Course : ECON6093 - Business Economics
Effective Period : September 2020
Pricing and Output Decisions:
Imperfect Competition (2)
Session 6
Thank you
LEARNING OBJECTIVES
1.Distinguish the features of 4 market structures
2.Explain the concept of Structure-ConductPerformance
3.Distinguish profit maximization under competitive
market, monopoly and oligopoly
4.Analyze decision making process with game tehory
5.Point out different type of price setting
Alternative Aims to Profit Maximisation
• Alternative aims
– separation of ownership and control
– the principal–agent problem
– managerial utility maximisation
– profit satisficing
• Sales revenue maximisation (short run)
– equilibrium output and price
• comparisons with short-run profit maximising
Sales revenue maximising price and output
£
MC
Q1 is the profitmaximising output,
where MC = MR
P1
AR
O
Q1
Q
MR
Sales revenue maximising price and output
£
MC
Q2 is the sales
revenue maximising
output where MR = 0
P1
P2
AR
O
Q1
Q2
Q
MR
Alternative Aims to Profit Maximisation
– Profit satisficing
Where decision makers in a firm aim for a target
level of profit rather than the absolute maximum
level.
– Sales revenue maximisation
An alternative theory of the firm which assumes
that managers aim to maximise the firm’s short-run
total revenue.
– Growth maximisation
An alternative theory which assumes that
managers seek to maximise the growth in sales
revenue (or the capital value of the firm) over time.
Alternative Aims to Profit Maximisation
• Alternative aims
– separation of ownership and control
– the principal–agent problem
– managerial utility maximisation
– profit satisficing
• Sales revenue maximisation (short run)
– equilibrium output and price
• comparisons with short-run profit maximising
– implications for advertising
– implications for the consumer
Alternative Aims to Profit Maximisation
• Growth maximisation
– measuring ‘growth’
– equilibrium for growth maximising firm?
• difficult to identify short-run equilibrium
– firm’s approach to profits
• virtually impossible to identify long-run equilibrium
Alternative Aims to Profit Maximisation
• Multiple aims
– behavioural theories of the firm
– satisficing and the setting of targets
• different stakeholders with different aims
• various possible targets
• potential conflicts between targets
– organisational slack
• a way of reconciling conflicting aims?
• cutting slack with ‘just-in-time’ methods
– the consumer’s interest
Pricing in Practice
• Do firms know their costs and revenues?
– difficulties in identifying the profit-maximising price and
output
– difficulties in predicting rivals’ behaviour
• Cost-based pricing
– p = AFC + AVC + Profit mark-up
– the use of a profit mark-up on AC
• choosing the level of output
• choosing the mark-up
Choosing the output and profit mark-up
£
P1
f
The firm could choose
a higher mark-up, but
a lower output …
... or a lower mark-up
and a higher output
P2
AC
h
g
j
D
O
Q1
Q2
Q
Pricing in Practice
• Do firms know their costs and revenues?
– difficulties in identifying the profit-maximising price and
output
– difficulties in predicting rivals’ behaviour
• Cost-based pricing
– the use of a profit mark-up on AC
• choosing the level of output
• choosing the mark-up
• equilibrium price and output?
• variations in the mark-up
Pricing in Practice
• Price discrimination
– meaning of price discrimination
• charging different prices to different
consumers for reasons unrelated to
costs
• the prices depend on price elasticity of
demand
Price discrimination
P
Revenue from
a single price
P1
Total revenue
D
O
200
Q
Price discrimination
P
Additional revenue
from charging some
customers the higher
price P2
P2
P1
D
O
150
200
Q
Pricing in Practice
• Price discrimination (cont.)
