...Kampala International University Abdifatah Adan Egeh Course work material +256718275925 caloolgeele@hotmail.com Introduction The analysis of barriers to entry and exit is fundamental to the assessment of market power and market efficiency. A firm or firms may exercise market power for a significant period of time only if barriers to new entry exist. Thus in determining whether or not a proposed merger is against the public interest, or whether a firm (or firms) is abusing monopoly or market power in antitrust cases, analysis of entry conditions is of primary importance. One might therefore expect to see rather extensive and sophisticated analyses of entry conditions, or barriers to entry, in monopoly and merger cases that come before competition authorities in the United States, United Kingdom, or member states of the European Union (EU). One might also expect that competition authorities would have placed a great deal of emphasis and effort on achieving a coherent and consistent framework for the analysis of entry barriers in a manner that makes use of the latest thinking on the subject by industrial organization economists. However, until very recently no competition authority that we are aware of has attempted to formulate a coherent and detailed framework for the analysis of barriers to entry, despite the significant degree of effort that has been put into clarifying the related problems of market definition and the measurement of monopoly or market power....
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...Entry and Exit Entrants threaten incumbents in two ways: First, they take market share away from incumbents. Second, entry often intensifies competition, leading to lower prices. This is a natural consequence of the Cournot and differentiated Bertrand models in which more firms imply lower prices. Some Facts about Entry and Exit There are three important implications for strategy: 1. When planning for the future, the managers must account for entry. 2. Managers should expect most new ventures to fail quickly. 3. Managers should know the entry and exit conditions of their industry. Entry and Exit Decisions: Basic Concepts The entrant must sink some capital that cannot be fully recovered upon exit – it is this element of risk that makes the entry decision difficult. The entrant hopes that postentry profits exceed the sunk entry costs. There are many potential sunk costs to enter the market such as specialized capital equipment to government licenses. The potential entrant may use many different types of information about incumbents, including pricing practices, costs and capacity to assess why postentry competition may be like. Barriers to Entry Structural entry barriers exists when the incumbent has natural cost of marketing advantages, or when the incumbent benefits from favorable regulations. Strategic entry barriers result when the incumbent takes aggressive actions to deter entry. Bain’s Typology of Entry Conditions * Blockaded...
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...maximization. Firms exit the industry if they fail to pass the survival test of making nonnegative wealth. Industry converges in probability to the monopolistically competitive equilibrium as the size of each firm becomes small relative to the market, as the entry cost becomes sufficiently small, and as time gets sufficiently large. Consequently, in the limit, the only surviving firms are those producing at the tangency of the demand curve to the average cost curve and no potential entrant can make a positive profit by entry. Introduction The criterion by which the economic system selects survivors: those who realize profits are the survivors; those who suffer losses disappear. In the late 1920s and early 1930s it became apparent that there were severe limitations in conducting economic analysis using a framework of either pure competition or pure monopoly. Consequently, economists began shifting their attention to middle ground between monopoly and perfect competition. One of the most notable achievements was Chamberlin’s, 1933 blending of elements of perfect competition and pure monopoly in a notion of ‘‘large group’’ monopolistic competition where there are many competing firms producing similar but different commodities which are not perfect substitutes. Because of the product differentiation each firm has a certain degree of monopoly power (i.e., faces a downward-sloping demand curve). The presence of a product group with free entry leads the industry to...
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...Guide Economist’s Model of Behavior Economic Theory of Choice Basic Assumptions 1. Self interest- 2. Unlimited wants and limited resources- 3. Constrained maximization- a. People will also try to minimize constraints 4. Creativity- indv max. their personal satisfaction given resource constraints Marginal Analysis and Benefits- more than dollars and cents 1. When to use it: in your own life and to change behavior 2. Sunken cost- costs and benefits that have already occurred a. Irrelevant to economic decision making b. Use opportunity cost rather than historic cost *Sunk cost fallacy: tendency to throw good money after bad 3. Opportunity cost: The value of the best alternate use 4. Indifference curves: preferences (all combinations of goods that yield the same utility.) Most people balance combinations/utility is max @ the pt of tangency btween the constraint and an indifference curve 5. If benefits are greater than the costs= DO IT 6. Explicit cost: opportunity cost that involves direct monetary payment 7. Implicit cost: opportunity cost that does not involve monetary payment (time) 8. Economic profit: takes into account implicit and explicit costs Accounting profit: only takes explicit cost into account 9. Risk premium: ppl will pick the option with the most certainty. Different Models -Happy-is-Productive: satisfied employees provide better service -Economic: highly compensated/paid employees provide...
