AIO_price_differentiation_etc

F2 would never choose to enter 38 38 game strategic

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Unformatted text preview: 1 = c - x Thus Thus F1 could choose an investment level that yields zero profits for F2 that PR2 = (1-c-x)2 / 9 – FC = 0 The „predatory“ level of investment would be xp = 1 – c – 3 FC0.5 39 39 q2 RF1 x (0, qm ) = a−c 2b q1 = a−c 3b RF2 q1 40 40 Strategic Investments x(p) x(p) is higher than short run profitabilty would require would x(i) x(i) would be the level incumbent would choose without entry threat choose However, x(p) may maximize long run profits However, if entry is deterred. if not not clear, though. Sunk cost of x(p) maybe so high, that it could be profitable to co-exist with entrant. that 41 41 Strategic Investments Also: even if x(p) preempts entry, we could not Also: tell whether the over-investment is antitell competitive 1. the more the incumbent lowers its cost, the lower is the the monopoly price that it charges in the future consumers will gain from the investment through price reduction caused by cost-decreasing investment investment 1. No possibility to identify predation, as Note: an efficient monopolist may price lower than a less Note: efficient duopoly efficient there is no evident benchmark for investments (unlike for there prices with p<AVC) prices and low prices are reversible, but most investments are not consumers will benefit even after „predation“ ends. „predation“ 42 42 Bundling/Tying Often Often a product is offered by the seller under the condition that another product is also bought („tie-in sales“ or „tying“). also Newspaper Newspaper with TV programme supplement on Sunday forced to pay higher price for the Sunday issue. the Computers include operating system and Computers application software application 43 43 Tying: efficiency reasons Assembling Assembling all parts of a computer is more costly for the consumer than buying a ready-tocostly use computer. „divison Also: of labor“ and scale economy arguments asymmetric information argument driving driving a car with different tyres than recommended by producer may become dangerous by poor performance of copy machine if other than poor recommended toner is used recommended tying is profitable for firm for certain products, but also good for consumers but it has to be checked carefully if tying is reasonable or if other simple solutions could help, e.g. indicate which toner is appropriate and which is not. is 44 44 Tying as price discrimination device 1‘s willingness 1‘s to pay to 2‘s willingness 2‘s to pay to Good A 7 4 Good B 5 8 Goods A and B 12 12 • Monopolists sells A and B to two consumers, 1 and 2. • Consumers have different willingness to pay for the goods, but firm cannot charge different prices to them (consider it as illegal). • If products sold separately, firm will choose price of A at 4, and of B at 5. • Profit (assume cost is zero) on A = 8, B = 10, total profit = 18. • Sell as bundle at price 12 profit equal to 24. 45 45 Assessment of Tying Practices Tying Tying is only problematic if it has exclusionary effects effects Thus: should only be considered as suspicious if Thus: firm in question has a dominant position in the market market If If firm has less than 40% in a market, EC should not investigate investigate Also OK, as tying typically has efficiency effects Tying may allow a non-dominant firm to become more Tying competitive. competitive. 46 46 Ilford example Kodak dominated UK colour film market in the 1960s Kodak about 80% market share Ilford only had 15% and worse development technology than Kodak Several independent film processors could not develop Ilford Several films films Ilford sold film with development included. Ilford Once you took your pictures, you sent the film to Ilford labs for development for That excluded independent processing labs who filed a That complaint to competition authorities complaint decrease in demand for their service decrease Ilford‘s exclusionary tying practice was forbidden Ilford exited the colour film market in 1968. This is an example were anti-trust authorities possibly This harmed welfare as Kodak became monopolist harmed 47 47...
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