– conditions for price discrimination
• firm must be able to set its price
• markets must be separate
• demand elasticity must differ between markets
– examples
• inter-temporal pricing
• peak-load pricing
– advantages to the firm
• higher profits
• possibility of cross-subsidisation
Pricing in Practice
• Pricing and the product life cycle
– the four stages
• launch
– first mover advantage
• growth
– rapid growth in sales
• maturity
– slow down in sales growth
• decline
– extension strategies
Sales per period
The stages in a product’s life cycle
O
Time
The stages in a product’s life cycle
Sales per period
Product not
becoming
obsolete
Product
becoming
obsolete
O
(1)
Launch
(2)
Growth
(3)
Maturity
(4)
Decline
Time
Pricing in Practice
• Pricing and the product life cycle
– the four stages
• launch
• growth
• maturity
• decline
– competition and pricing in each stage
The stages in a product’s life cycle
Sales per period
Product not
becoming
obsolete
Product
becoming
obsolete
O
(1)
Launch
(2)
Growth
(3)
Maturity
(4)
Decline
Time
Course : ECON6093 - Business Economics
Effective Period : September 2020
Business Growth and Strategy
Session 6
Acknowledgement
These slides have been adapted from:
Essential Economic for Business 6th Edition
JOHN SLOMAN, ELIZABETH JONES
LEARNING OBJECTIVES
1.Analyze business environmental with PEST, Porter’s
Five Forces and Value Chain
2.Distinguish various business strategy based on
Porter’s Generic Strategy
3.Distinguish profit maximization under competitive
market, monopoly and oligopoly
4.Identify internal and external growth strategy
5.Identify the challenges faced by SME
Strategic Analysis
• Strategic management
The management of the strategic long-term decisions and
activities of the business.
– strategic and day-to-day management
– the components of strategic management
• strategic analysis
• strategic choice
• strategic implementation
Strategic Analysis
• Strategic analysis of the external business environment
– PEST / STEEPLE analysis
– Competitive Advantage
the various factors, such as lower costs or a better
product, that give a firm an advantage over its rivals.
– five forces of competition
• In 1980, Professor Michael Porter of Harvard
Business School identified five factors which are
likely to affect an organisation’s competitiveness
and success
Five forces of competition
Potential
entrants
Threat of
new entrants
Bargaining power
of suppliers
Suppliers
Industry competitors
Rivalry among
existing firms
Threat of
substitutes
Substitute
products
Bargaining power
of buyers
Buyers
Strategic Analysis
– five forces of competition
• actions of ‘complementors’ (a 6th force)
Firms producing complementary goods (products that are
used together)
• government (an alternative 6th force)
•
The business environment (cont.)
– identifying and analysing competitive factors
• but problem of uncertainty
– limitations of the five forces model
• importance of co-operation and collaboration
Strategic Analysis
•
Internal strategic analysis: value chain analysis
Value-chain analysis, also developed by Michael Porter, is
concerned with how each of these various operations adds value to
the product and contributes to the competitive position of the
business.
– primary activities
• inbound logistics
• operations
• outbound logistics
• marketing and sales
• service
Strategic Analysis
• Value chain analysis (cont.)
– secondary activities
• procurement
• technological development
• human resources management
• firm infrastructure
The value chain
After-sales
service
Marketing
and sales
Outbound
logistics
Operations
Inbound
logistics
Strategic Choice
• Environment- or market-based choices
– As an extension of his Five Forces Model of competition,
Porter argued that there are three fundamental (or
‘generic’) strategies that a business might adopt:
• Cost leadership - Competing through lower costs
• Differentiation - competing by producing a product
different from rivals’ products
• Focus - producing a specialised product for a market
niche
Porter’s Generic Strategy
Strategic Choice
• Internal resource-based strategic choices
– Resource-based strategy focuses on exploiting a
firm’s internal organisation and production
processes in order to develop its competitive
advantage.
– What the firm will seek to exploit or to develop is
one or more ‘core competencies’.
– Core competencies The key skills of a business
that underpin its competitive advantage.
