100
80
Where?
How? When?
What?
Why?
2015
60
East
West
North
40
20
0
1st Qtr
2nd Qtr 3rd Qtr 4th Qtr
Who?
Managerial Economics
Stefan Markowski
Market research and market
analysis
The economics of competitive advantage
Detailed course schedule
Day no
Topic
Textbook ch.
1 (24 Nov;
3 hrs)
1. Introduction. Decision making process and its elements. The scope of
economic decision making. Application of marginal analysis
Chs. 1-2
2
3
3
3
2. Demand analysis and demand elasticities
Ch. 3
3. Buyer product valuation and choices. Consumer surplus. Buyer pricing
decisions
Ch. 4
4 (27 Nov;
2 hrs)
4. Production/transformation process. Production technologies and input-output
structure
Ch. 5
5 (28 Nov;
2 hrs)
5. Cost structure and cost drivers of producer pricing strategies. Production
scale and scope.
Chs. 5 and 7
6 (1 Dec; 3
hrs)
6. Structure-conduct-performance. Market structures: competition and
contestability. Pricing strategies of buyers and sellers
Ch. 8
7 (2 Dec; 3
hrs)
7. Market structures: monopoly/monopsony, monopolistic competition and
oligopoly. Pricing strategies and strategic behaviour
Chs. 9-10
8 (3 Dec; 3
hrs)
8. Input sourcing and investment. Pricing and market power
Chs. 6 and 11
9 (4 Dec; 2
hrs)
9. Decision making under conditions of uncertainty. Informational asymmetries
and risk management
Ch. 12
10 (5 Dec;
2 hrs)
10. Market research and market analysis. Auction and rings. Strategic
behaviour
Ch. 13
11 (8 Dec;
2 hrs )
12 (9 Dec;
2 hrs)
11. Public sector perspective
Ch. 14
13 (11
Dec; 2 hrs)
Examination
(25 Nov;
hrs)
(26 Nov;
hrs)
12. Revision
13. Examination
Topic 10: Market research and market
analysis, Auction and rings
Strategic behaviour
Topic Contents
9.1 Managerial perspective
9.2 Understanding structure
9.3 Understanding conduct
9.4 Understanding performance
9.5 Market conduct: Auctions
9.6 Further reading
9.1 Managerial perspective
• Firms make decisions with reference to their
operational environment, i.e., rivals, suppliers,
customers and labour markets
• They measure the competitiveness of their
industry by looking at various measures of
industry concentration, the higher concentration
the less competitive it is
• They are also concerned with the size of other
firms (turnover, employment, capitalisation),
industrial leadership (who dominates),
conditions of entry and exit, mergers and
takeovers, and so on
9.1 Managerial perspective
• In other words, they are interested in Structure,
Conduct and Performance of a market/industry
• The structure-conduct-performance paradigm is
used to discuss industry growth and sustainable
competitive advantage
• In practical applications in management this
has been adapted by Michael Porter as the Five
Forces Framework for industry/market analysis:
– Entry conditions
– Industry rivalry
– Substitute and complementary products
– Power of input suppliers
– Power of buyers
9.2 Understanding structure
Firm size
• Firm size is an indicator of its influence,
possible dominance and terms of entry/exit.
