competencia CAPITULO 3

8/13/2019 competencia CAPITULO 3

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CHAPTERhm IftiChttOil apprOle.1C111

.41111,1 Thigh Gong',Pcifect compebtion pruvides a benehmark against which the behavioruf odiar markers is judged. The chapter starts by examining perfectcompetition. cien though in; stronu assumptions apply t only a fewmarkets twa useful tools of analysis. elasticities and residual de-ntario eus cs. sic diseussed. Then the chapter shows that competitionhas desirable edicicney and welfare properties. These properties, how-ever. depord crucially un the assumptions o free cntry and exit and onn o externalities Ithans bear the t'un dosis of their actionst. The chapterchscusses ihc adYerse effects if these conditions do non hold. The chap-ter concludes with examples of industries that most economists wouldcharacterize s compePtive.In Mis chapes. ea stress five key points:

( omoctition nes many desirable propertie s.2. bree entre and exit is a crucial factor in determining wheihermarket is competitive and crcient.Ons",:nouriarii measure o selfarc is maximixed undet competition.

r h a . : desirabdity of competition is redtwed in the presente of e.x-such as pollutien.5. F,,u if .orate of the necessarv conditions br perfect competition

do no: hola. maricets can come alosa to achievirdir the desirableiet ce n COMpetitiOn_

Ft cn th pela:cal competition is rarely, if over. eneouniered in therea]] eerld. mils the perfect competition modal beeause it providesan ideal aaall1S1 eliich to compare other models and markets. 1n lates

3

56


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we examine how actual markets sleviatt erfeells competa:tse orles.u'ci determine sshich markets are liken lo has e the crear est des reno: Tse [he Ces;ahie properties of a perfee(iY eompenti>u economv explatn s. hy econcanIsts.,II 11111' competition That a rnarket devanes From Me NITeetly eomochin emodel does not necessarily metal that the ps:rformance el' a merina ele; he lincuess ed. huna:\ Cr. as is slisenssed at lenyth throulhout the bock.

VAe define perfect competition asa market outcome in svhidh a1I nns produceJ.:Hee/11S. perfectl di \ esehle otiTut and tase nv barrios to enh1 sir cyic orlad; les.densa -nen, hale htll intimnation. incur 110 transaet ,. and are price tase'seleic ale no externalities he nein Issumption.ol perfect stimpetition

/ -/on/Heenearo Goo,/ \ II Ihan, sell ala alentieal prothiet nshmers s iess thepialleits 01 sunou, nitro sis tltx sama: cu heisee are todulaeleal h u t N s ee' :ha l Pse feet ha/armanon. 1 -liners and ;n'Uses ha' e : II lelsniln; uvbi rex lee ihne;the market including the price and citialitr ot the produce . Prire hihing Bastas and sellers calmot intluenee the place ,itss Inch the produce can hc purenNed lar sols1 linee ls dele' verted hr the as -

ket. >u caeh btlyCl" and >eller Cake, die imue ,ts : A o Ti:visasan Osss 1either Ismer: not sel lel s inca; co si. lar s tc ;haTale in the market 'so /asu:Hui/me:, Mach tan hea: s the fati coas ol iu pitaduehen proc ese, I Tu1s. the


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58 ( kipier COmpet(tIon

F4tilta,S

L mpetiuv: LItput, y

t 'impulln e 1113,r1,,:.: r pt,:111 ,, ha s e a large number irms and etmsurners.but he plopel res (a" perfect competition een itiouuti thereaie fnms i , :1/se ILCKIZIC ,

Lel u , . 1::- y , .urr, , , , he short-rur illiket pr:c:: v, natch Shouldprodu, e Inda 1/41 d 1 .1i; . oi an,. ineltatin;_t prapentp e tirrn,

10 mane//z rt, Y. w en firmy..te he eumpetitne


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(luan i s

= rr Macc I.

Eccit,

1 1 1

: 1 7 T i /ro - ((al.here p i. price_ utput. and C mi is total cosi \ s us ar:. al Ihe pl um.tssuniption ah0Ve. the brin can sell all n naras al ;anee 1h2li\


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60 apl '

for decid-mg N k herik us nn in business Es- Produce and scll onls 1f Fel'efIlleS areal estas. greta as :o He cos. l'quissileinly, the firm shoulti produce and sellat price') only egttals or exceeds as ertiee variable utast 1.16 /c)

userage cosi - oint Oil en c s ereater thanminimum Al r .11 tT. En han ron. beeause zemee coas are average variablecosts plus aver:gc Used cosi , I kis. a lirm finds h more protilable lo produce thanto shut do ten ir price u befos minimunt average cos, p tsi 4C*. bou aboye mni-mum eVerdee .111Ible Coy, - . -11 . (>" i1 is more pr.afitable to produce and earnsota, res enue ar- ceelThiable cos than lis shut down and caro no rewenuesMusa) can help m'Iset die Exioi eusIsi T haz is, the lirm chooses to produce eventhough it u losine imite-. u heti ah cotas are considered. ( onsider an example toclaril ly !l'IN Emprimo Tiy a ya s iton

Stintlitse 3 1\:CI 5200 unk. 11), 11131'2i1 1J cos 1.1l(l is constaraal SI o el quantum, l e s. Mita HM unas \ t more [han 100 units, s extremelyhieh I I . the ot s sE l'E HE: mili produces and sea1, [un unas The brin jus t eoN e r sas pi mlusithot t i , centro , .1Ior. te roe u n i.ed cust: I t hseS s200

