Eg polaroid v digital photography how to determine

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Unformatted text preview: ew substitutes may pose large threats to established products, even if they seem harmless now. e.g. Polaroid v. digital photography How to determine whether a product is in the same market as existing products, a new entrant, or a substitute? • Cross-price elasticity, measures the percentage change in demand for good B that results from a 1% change in the price of good A; identifies the substitutes faced by our product. e.g. Pepsi and tap water? • Residual demand curve analysis — pricing decisions in a well-defined market will not be constrained by the possibility that consumers will switch to sellers outside the market: if pricing is so constrained, enlarge the market definition. R.E. Marks ECL 2-7 • Price correlation — if two sellers are in the same market, they should face the same demand forces, which will lead to correlated price movements. Not a good method: may be hard to interpret — if firms are colluding, their prices will move together. • Trade flows — identical product not sold in the same geographical area are not substitutes: must identify the customer catchment area. • Competition among firms in an industry is captured by the firm-level price elasticity of demand (see p. 1-18). • Threatening substitutes measured by the industry-level price elasticity of demand • Others? Own-price elasticity of demand? R.E. Marks ECL 2-8 2.2.4 Supplier Power and Buyer Power Suppliers of inputs (labour, materials, energy, equipment, certification, etc.) may be able to charge prices that extract profits (surplus) from their customers: supplier power. No market power if the input supply industry is perfectly competitive, and prices are set by the interaction of supply and demand. But suppliers may have market power: • if they are concentrated, or • their customers are locked into continuing relationships with them because of relationship-specific investments (see §2.4 below). Unions have raised wages when its employer industry is faring well, and may make concessions when things aren’t good. A supplier can thus extract much of the target industry’s profits without destroying the industry firms. “Power” is not the same as “importance.” e.g. jet fuel is important, but from a competitive supply industry R.E. Marks ECL 2-9 Buyer power is analogous: customers may be able to negotiate lower prices, and hence capture some of the profits. Many buyers have some power, but the markets for output are price competitive, with price close to MC (see page 1-20.) The willingness of buyers to shop for best price is a source of internal rivalry in the industry, not buyer power. In many industrial markets, fierce internal rivalry and buyer power can coexist: each transaction is the result of a bargain between a sales agent and a purchasing agent, and the contract price for identical products can vary significantly. R.E. Marks 2.2.5 Strategies for Coping with the Five Forces A five-forces analysis identifies the threats to industry profits that all firms in the industry...
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This note was uploaded on 02/04/2014 for the course TIDB 1010-18 taught by Professor Kellygrany during the Fall '13 term at Tulane.

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