How firms compete
Easy as PIE: Presenting in English
09/03/2011

Plan of the lecture
 Approaches, definitions
 Market structures
 Antitrust regulation, competition policy
Types of competition
price
nonprice
•Price reduction P→MC
•Price wars
•Product differentiation
Types of competition
perfect
imperfect
• Monopolistic competition
• Oligopoly
No
• Monopoly
competition
Market structure
The state of the market with respect to the number and the
power of buyers and sellers.
•
Number of firms (buyers)
•
Control over price
•
Product differentiation
•
Ease of entry (barriers to entry)
Market power – the ability to affect the terms and
conditions of exchange so that the price of the product is set
by the firm (not imposed by the market)
Product differentiation
The process of distinguishing a product or service from others to make it
more attractive.
Sources of differentiation:
 Quality (e.g. longer warranty)
 Functional features or design
 Promotion activities, branding, advertising
 Availability, e.g. timing and location (spatial differentiation)
Goal: to make the product unique for the particular consumer
Barriers to entry
obstacles on the way of potential new entrant to enter the market
and compete with the incumbents
 Structural barriers (industry conditions)
 Costs, demand, economies of scale, network effects, etc.
 Strategic barriers (incumbent firms’ actions)
 Customer loyalty, switching barriers, exclusive agreements,
predatory pricing, government regulation,
intellectual property (patents, trademarks),
vertical integration, etc.
Principal kinds of market structures
 Perfect competition
 Monopolistic competition
 Oligopoly
 Monopoly
Mind map
Perfect competition
 Many Buyers and Sellers
 Sellers - price takers
 Homogenous products
 Freedom of entry and exit
 Perfect information
 Long run normal profit
Monopolistic competition
 Many Buyers and Sellers
 Some control over price
 Differentiated products
 Tiny monopoly over product
 Relatively free entry and exit
Oligopoly
 Competition amongst the few
 Interdependence between firms
 Product differentiation
 High Barriers to entry
 Price stability? Collusion?
 Abnormal Profits
Monopoly
 Firm = Industry
 Unique product
 Control over price OR output
 Price discrimination? (1st deg. – perfect, 2nd deg. –
quantity, 3rd deg. – segmentation)
 High Barriers to Entry
 Abnormal Profits
Monopolies
 Pure monopoly – industry is the firm!
 Actual monopoly – where firm has >25% market
share
 Natural Monopoly – high fixed costs – gas,
electricity, water, telecommunications, rail
 Legal (statutory monopoly) - a monopoly that is
protected by law from competition
What’s wrong with monopoly?
 Lower output, higher prices
 Deadweight
 Low incentives for development
Competition (Antitrust) law
law that promotes or maintains market competition by
regulating anti-competitive conduct
 US - antitrust law. Sherman Antitrust Act
(1890), Clayton Antitrust Act (1914)
 EU – competition law. Treaty of the
European community (EC Treaty), Articles
81 and 82
 Russia – antitrust authorities, but
competition law (1991, 2006)
Main issues
 Prohibiting collusion and cartels
 Banning abuse of dominant position (predatory
pricing, tying, refusal to deal, etc.)
 Controlling M&A
acquisitions
mergers
conglomerate
horizontal
vertical
friendly
hostile
Why does competition policy matter?
Competition policy is about applying rules to make sure
that businesses and companies compete fairly with
each other. It has many positive effects:
 encouraging enterprise and efficiency
 widening consumer choice
 helping deliver lower prices and higher quality.
Thank you for your attention!