ECON 4820 Strategic Competition
INTRODUCTION
Lecture notes 19.01.04
Strategic competition
Two aspects of strategic competition
1)
Firms interact strategically
2)
Imperfect competition
Three questions
1)
Do firms have market power?
2)
If yes, do they have incentive to exercise it?
3)
If yes, is the result inefficient?
Reference (in Norwegian): N.-H. von der Fehr, V. Norman, T. Reve and A.
Ryssdal (1998), Ikke for å vinne? Analyse av konkurranseforhold og
konkurransepolitikk, SNF-rapport 8/98, Samfunns- og næringslivsforskning
AS.
Sources of market power
A firm can have market power only if it controls or has access to some unique
profit opportunity. In the absence of such opportunities firms are essentially
identical and competition will be perfect.
Unique profit opportunities may arise from:
„
control over key inputs
„
technology and economies of scale and scope
„
products, distribution channels and customer relations
Example: electricity generation
„
limited capacity, location and efficient hydro facilities
„
vertical relations between distribution and retail
„
transaction costs
Reference (in Norwegian): T. Bye, N.-H. von der Fehr, C. Riis og L. Sørgard,
Kraft og makt – en analyse av konkurranseforholdene i kraftmarkedet,
Rapport utarbeidet for Arbeids- og administrasjonsdepartementet.
Competitive environment – turbulence
Exercising market power may involve costs
„
loss of market share
„
cost inefficiency
Key question: how are future profit opportunities affected by current
behaviour? This largely depends on the competitive environment in which the
firm operates
„
stability?
„
turbulence?
„
chaos?
From a competition policy point of view ideal conditions are sufficiently stable
to allow firms to take a long-term view, but at the same time sufficiently
uncertain that firms do not dare to exercise market power.
Factors affecting competitive pressure (turbulence)
„
competition from abroad
„
entry conditions
„
stability of customer relations (cf. transaction costs)
„
ownership
„
innovation
„
(tacit or overt) collusion
Contracts and information
The last issue concerns whether exercising of market power leads to
inefficiency.
Starting point may be the so-called ‘Coase theorem’: inefficiency results from
unclear property rights or limitations on contracting, not market power per se.
Example: monopoly and price discrimination
2
Limitations on contracting may result from
„
laws, regulations or tradition/social norms
„
information asymmetries
Information problems would tend to be more important in markets with
„
many buyers and/or sellers
„
short or infrequent seller-buyer relations
„
transactions of low value
Competition analysis
Analysis of
1)
sources of market power
2)
incentives to exercise market power (turbulence)
3)
limitations on contracting
In the further analysis we will concentrate attention on 2):
„
static oligopoly models
„
dynamic oligopoly models (collusion)
„
entry and exit
„
asymmetric information
The discussion of product differentiation has particular relevance for 1) while
the discussion on asymmetric information has relevance for 3).
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