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...company. Michael E. Porter of the Harvard School of Business Administration has developed a framework that helps managers in this analysis. Porter’s framework, known as the five forces model focuses on five forces that shape competition within an industry: (1) the risk of new entry by potential competitors, (2) the degree of rivalry among established companies within an industry, (3) the bargaining power of buyers, (4) the bargaining power of suppliers, and (5) the closeness of substitutes to an industry’s products. A. Potential Competitors Established companies try to discourage potential competitors from entering, since the more companies enter an industry, the more difficult it becomes for established companies to hold their share of the marker and to generate profits. Thus a high risk of entry by potential competitors represents a threat to the profitability of established companies. On the other hand, if the risk of new entry is low, established companies can take advantage of this opportunity to rise prices and earn greater returns. The strength of the competitive force of potential rivals is largely a function of the height of barriers to entry. The concept of barriers to entry implies that there are significant costs to joining an industry. The greater the costs that potential competitors must bear, the greater are the barriers to entry. High entry barriers keep potential competitors out of an industry, even when industry returns are...
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...Competition Market Characteristics ……..………………….5 1.2. Perfect Competition Supply and Demand…………………………...9 CHAPTER II Perfect Competition Short-Run Supply………………………………..13 2.1. Short-Run Production Alternatives of a Competitive Firm………... .13 2.2. Short-Run Equilibrium and Supply Curve ………………………… 23 CHAPTER III Perfect Competition Long-Run Supply………………………………29 3.1. Long-Run Equilibrium Conditions…………………………………..29 3.2. Long-Run Industry Supply Curve…………………………………...33 3.3. Perfect Competition Market Efficiency……………………………...36 CHAPTER IV Practical analysis……………………………………………………..41 CONCLUSIONS……………………………………………………………………...45 LITERATURE………………………………………………………………………...47 APPENDIX…………………………………………………………………………...49 INTRODUCTION The issue of supply in the perfect competition conditions is a rather complex topic. It comprises of many crucial points that I will try to identify and explain. Some of them will be caused by the perfect competitive conditions’ regulations of the general processes of the supply formation, profit maximization, equilibrium achieving and others, dictated by the characteristics of the perfect competition itself, such as a large number of small firms, identical products sold by all firms, perfect resource mobility or the freedom of entry into and exit out of the industry, and perfect knowledge. It is obvious that when dealing with perfect competition...
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...and individuals who are willing and able to buy or sell a particular product. Potential entrants are all individuals and firms that pose a sufficiently credible threat of market entry to affect the pricing and output decisions of incumbent firms. Market structure refers to the basic characteristics of the market environment, including (1) the number and size of buyers, sellers, and potential entrants; (2) the degree of product differentiation; (3) the amount and cost of information about product price and quality; and (4) the conditions for entry and exit. Competitive Markets * A large number of potential buyers and sellers * Product homogeneity * Rapid dissemination of accurate information at low cost * Free entry into and exit from the market Individual buyers and sellers rake the market price for the product as given-no single participant has any real control over price. If a seller charges more than the market price, buyers simply will purchase the product from other suppliers. And firms always can sell their output at the market price; thus they have no reason to offer discounts to attract buyers. In this setting, firms view their demand curves as horizontal-a firm can sell any feasible output at the market price, P* -but sells no output at a price above P*. The demand curve is horizontal. Both marginal revenue and average revenue are equal to the market price. Marginal revenue is equal to price (P). In the short run, the firm takes its plant...
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...3 Industry Analysis: The Fundamentals When a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact. —Warren Buffett, Chairman, Berkshire Hathaway The reinsurance business has the defect of being too attractive-looking to new entrants for its own good and will therefore always tend to be the opposite of, say, the old business of gathering and rendering dead horses that always tended to contain few and prosperous participants. —Charles T. Munger, Chairman, Wesco Financial Corp. OUTLINE n n n n n INTRODUCTION AND OBJECTIVES FROM ENVIRONMENTAL ANALYSIS TO INDUSTRY ANALYSIS THE DETERMINANTS OF INDUSTRY PROFIT: DEMAND AND COMPETITION ANALYZING INDUSTRY ATTRACTIVENESS Porter’s Five Forces of Competition Framework Competition from Substitutes Threat of Entry Rivalry Between Established Competitors Bargaining Power of Buyers Bargaining Power of Suppliers APPLYING INDUSTRY ANALYSIS Describing Industry Structure Forecasting Industry Profitability Strategies to Alter Industry Structure 66 INTRODUCTION AND OBJECTIVES 67 n n n n DEFINING INDUSTRIES: WHERE TO DRAW THE BOUNDARIES Industries and Markets Defining Markets: Substitution in Demand and Supply FROM INDUSTRY ATTRACTIVENESS TO COMPETITIVE ADVANTAGE: IDENTIFYING KEY SUCCESS FACTORS SUMMARY NOTES INTRODUCTION AND OBJECTIVES In this chapter and the next we explore the external environment of...
