Competition Wk5-Ch 8

7/30/2019 Competition Wk5-Ch 8

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TWO WAYS TO INCREASE

SURPLUS

Increase demand: Raise

value to the buyerIncrease supply: Lower thecost of making theproduct


3/17

Trades generate consumer andproducer surplus

Demand Curve = MB Curve

Supply Curve = MC Curve

P r i c e

( P e r

S l i c e

)5

4.5

4

3.5

3

2.5

2

1.5

1

.5

0

1 2 3 4 5 6 7 8 9 Slices

Consumer

surplus

Consumer surplus


4/17

Increase in Demand implies buyersincrease their valuation of the good.



P r i c e

( P e r

S l i c e

)5

4.5

4

3.5

3

2.5

2

1.5

1

.5

0

1 2 3 4 5 6 7 8 9 Slices

Producer surplus



5/17

Increase in Supply implies thesellers lowered the costs of

making the good



P r i c e

( P e r

S l i c e

)5

4.5

4

3.5

3

2.5

2

1.5

1

.5

0

1 2 3 4 5 6 7 8 9 Slices

Consumer

surplus

Supply Curve =MC Curve


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SINGLE BUYER AND SINGLE SELLER

SellersOpportunity

Cost$5

Buyers Valuation$15

$10 Agreed Price

Consumer Surplus =

Producer Surplus =

Total Surplus


7/17


8/17

SINGLE BUYER AND SINGLE SELLER:

SellersCost$5

Buyers newValuation$14

Buyers oldValuation$15OldPrice

$10

Old New

Sellers Costs $5 $2

Buyers Valuation $15 $14

Total Surplus $10 $12

Seller is will to lower price by $3 at the most in return for costs savings (lowest price=$7)Buy must get at least a $1 price decrease to be willing to accept the new product(Highest price is $9)

Sellers cuts back to lower costs.

SellersCost$2


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TRANSACTIONS COSTS


SellersOpportunityCost$5

Buyers

Valuation$15

Sellers

TransactionsCost$3

$8$11

BuyersTransactionsCost

$4

Price= $10

Buy is willing to pay only $11 due to the transactions costs.Seller must get $8 due to opportunity costs + transactionscost


10/17


SellersOldCost$5

Buyers

Valuation$15

$11

Buyers old

Transactions Cost$4

OldPrice$10

Sell incurs costs to lower the transaction cost to the buyer

SellersNewCost$7

Buyers newTransactions Cost

$0

Old New

Sellers total costs 5 7

Buyers net benefit 11 15

Value from the transaction 6 8

Seller needs $2 higher price to lower the transactions cost to the buy. Minimumnew price = old price + $2 = $12.Buyer willing to pay up to $4 more than the old price. Maximum new price = OldPrice + $4 = $14


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ONE SELLER AND MANY BUYERS

6

5

4

3

2

1

01 2 3 4 5 6 7 8

P

Q

D MR

MC

Profits = (P- ATC)*Q =(2-1)*2=2

Seller raises costs to raise the valuation of the good to the buyer

MC1

D1

MR1

Profits1 = (P- ATC)*Q =(4.5-2)*6=15

ATC

ATC1


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C o s

t a n d

R e v e n u e

20

15

10

1

Output

MC

ATC

20

10

MarketPrice

1000

S

Market

Market QuantityBushels of Wheat

C o s

t a n d

R e v e n u e

20

15

10

1 2

Output

MC

ATC

1000 firms supply the market

D

S

MANY SELLERS AND MANY BUYERS:INNOVATION

Innovators1500


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22

20

19

18

MarketPrice

Market


D

$2 decrease in costdue to innovation

MANY SELLERS AND MANY BUYERS: Lower Costs

100 120

S

Lower costs by $2. Who gains?Consumers used to pay_____. Now they pay_____. Netgain___ Price paid to producers used to be______. Now it is


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22

21

20

19

18

MarketPrice

Market


D

MANY SELLERS AND MANY BUYERS: RaisingBuyer Valuation

100 120

S

Raise valuation by $2. Who gains?Consumers used to pay_____. Now they pay_____. But their valuation increased by. Net gain___

Price paid to producers used to be______. Now it is _______,Net ain


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22

20

19

18

17

MarketPrice

Market


D

MERGERS: Decrease or increase surplus?

100 120

MC

MR

HORIZONTAL MERGERS

Competitive

outcome

Outcomeafter Merger


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22

21

20

19

18

17

MarketPrice

Market


D

Mergers

100 120

S

MC of mergedfirms

MR

VERTICAL MERGERS

MC of industrywith out merger


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SUSTAINING AND EXTENDING

COMPETITIVE ADVANTAGE

Restrictive agreements Size

Trademarks and advertising Influencing the government

Competition Wk5-Ch 8

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Transcript of Competition Wk5-Ch 8