Lecture4_Cycles - INTRO CAPACITY SEARCH COMMITMENT INFO...

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Unformatted text preview: INTRO CAPACITY SEARCH COMMITMENT INFO OTHER I NDUSTRIAL ORGANISATION (2011) T OPIC 4: P RICE CYCLES Nicolas de Roos 1 1 School of Economics University of Sydney INDUSTRIAL ORGANISATION (2011) TOPIC 4: PRICE CYCLES INTRO CAPACITY SEARCH COMMITMENT INFO OTHER O UTLINE INTRODUCTION CAPACITY CONSTRAINTS Edgeworth model 2 stage Bertrand game CONSUMER SEARCH INTENSITY Overview PRICE COMMITMENT Overview THE ROLE OF INFORMATION FLOWS Fuelwatch Other states ALTERNATIVE EXPLANATIONS Other explanations INDUSTRIAL ORGANISATION (2011) TOPIC 4: PRICE CYCLES INTRO CAPACITY SEARCH COMMITMENT INFO OTHER A TYPICAL PRICE CYCLE IN P ERTH INDUSTRIAL ORGANISATION (2011) TOPIC 4: PRICE CYCLES INTRO CAPACITY SEARCH COMMITMENT INFO OTHER I NTRODUCTION Candidate causes of petrol price cycles • Edgeworth cycles • capacity constraints for retailers • costly consumer search • price commitment • cyclical demand • wholesale price cycles • an inventory cycle • collusion INDUSTRIAL ORGANISATION (2011) TOPIC 4: PRICE CYCLES INTRO CAPACITY SEARCH COMMITMENT INFO OTHER P RICE CYCLES IN A USTRALIA Petrol price cycles • weekly cycles in Sydney, Melbourne, Brisbane, Adelaide • longer cycles in Perth, Hobart • no cycles outside metropolitan areas • no cycles in diesel What’s special about petrol? • homogeneous products • prices are highly visible INDUSTRIAL ORGANISATION (2011) TOPIC 4: PRICE CYCLES INTRO CAPACITY SEARCH COMMITMENT INFO OTHER O UTLINE INTRODUCTION CAPACITY CONSTRAINTS Edgeworth model 2 stage Bertrand game CONSUMER SEARCH INTENSITY Overview PRICE COMMITMENT Overview THE ROLE OF INFORMATION FLOWS Fuelwatch Other states ALTERNATIVE EXPLANATIONS Other explanations INDUSTRIAL ORGANISATION (2011) TOPIC 4: PRICE CYCLES INTRO CAPACITY SEARCH COMMITMENT INFO OTHER P RICING WITH CAPACITY CONSTRAINTS Assumptions • firms choose prices • homogeneous product • firms compete for a single period • firms have capacity constraints • rationing rule: • p i < p j ⇒ firm j captures whole market up to their capacity • p i = p j ⇒ i and j each get 50% of the market, subject to capacity constraints INDUSTRIAL ORGANISATION (2011) TOPIC 4: PRICE CYCLES INTRO CAPACITY SEARCH COMMITMENT INFO OTHER P RICING WITH CAPACITY CONSTRAINTS Consider 3 cases • “large” capacities • if both firms can supply the whole market when P = MC • the game becomes equivalent to Bertrand competition • firms set price equal to marginal cost • “small” capacities • if both firms have very small capacity • their rival will be restricted by capacity • each firm acts as a monopolist with respect to residual demand • if capacities are small, then MR > MC for all feasible output • so firms will produce as much as possible - ie at full capacity • intermediate capacities • the Edgeworth model INDUSTRIAL ORGANISATION (2011) TOPIC 4: PRICE CYCLES INTRO CAPACITY SEARCH COMMITMENT INFO OTHER THE E DGEWORTH MODEL Example : • demand: Q ( p ) = 1000- 1000 p...
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This note was uploaded on 10/28/2011 for the course ECOS 3005 taught by Professor Douglas during the Three '10 term at University of Sydney.

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Lecture4_Cycles - INTRO CAPACITY SEARCH COMMITMENT INFO...

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