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...3 Industry Analysis: The Fundamentals When a management with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact. —Warren Buffett, Chairman, Berkshire Hathaway The reinsurance business has the defect of being too attractive-looking to new entrants for its own good and will therefore always tend to be the opposite of, say, the old business of gathering and rendering dead horses that always tended to contain few and prosperous participants. —Charles T. Munger, Chairman, Wesco Financial Corp. OUTLINE n n n n n INTRODUCTION AND OBJECTIVES FROM ENVIRONMENTAL ANALYSIS TO INDUSTRY ANALYSIS THE DETERMINANTS OF INDUSTRY PROFIT: DEMAND AND COMPETITION ANALYZING INDUSTRY ATTRACTIVENESS Porter’s Five Forces of Competition Framework Competition from Substitutes Threat of Entry Rivalry Between Established Competitors Bargaining Power of Buyers Bargaining Power of Suppliers APPLYING INDUSTRY ANALYSIS Describing Industry Structure Forecasting Industry Profitability Strategies to Alter Industry Structure 66 INTRODUCTION AND OBJECTIVES 67 n n n n DEFINING INDUSTRIES: WHERE TO DRAW THE BOUNDARIES Industries and Markets Defining Markets: Substitution in Demand and Supply FROM INDUSTRY ATTRACTIVENESS TO COMPETITIVE ADVANTAGE: IDENTIFYING KEY SUCCESS FACTORS SUMMARY NOTES INTRODUCTION AND OBJECTIVES In this chapter and the next we explore the external environment of...
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...Industry Structure & Competitive Strategy: Keys to Profitability Michael E. Porter The first step in structural analysis is an assessment of the competitive environment in which the company operates—the basic competitive forces and the strength of each in shaping industry structure. The second is an assessment of the company's own strategy—of how well it has positioned itself to prosper in this environment. Taken together, these steps are the key to forecasting a company's earning power. THE SUCCESS OF A COMPANY‘S competitive strategy depends on how it relates to its environment. Although the relevant environment is very broad, encompassing social as well as economic forces, the key aspect of the company's environment is the industry or industries in which it operates. Industry structure has a strong influence in defining the rules of the competitive game as well as the strategies potentially available to the company. The intensity of competition in an industry is not a matter of luck. Rather, competition is rooted in underlying industry economics and goes well beyond the established competitors. Not all industries have equal potential. They differ fundamentally in their ultimate profit potential as the collective strength of the forces of competition differs; the forces range from intense in industries like tires, paper and steel, where no firm earns spectacular returns, to relatively mild in industries such as oil field equipment and services, cosmetics and toiletries, where...
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...Business Models for Strategic Marketing This report is designed to show entrepreneurs and small business owners the importance of utilizing and applying business models into the business plan and strategy to better understand a market, the industries and firms that make up the market. This guide will cover the following business models: Porters 5 Forces of Competition, Breakeven Analysis, Product Life Cycle and SWOT Analysis. Porter’s 5 Forces of Competition Figure 1: Porter's Five Forces Figure 1: Porter's Five Forces Porter’s model identifies and analyzes five competitive forces that shape every industry. This model also helps determine the weaknesses and strengths present in an industry. This is particularly helpful for a firm because it paints a clear image about where the power lies within the business to take advantage of the strengths and improve the weaknesses. By doing so, the business can compete efficiently and effectively. Additionally, this business strategy tool helps analyze the attractiveness in an industry structure. In other words, the model measures the profitability potential in a business situation. Figure 1 is a graphical representation of Porter’s Five Forces. The five competitive forces identified by Michael porter are: Threat of Substitute Products, Threat of New Entrants, Intense Rivalry Among Existing Players, Bargaining Power of Suppliers and Bargaining Power of Buyers. Threat of Substitute Products means how easily your customer can switch...
