Lecture 2

Lecture 2 - Outline Defining a market Assessing opportunity in a market Value Added Porter's Five Forces Examples Monster.com Zipcar What is a

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Outline • Defining a market. • Assessing opportunity in a market – Value Added – Porter’s Five Forces •Ex am p l e s – Monster.com –Z ipcar What is a Market? • A “place” where a product or service is priced. • Components of a market – The product itself – Substitute products – Buyers of the products – actual and potential – Sellers of the products – actual and potential
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Value Added - I • Simple approach to analyzing the profit potential of a new business or product. • Value Added = difference between demand and supply (costs) for the new product. • Value Added represents the maximum profits you can earn in a undertaking. Demand P Q Costs Value Added Value Added - II Value Added - III • Once you determine that there is significant value added of a new product, the question is how much of this value added you can capture as profits. • Are competitors / substitutes / entrants / suppliers / demanders going to drive these profits to zero?
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Porter’s Five Forces - I Supplier Bargaining Power Potential Entrants Substitutes Buyer Bargaining Power Rivalry Among Existing Firms Porter’s Five Forces - II • 1) Rivalry among existing competitors – More rivalry Æ lower prices Æ less profits . – How many competitors? – Are capacity constraints important (price (Bertrand) vs. quantity (Cournot) setting)? – Amount of product differentiation? – Consumer switching/search costs? – High exit barriers (e.g. specific assets)? – Ability to tacitly collude?
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This note was uploaded on 09/03/2009 for the course ECON 106E taught by Professor Ackerberg during the Spring '08 term at UCLA.

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Lecture 2 - Outline Defining a market Assessing opportunity in a market Value Added Porter's Five Forces Examples Monster.com Zipcar What is a

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