VRIO Framework
Growth Strategy
• Growth by internal or external expansion
Alternative growth strategies
GROWTH OF A FIRM
Internal expansion
(1) Horizontal expansion
Same product,
but increase in market share
or diversification into new
varieties
External expansion
Strategic alliances
Mergers and acquisitions
(1) Horizontal integration
Merger or acquisition of firms
producing same product
at the same stage of production
(2) Vertical integration
Same product,
but expanding to different
stages of the productive
process
(2) Vertical integration
Merger or acquisition of firms
producing at different stages of
same process
(3) Conglomerate
(3) Conglomerate
Diversification - introduction
of totally different products
Diversification – merger or
acquisition of firms producing
totally unrelated products
Airline strategic alliances
Adria, Aegean,
Aeroflot, Aerolineas
Argentinas, AeroMexico,
Air Europa, Air France,
19%
Alitalia, China Airlines, China
Eastern, China Southern, Czech
Airlines, Delta, Garuda Indonesia,
Kenya Airways, KLM, Korean Air,
MEA, Saudia, TAROM, Vietnam
Airlines, Xiamen Air
Air Canada, Air China,
Air India, Air New Zealand,
ANA, Asiana Airlines, Austrian,
Avianca, Brussels Airlines, Copa
22%
Airlines, Croatia Airlines, Egyptair,
Ethiopian Airlines, EVA Air, Polish
Airlines, Lufthansa, Scandinavian
Airlines, Shenzen Airlines,
Singapore Airlines, South African
Airways,
Swiss, TAP Portugal, Thai, Turkish
Airlines, United Airlines
American Airlines,
BA, Cathay Pacific, Finnair,
Iberia, Japan Airlines, LATAM,
Malaysia Airlines, Qantas,
Qatar Airways, Royal
Jordanian, S7 Airlines,
SriLankan Airlines, FIJI
Airways,
Royal Air Maroc
16%
Star Alliance
Figures show
percentages of total
worldwide revenue
passenger kilometres
(RPKs) (2017)
Financing Growth and Investment
• Sources of business finance
– internal sources
• ploughed-back profit
– external sources
• banks
– mainly short- and medium-term finance
• stock market
– longer-term finance
• problem of 'short-termism'
– international sources
Financing Growth and Investment
• The role of the Stock Exchange
– primary market
– secondary market
– advantages
• brings together savers and firms seeking finance
• regulates firms and helps encourage confidence
• facilitates mergers and takeovers
• reduces transaction costs of investment finance
– disadvantages
• cost of getting listed
• public scrutiny
• possible short-termism and instability
Financing Growth and Investment
•
Is the stock market efficient?
– the efficient market hypothesis
• share prices reflect information about firms' current
and expected future performance
– implications of stock market efficiency
• benefit of speculation diminishes as efficiency
increases
• perfect efficiency and share prices following a
'random walk'
Starting Small
• EU definition of SMEs
– by number of employees
• micro enterprises: <10 employees
• small enterprises: 10 – 49 employees
• medium enterprises: 50 – 249 employees
– by turnover
EU SME definitions
Criterion
Micro
Small
Medium
9
49
249
2a. Maximum annual turnover
€2m
€10m
€50m
2b. Maximum annual balance
sheet total
€2m
€10m
€43m
3. Maximum % owned by one,
or jointly by several,
enterprise(s) not satisfying
the same criteria
25%
25%
25%
1. Maximum number of
employees
Note: to qualify as an SME criteria 1 and 3 must be met and either 2a or 2b
Starting Small
• Competitive advantage and small firms
– flexibility
– quality of service
– production efficiency and low overheads
– product development
– innovation
Starting Small
• Problems facing small businesses
– selling and marketing
– funding R&D
– management skills
– less ability to gain economies of scale
• The role of entrepreneurs
– what is an entrepreneur?
– international comparisons of entrepreneurship
• the Global Entrepreneurship Monitor (GEM)
60
50
New
Nascent
Established
40
30
20
10
Note: Unweighted average is of 53 countries (missing data for Israel)
Source: Based on data in Global Entrepreneurship Monitor,Global Report 2018/19, Table 1
Average
0
France
Italy
Japan
Germany
Qatar
China
UK
Greece
Poland
India
Taiwan
USA
Netherlands
Canada
Brazil
Lebanon
Angola
Entrepreneurial Activity (% of working
population)
Entrepreneurial activity
Starting Small
• Problems facing small businesses
– selling and marketing
– funding R&D
– management skills
– less ability to gain economies of scale
• The role of entrepreneurs
– what is an entrepreneur?
– international comparisons of entrepreneurship
• the Global Entrepreneurship Monitor (GEM)
– attitudes towards entrepreneurship
– policies towards entrepreneurship
.
Thank You
TEXTBOOK:
Essential Economic for Business
6th Edition
JOHN SLOMAN
ELIZABETH JONES