantity

Price

S

D

Q 1Q 2

P W

F$an"i"y demanded alls"o Q ; and *$an"i"y s$%%liedrises "o Q 9

Q 4 Q 3

S$%%ose " a" " e go&ernmen"crea"es a "ari " a" raises" e %rice "o P R

P R

Im%or"s are no# Q ; 1 Q 9

imports



Cons$mer s$r%l$s alls

Prod$cer s$r%l$s rises

T ese "#o "rianglesre%resen" dead#eig " loss

T e go&ernmen" ge"s"ari re&en$e

E ec"s o a Tari

Quantity

Price

S

D

Q 1Q 2

P W

Q 4 Q 3

P R



Es"ima"es o Dead#eig "Losses

• Es"ima"es o " e si(es o " e#el are loss "riangle can !e

calc$la"ed• @eca$se P R / 2+. t 3P W , " e

%ro%or"ional c ange in *$an"i"y

demanded is DDW

W R

teeP

P P

Q

QQ

=⋅

−=

−1

13



T e areas o " ese "#o"riangles are

E ec"s o a Tari

Quantity

Price

S

D

Q 1Q 2

P W

Q 4 Q 3

P R

))((. 311 50 QQP P DW W R

−−=

1

2

1 50 QP et DW W D.−=

))((. 242 50 QQP P DW W R −−=

2

2

2 50 QP et DW W S .−=



O" er Trade :es"ric"ions

• A *$o"a " a" limi"s im%or"s "o Q ; 1

Q 9 #o$ld a&e e ec"s " a" are

similar "o " ose or " e "ari – same decline in cons$mer s$r%l$s – same increase in %rod$cer s$r%l$s

• One !ig di erence is " a" " e*$o"a does no" gi&e " ego&ernmen" any "ari re&en$e – " e dead#eig " loss #ill !e larger



Im%or"an" Poin"s "o No"eG• T e conce%"s o cons$mer and

%rod$cer s$r%l$s %ro&ide $se $l#ays o analy(ing " e e ec"s oeconomic c anges on " e #el are omar)e" %ar"ici%an"s – c anges in cons$mer s$r%l$s re%resen"

c anges in " e o&erall $"ili"y cons$mersrecei&e rom cons$ming a %ar"ic$largood

– c anges in long1r$n %rod$cer s$r%l$sre%resen" c anges in " e re"$rns



Im%or"an" Poin"s "o No"eG

• Price con"rols in&ol&e !o""rans ers !e"#een %rod$cers and

cons$mers and losses o"ransac"ions " a" co$ld !ene?"!o" cons$mers and %rod$cers



Im%or"an" Poin"s "o No"eG• Ta' incidence analysis concerns " e

de"ermina"ion o # ic economicac"or $l"ima"ely !ears " e !$rden o

" e "a' – " is incidence #ill all mainly on " e

ac"ors # o e' i!i" inelas"ic res%onses"o %rice c anges

– "a'es also in&ol&e dead#eig " losses" a" cons"i"$"e an e'cess !$rden inaddi"ion "o " e !$rden im%osed !y " e

ac"$al "a' re&en$es collec"ed



Im%or"an" Poin"s "o No"eG

• Trade res"ric"ions s$c as "ari s or*$o"as crea"e "rans ers !e"#een

cons$mers and %rod$cers anddead#eig " losses o economic#el are – " e e ec"s o many "y%es o "rade

res"ric"ions can !e modeled as !einge*$i&alen" "o a %er1$ni" "ari

Applied Competitive Analysis

Documents

Transcript of Applied Competitive Analysis