[PDF] - Imperfect competition with entry/exit 1 Falafel vendors on the PDF Document

SLIDE 1

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 13-Bis • Imperfect competition with entry/exit Page 1

1 Imperfect competition with entry/exit

2 Falafel vendors on the beach of Beirut

B e a c h

Jennie Anjum Yen Ling Cheng Inês Weiwen Harry Vivek Charlie

SLIDE 2

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 13-Bis • Imperfect competition with entry/exit Page 2

3 A metaphor for product attributes …

Fewer administrations Cardiovascular improvements

4 Rheumatoid arthritis market (2008)

Kineret Cimzia Remicade Golimumab Humira Orencia Enbrel

SLIDE 3

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 13-Bis • Imperfect competition with entry/exit Page 3

5 For fixed firms, price competition …

10 20 30 40 50 10 20 30 40 50

PB PA

Firm B Firm A

6 … or quantity competition

200 400 600 800 200 400 600 800

Q2 Q1

SLIDE 4

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 13-Bis • Imperfect competition with entry/exit Page 4

7 What does entry do to prices, volumes, var. profits?

8 Numerical example: Cournot

Market demand curve:

Q = 1500 − 50P

Constant MC = 10 .

Then I calculate the Nash equilibrium for any number N of firms.

SLIDE 5

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 13-Bis • Imperfect competition with entry/exit Page 5

9 Entry: prices, volumes, variable profits

Number

f firms

Total Output Price Output per firm Profit per firm Q = 1500 - 50P || P = 30 - Q/50 1 500 20.00 500 5,000 2 667 16.67 333 2,222 3 750 15.00 250 1,250 4 800 14.00 200 800 5 833 13.33 167 556 6 857 12.86 143 408 7 875 12.50 125 313 8 889 12.22 111 247 9 900 12.00 100 200 10 909 11.82 91 165 11 917 11.67 83 139 12 923 11.54 77 118 13 929 11.43 71 102 14 933 11.33 67 89 15 938 11.25 63 78

10 What happens if FC falls?

Before entry of new firms? After entry of new firms?

SLIDE 6

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 13-Bis • Imperfect competition with entry/exit Page 6

11 Numerical example with free entry

All firms have same fixed cost Number

f firms

Total Output Price Output per firm Profit per firm Q = 1500 - 50P || P = 30 - Q/50 1 500 20.00 500 5,000 2 667 16.67 333 2,222 3 750 15.00 250 1,250 4 800 14.00 200 800 5 833 13.33 167 556 6 857 12.86 143 408 7 875 12.50 125 313 8 889 12.22 111 247 9 900 12.00 100 200 10 909 11.82 91 165 11 917 11.67 83 139 12 923 11.54 77 118 13 929 11.43 71 102 14 933 11.33 67 89 15 938 11.25 63 78

FC 350 1000 N∗

6 3

P∗

12.86 15.00

12 Let’s try again, this time using insights from IC+FE

Q: Why do pharmaceutical companies charge so much for AIDS medicine? A: Because they have to recover R&D expenses.

Higher R&D expenses do lead to higher prices, but … Not because any firm takes them into account when setting prices. Instead, because the higher R&D expenses limit entry. The resulting lack of competition is what leads to higher prices.

SLIDE 7

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 13-Bis • Imperfect competition with entry/exit Page 7

13 How does this change if …

an article is published extolling the virtues of eating falafel?

10 20 30 40 50 10 20 30 40 50

PB PA

Firm B Firm A

14 How does this change if …

market size grows, but composition does not change, and firms have constant MC?

10 20 30 40 50 10 20 30 40 50

PB PA

Firm B Firm A

SLIDE 8

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 13-Bis • Imperfect competition with entry/exit Page 8

15 Wrap up: Imperfect competition with entry and exit

1. Entry has two effects on profit:
smaller market shares
greater competitive pressure on prices
2. Higher FC ⇒ less entry ⇒ less intense competition ⇒ higher prices

(Even though no firm bases pricing on its fixed cost.)

3. Increase in market volume ⇒ more entry ⇒ lower prices