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ajaz_eco_204_2012_2013_chapter_15_Competition

ajaz_eco_204_2012_2013_chapter_15_Competition - University...

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University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. 1 ECO 204 Chapter 15: Competitive Firms and Markets (this version 2012-2013) s Department of Economics (STG), ECO 204, Sayed Ajaz Hussain _________________________________________________________________________________________________ C HAPTER 15: Competitive Firms and Markets 1 Updated: 3/27/2013 Fixed typos are shaded yellow 1. Introduction In this chapter we will analyze models of competitive markets and firms. In perfect competition, firms are price takers (a behavioral assumption). Examples of price taking (or almost price taking) markets includes, stock exchanges ( NYSE , NASDAQ , TMX ), coffee (traded on the ICE ; see for example Coffee C benchmark contract for Arabica coffee), and aluminum (traded on the London Metal Exchange ; see the HBS case The Aluminum Industry in 1994 ). Typically, two main factors give rise to price taking behavior (in business parlance this is known as “commoditization”): ineffective product differentiation and price rivalry due to a “ large numbers of sellers arising from no or low barriers to entry. For example: Product Differentiation: In 1994, Kodak dominated the camera film market with its flagship Kodak Gold product line. But while it had a 70% market share (down from 76% in 1989), its US dollar sales were growing at an annual growth rate of 3% compared with Fuji and Polaroid’s 15% annual growth rate. Why? One possibility is that Kodak’s pricing was inconsist ent with consumer preferences. The following table shows Consumer Reports quality ratings of leading camera films (100 = maximum), price, and target segment: Film Quality Rating (max = 100) Price (per roll) Target Segment Polaroid High Definition 95 $2.49 Price Fuji color Super G 94 $2.91 Economy Kodak Gold Plus 93 $3.49 Premium Konica Super SR 93 $2.91 Economy Kodak Ektar 92 $4.27 Super premium Scotch Color 92 $2.69 Economy Source: HBS Case Kodak Funtime Film. Quality ratings in p. 3 and price, segment in Exhibit 1. 1 Thanks: Asad Priyo, Adam Michael Lavecchi, Sub-ann , and especially Akber Nafeh for typing practice problems and solutions. For feedback, comments and typos please e-mail [email protected] Note to self: clean up grammar and flow. Also, make stress that supply curve consists of firms have been setup (though they may be in operational); as new firms enter, firms jostle for position on the supply curve. Also, discuss SCP approach of measuring market structure. Also, do boom-bust cycles with various scenarios on impact on input prices (requiring a separate model of CMP with capacity constraints on inputs) and learning by doing (or forgetting!).
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University of Toronto, Department of Economics (STG). ECO 204, S. Ajaz Hussain. Do not distribute. 2 ECO 204 Chapter 15: Competitive Firms and Markets (this version 2012-2013) Notice that Kodak’s flagship brand Gold Plus is pricier than other brands. Given the fact that “consumers tend to view film as a commodity , often buying on price alone” Kodak’s higher price explains why it’ s lagging behind Fuji. Without effective (actual/perceived) product differentiation Kodak shouldn’t be charging higher prices and if anything it should be charging the same price as its rivals. I
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