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...STATE COUNCIL OF EDUCATIONAL RESEARCH &TRAINING VARUN MARG, DEFENCE COLONY, NEW DELHI Teaching- Learning Material (On the basis of weekly syllabus for the Month of July’ 2011) For Class XII PGT (Economics) Chief Advisor Ms. Rashmi Krishnan, Director, SCERT Advisor Dr. Pratibha Sharma, Joint Director, SCERT Mohammad Zamir, Principal, DIET Keshav Puram Co- ordinators Dr. Seema Srivastava, Sr. Lecturer, DIET, Moti Bagh Ms. Meenakshi Yadav, Sr. Lecturer, SCERT Contributors Dr. Seema Srivastava, Sr. Lecturer, DIET, Moti Bagh Ms. Meenakshi Yadav, Sr. Lecturer, SCERT Mr Bharat Thakur, PGT (Economics) RPVV, Surajmal Vihar Support Material For Teachers In Economics – Class XII Co-ordinators Dr. Seema Srivastava Ms. Meenakshi Yadav Contributors Dr. Seema Srivastava Ms. Meenakshi Yadav Mr.Bharat Thakur Technical Support Mr.V.K.Sodhi Ms.Sapna Yadav Ms.Radha Ms.Garima Ms.Ritu Class – XII Teaching -Learning Material for PGT (Economics) Based on “Week- Wise Distribution of Syllabus 2011 -2012” For the Month of July: Unit-IV (18.07.2011 – 25.07.2011) 7 days (25.07.2011-30.07.2011) 6days Abstract Present unit deals with the Concept of Market Structure which comprises of different market conditions under which the firms produce and sell products in the market. The unit also elaborates upon various Forms of Market Structure such as Perfect Market and * Imperfect Market (*Monopoly, Monopolistic Competition and Oligopoly). The conditions and determination...
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...critical for several reasons. First, it can help to assess the potential opportunities for your venture, particularly important if you are entering this industry as a new player. It can also be a critical step to better differentiate yourself from others that offer similar products and services. One of the most respected models to assist with this analysis is Porter’s Five Forces Model. This model, created by Michael E. Porter and described in the book “Competitive Strategy: Techniques for Analyzing Industries and Competitors,” has proven to be a useful tool for both business and marketing-based planning. Background The pure competition model does not present a viable tool to assess an industry. Porter’s Five Forces attempts to realistically assess potential levels of profitability, opportunity and risk based on five key factors within an industry. This model may be used as a tool to better develop a strategic advantage over competing firms within an industry in a competitive and healthy environment. It identifies five forces that determine the long-run profitability of a market or market segment. * Suppliers * Buyers * Entry/Exit Barriers * Substitutes * Rivalry Supplier power * Supplier concentration * Importance of volume to supplier * Differentiation of inputs * Impact of inputs on cost or differentiation * Switching costs of firms in the industry * Presence of substitute inputs * Threat of forward integration * Cost relative...
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...Department of Economics Spring Semester 2010 University of Pacific ECONOMICS 53 Problem Set 6 Due before lecture on April 1 Part 1: Multiple Choice (15 Questions, 1 Point Each) 1. If a monopolist's marginal revenue is $35 a unit and its marginal cost is $25, then A) to maximize profit the firm should decrease output. B) to maximize profit the firm should continue to produce the output it is producing. C) to maximize profit the firm should increase output. D) Not enough information is given to say what the firm should do to maximize profit. Figure 1 2. Refer to Figure 1. If the firm's average total cost curve is ATC1, the firm will A) make a profit. B) suffer a loss. C) shut down D) break even. 3. Refer to Figure 1. If the firm's average total cost curve is ATC2, the firm will A) make a profit. B) suffer a loss. C) shut down D) break even. 4. For a monopolist to sell more units of output, A) the price must be increased. B) the price must be reduced. C) demand must become more elastic. D) the other competing firms must sell fewer units. 5. For a monopolist, price A) equals marginal revenue at all output levels. B) is less than marginal revenue. C) is greater than marginal revenue. D) can be greater than or less than marginal revenue. 6. In the long run, a monopoly A) will always earn zero economic profits. B) may earn positive economic profits due to...
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...Introduction: In 1979, Harvard Business Review published “How Competitive Forces Shape Strategy” by a young economist and associate professor, Michael E. Porter. It was his first HBR article, and it started a revolution in the strategy field. In subsequent decades, Porter has brought his signature economic rigor to the study of competitive strategy for corporations, regions, nations, and, more recently, health care and philanthropy. “Porter’s five forces” have shaped a generation of academic research and business practice. With prodding and assistance from Harvard Business School Professor Jan ‘ Rivkin and longtime colleague Joan Magretta, Porter here reaffirms, up-dates, and extends the classic work. He also ad-dresses common misunderstandings, provides practical guidance for users of the framework, and offers a deeper view of its implications for strategy today. In essence, the job of the strategist is to understand and cope with competition. Often, however, managers define competition too narrowly, as if it occurred only among today’s direct competitors. Yet competition for profits goes beyond established industry rivals to include four other competitive forces as well customers, suppliers, potential entrants, and substitute products. The extended rivalry that results from all five forces defines an industry’s structure and shapes the nature of competitive interaction within an industry. As different from one another as industries might appear on the surface, the underlying...
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