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Class Notes (F08)

Class Notes (F08) - Lecture 2 Implications of org mkt o...

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Lecture 2: Implications of org. mkt o Standard models: PC, monopoly Pick one variable, assume everything else is standardized, magically sells itself at eq price Only variable you pick is quantity produced o Perfect market – no pricing policy o If things sell themselves, is there a need for marketing? Price wars – you can force it down, but you can’t push it back up so there’s more risk More efficient to compete in other ways? Ways that’ll be harder for other people to imitate o Ex. Hard to imitate – world’s smartest consultant Organized exchange – no disagreements in the firm because everything’s standardized, nothing to disagree about, all you choose is Q o When not in an org. exchange, people have different opinions Where did PC come from? It’s a way to make supply and demand look scientific o Make explicit assumptions, assume away friction o Here are the assumptions, we derive supply and demand from them because we knew it worked In perfect market, price change is instantaneous, where others can match immediately, but in the real world, not true Can’t cut price unless you have monopoly power Is advertising competitive or a barrier to entry? o In PC model, never advertise, but doesn’t that mean you’re a monopoly because you’re not competing? o Barrier to entry? Yes. Why no barriers to entry in org. exchange world? Ex. Wheat farmers If someone wants to enter, no problem because he demand is identical Ex. Widgets Barriers to entry because reputation, there will be an incentive for me to prefer one over the other – doesn’t that mean you’re a monopoly? Advertising in a way that works that’s a barrier – information Product differentiation – liver Os..not a barrier to entry..because no one wants it YOU are the real barrier because you’re choosing these things You always start by assuming there’s barrier to entry, but shouldn’t you ask where it came from? o If you’re passing on the gains, aren’t you making the consumer better off than before? How is that monopoly abuse? Ex. Someone can produce for $5, someone is charging $10, so you can choose to charge between $5 and $10. Can you charge above $10? No so how do you have the ability to harm people? So is she picking how much to harm people or how much of the gains to pass on to people?
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When you see something that doesn’t fit with the model, you say, there must be something wrong with the model or there’s something wrong with the world – people tend to sway towards the latter – antitrust models, if what your’e doing doesn’t match the models, you’re wrong Price discrimination o Can’t, not because there’s too many people, but because there are no search costs in the PC model o Ex. Road side stands Many but how come not all of them charge the same price? Because they’re not located at the same place, with the same quality If someone’s already there, why do you have the advantage? Bc there’s a
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Class Notes (F08) - Lecture 2 Implications of org mkt o...

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