Imperfect competition with exit/entry Session 13 Imperfect - - PowerPoint PPT Presentation

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Imperfect competition with exit/entry Session 13 Imperfect - - PowerPoint PPT Presentation

Dec 18, 2022 107 likes •276 views

Imperfect competition with exit/entry Session 13 Imperfect competition Slide 1 P1 SepOct 2012 Timothy Van Zandt Prices & Markets Falafel vendors on the beach of Beirut h c a e B Yen Ling Harry Cheng Charlie Jennie

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SLIDE 1

Imperfect competition with exit/entry

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 13 • Imperfect competition Slide 1

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SLIDE 2

Falafel vendors on the beach of Beirut

B e a c h

Jennie Anjum Yen Ling Cheng Inês Weiwen Harry Vivek Charlie P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 13 • Imperfect competition Slide 2

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SLIDE 3

A metaphor for product attributes …

Fewer administrations Cardiovascular improvements

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 13 • Imperfect competition Slide 3

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SLIDE 4

Rheumatoid arthritis market (2008)

Kineret Cimzia Remicade Golimumab Humira Orencia Enbrel

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 13 • Imperfect competition Slide 4

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SLIDE 5

For fixed firms, price competition …

10 20 30 40 50 10 20 30 40 50

PB PA

Firm B Firm A

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 13 • Imperfect competition Slide 5

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SLIDE 6

… or quantity competition

200 400 600 800 200 400 600 800

Q2 Q1

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 13 • Imperfect competition Slide 6

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SLIDE 7

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

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 13 • Imperfect competition Slide 7

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SLIDE 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.

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 13 • Imperfect competition Slide 8

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SLIDE 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

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 13 • Imperfect competition Slide 9

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SLIDE 10

What happens if FC falls?

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

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 13 • Imperfect competition Slide 10

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SLIDE 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

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 13 • Imperfect competition Slide 11

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SLIDE 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.

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 13 • Imperfect competition Slide 12

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SLIDE 13

How does this change if …

an article is published extolling the virtues of eating falafel?

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PB PA

Firm B Firm A

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 13 • Imperfect competition Slide 13

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SLIDE 14
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SLIDE 15

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

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 13 • Imperfect competition Slide 14

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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

P1 Sep–Oct 2012 • Timothy Van Zandt • Prices & Markets Session 13 • Imperfect competition Slide 15