562_Lecture4a_pure_competition

562_Lecture4a_pure_competition - SI 562 Lecture 4 Pure...

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1 Page 1 SI 562 Lecture 4 1 Pure Competition and Market Equilibrium Yan Chen Fall 2009 AGENDA Pricing: Pure Competition Market Equilibrium and Long-run Supply 2 Next week: Monopoly Motivating Example Online Bookselling - One of the major forms of e-commerce: e.g.: In 1996 1/27 on the Internet went to Amazon books. - Low barriers to entry and exit; - Yahoo! lists a few hundred online booksellers; - More than a dozen competitive shopping agents for books; Question: Expect price convergence or dispersion? 3 Question: Expect price convergence or dispersion? NYT Bestseller Random Books std dev % of avg price 27% 15% min/max diff % of avg price 93% 67% (Source: Chang, Krishnan and Wolff, Proc. EC-00, Oct 2000.)
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2 Page 2 How can there be price dispersion? Uninformed consumers Differentiated product, service provided Number of competitors 4 Barriers to entry and exit Collusion among firms Next several class: how do these factors affect pricing? Choosing a Price Canonical example: Demand: P(Q) Supply: C(Q) Firm: max P(Q) Q – C(Q 5 Firm: max P(Q) Q C(Q) We will be studying how MR and MC interact to determine pricing. Determinants of Firm’s Demand Individual demand: from individual utility maximization Market demand: horizontal sum of 6 individual demand Firm’s demand: Relevant market Market structure Strategic forces
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3 Page 3 1. Relevant Market Group of economic agents that interact in a buyer-seller relationship Buyer-seller relationship: they interact in ways that affect economic terms of exchange, e.g., price, variety, quality. 7 Examples: Coca-Cola Corp. and Pepsico: same market? Southwest Airlines and Delta: same market? Web browsers: IE vs. Firefox vs. Netscape Basically, what other agents can constrain a firm’s ability to charge high prices …. 2. Market Structure Number of buyers and sellers Barriers to entry and exit Collusion among firms Problems: illegal Explicit vs implicit collusion 8 Explicit vs. implicit collusion entry of new firms Similarity of products Northwest vs. United on Detroit-Chicago Consumer information If consumers don’t know better prices exist … Note: info may be available but costly. 3. Strategic Forces (M. Porter) Substitutes Q: What substitute OS for Windows? Threat of entry Intel: tolerate some entry for low-priced chips; 9 When rival’s market share grows, slash prices.
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This note was uploaded on 12/16/2009 for the course SI 562 taught by Professor Chen during the Fall '08 term at University of Michigan.

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562_Lecture4a_pure_competition - SI 562 Lecture 4 Pure...

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