Size matters
• Google and look up the annual Fortune
Largest 2000 Global Companies, which not
only ranks the largest companies but also
contains links to each company’s annual
report
Industry concentration
• The concentration of largest firms in the
industry’s total turnover/sales is a measure of
its competitiveness
9.2 Understanding structure
• Concentration ratios measure the proportion of
sales or production attributed to the largest
firms
• Four firm concentration ratio
C4 = (S1+ S2+ S3+ S4) / ST, where
Si is sales of the firm i
ST total sales of all firms in the industry/market
wi = Si / ST
C4 = (w1+ w2+ w3+ w4)
9.2 Understanding structure
• Herfindahl-Hirschman index (HHI) is the sum of
the squared market shares of firms in a market
multiplied by 10,000 to avoid decimals
HHI = 10000 S (wi)2 and wi = Si / ST
• It takes the value between 0 (all firms very
small and very numerous so nearly 0% shares)
and 10,000 (only one firm with 100% share)
• Instead of T measuring all firms in a market or
an industry we can focus on the top 50 or 100
Technology
• Various technology related indices e.g., R&D
shares in costs or sales
9.2 Understanding structure
Capitalisation measures
• We can use the number of workers/operatives
per $1 million of sales or capital-labour ratios
Demand conditions
• This is to capture demand characteristics of a
market or an industry
• Rothschild index measures the ratio of own
price elasticity of demand for the total market,
T, to the own price elasticity of demand for an
individual firm, Fi, R = ET / EFi
• It takes values between 0 and 1 (similar
elasticities)
9.2 Understanding structure
Entry/exit barriers
• Measures of capital intensity
• Patents
• Economies of scale
9.3 Understanding conduct
Pricing behaviour of rivals
• Lerner index L = (P-MC) / P, where P is price
and MC is the marginal cost
• When P=MC L=0 as P-MC increases L
1
• This can be rearranged as
P= (1 / (1 – L) ) MC, where 1 / (1 – L) is the markup factor
• Recall MR = P ((1 + E) / E), where E is own price
elasticity of demand and MR is marg. revenue
P = MR (E/(1+E)) and to max profits MR = MC by
manipulation L = 1 – E / (1+E)
9.3 Understanding conduct
Mergers and acquisitions
• Different mergers and acquisitions can occur in
a market/industry:
– Vertical integration
– Horizontal integration (economies of scale)
– Conglomerate integration (economies of scope)
Advertising
• Spending on advertising reflects the
competitiveness of a market/industry
R&D
• A function of technical change and competition
9.4 Understanding performance
Profitability
• Profitability ratios
Rent seeking
• Stakeholders ’ (e.g., workers, bankers) ability to
capture rents
Social benefit
• This measures the impact of a market/industry
on social welfare (all of us)
• Dansby-Willig preformance index ranks markets/
industries by the degree of an incremental
increase in output would increase s. welfare (if
0 no change if >0 improvement)
9.5 Market conduct: Auctions
• In an auction, buyers compete directly (bid) for
the right to buy a good or service
• Types of auctions
– English auction – bidders observe bids of other bidders
and respond by increasing their bid or abstaining from
bidding
the auction ends when only a single bidder remains
and is successful if his/her offer price exceeds the
seller’s reservation price
– First-price sealed-bid auction – bidders made written
offers (or electronic) and the highest bid wins if the
offer price exceeds the seller’s reservation price
– Second-price sealed-bid auction – bidders made
written offers (or electronic) and the highest bid wins
but pays the offer of the next highest bidder (if the
offer price exceeds the seller’s reservation price)
9.5 Market conduct: Auctions
– Dutch auction – the auctioneer begins with a high
price and bids it down to the highest acceptable offer
• In principle, bids in the English and Dutch
auctions should end up at the same level but in
reality the auction dynamics could be different
as people are emotional
• The optimal bidder strategy for an English
auction is to set a reservation (own valuation)
price and bid no more than that
• In a second-price sealed bid auction the
bidder’s best strategy is to make a written offer
equal his/her reservation price
9.5 Market conduct: Auctions
• This is an interesting auction it is the second
mouse that sets the bid but the first mouse gets
the cheese
• The optimal strategy is more complicated for
the first-price sealed-bid auction and the Dutch
auction – generally one should bid less than
one’s reservation offer price
• Winner’s curse occurs when the winning bidder
overestimates the true value of the item and
bids too much – do not copycat other people’s
valuation
• Gambler’s ruin – when a series unfavourable
outcomes occurs in a row
9.5 Market conduct: Auctions
• When you assess the value of items you wish to
make an offer for you must decide whether it is
an essentially private (subjective) valuation
independent of other people’s assessments or
not. Do you buy it for your own enjoyment or
resale?
• At some auctions all bidders may wish to use
the same valuation (e.g., when they bid to buy
and resell the item), but they do not know what
to pay. Here they may influence each other and
value the item higher (set higher reservation
price) when they see other bidders bid more
(learning by bidding could be expensive)
9.6 Further reading
Baye (2010): chs. 7 and 12