II the price N 'a , rnr N hetter tu( not pimiar:mg et alt. because n loses anddeldionni SI lhi c4 d'y Tila it produces and skould lose S300 ir it prod uc e d I DOunits It u bener 1t.: doEsti 1nd lose out\ 5200 than to produce and sulter greaterlosesIr the price is 1 lts nosslatang 100 units, the ruin nos' more Man covers vari-able cos: It eal lb / 4 , I able eost, II slill loses money oyeren ( 00 o100 - - 0 0 ) 1 - , ) , . .1 ) 1 ) , ) , .0 lar Esed cosi o S200. but it is bener t lose SIDO than5200 1 he point he es.rnlie s tral the deciston to produce or !loa is indkikitoutemof the lised sonarxosi It seit costs are sunk (Encurta:el whether the tirin produces 01'1101). they S110111( 1. he Ot21101ed iu ttecidinc wltether le produceIr al! tixed tinas oper a res Efp Es greater [han or etnia! tu Aeuui HOI di) 11-. Ie,. 111.1:1 - IJ ( he price a; which a lirm censes production is theshuulowil point, ))). i n )) in Figure 3.1. That is. itprice execeds.-11T"", the firmoperates along lis lir dorsi' I lie tirnt's supply curve rel1ecis the quantiis that aPm; 1. \ 4 hrTir n p:46 al .T grven pt N: The compentise uppls curve.ilten is the portion he 115 rve abuse .41'2, the slitudown p o int.Ir)) flan )))urrer), 1,)))));), 1)1 Elle short ion (the period in which eosts are sunk),should ir sontinise 'EL late test -..room mimo:atable in the (mute T I No. lit the longron. ,t tErnE man o t-sin eit Ishns est- El w 1 1 n o s COIntle oso.S11011-11111 10. Se , 1 1,11 'he Irn :41011111110f mes tr ther to repineeand equipmcm. c lolLi i on. 11 rntional fina 4M, tiO An if it expec(S to havelosses xielt P torta.o, ense pros uduen raiher iban inest inne 4. 1':,TITri:TL .41 4

HL. thr rmi are. ..i %.1.ifillne c(iro


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11 vi 1

When a lirm loses in the short run, lis rc)enueSare belew tha InlIgg un inprai[My cosa or i resourcei f3ecause opportunny cosa Meludes a normal prom. 3 rethat is inaking a loss mut not Itterally he paying out more menet iban u renco. es asimply earning less than it couid has e carned had it invested lis Calisgyki I suni liarassumid hace hect) willing lo spend 54 more for the lir st 100 units. S2 more for Ihe o.si200 units, and no extra 1111101i:1 toar 300 Unas . 111c total .JOI1M11 - . 1 C : :Shaded arco beiOW the demansl cure and ahoye the equilibrituu pi icC of S6 iip lo ineequilibrium quantity of 300 units rhis arca equals 5000 512 - SOI 00,2a

In the competitive market. consumers paid SI.800 to buy the 300 units In tisisexample. consumer surplus is 50 percent of the innount they actually pay. It con-sumers could have liad the choice o bllying 300 1111i15 Of nonti. [hoy \venid has e[leen willing to spend u2 t 52,700 (the SI,800 they spent. plus the extra 5900 inconsumer surplus)to purchase. the 300 units.Producer Surplus. Similarly, tirms mar rCeCIVC more for rhe geods the sell Watsit costs them lo produce thosc goods. Producer surplus is rhe largest amount thatcould he subtracted from a supplier's revenues and yet the supplier would stillinely produce the. product.\Ve can use in(ormation from the supply curve to calculare tiro;plus. A supply curve represento the marginal cosi of producing ouiput. For enuu-pie, in Figure 3.6, it COSIS finas S2 to produce 100 units. S4 to produce 200 ungs.and S6 to produce 300 units. The producer SLITTIRIs is the arca abOVC. 111C 5t,prycurve and beles; the market price up to the quantity eisid. 1 he producer surplus isthe arca equal lo 5900. which is aboye the supply curve and heloss the price oftqr to 300 units. I hat is. Oais would be svilling to par 5000 for the right lo seliunits of the uood at 56 rather han seiling neme tu all.V Aiire. One common measure of welfare from a market is the solo el rousannoreurplus and producer surplus. This Pleasure of wel raro is the value thatconsumer:

ler sol pu ccuraie Treasure or consumer I ell-hcang ir there slee no incoare eirech, lu ski n gecan ,unle: s inc Lr i cases deriand unchanged) C en l hen ibero dre oreaoe e t T e L i ; , 1 17 , , , , ad e a clum: apTroxunation ro t.tifare t O 11111 9 -6a


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C sumerSurplus andProducer Siaphis

s

1 2

Consumar Surplus8

Supply. S

.

Producer Surpius4

Demand, D

I U O 00 00 uentin:,

72 Chaptcr 3 C ompetido])

and producers wo uld ha vcl ing ro pay to pu rchase the equi l ibr ium quant i ty of ou t-put at the equ il ibrium price.Figure 3.b IIlu. taca Mat Ibis measure of welfare is maximized at the eompcti-L ive equilihrium . for example. f fewer tutt i , svere produced, welfare l' , " 0 1 1 1 d fan. aswe now show.Deadssemiq I .oss. The crol to society ofa iharkers nos operating efficiently iscalled deadweigh t luss ((MIL) la is aire wei faro loss the sum o the consum er sur-plus and produce su rp lu s .o sh--from a des imio n froni the compet i t ive equ i l ihr ium.For example. the ct3mpetnixe equilibrium is at pricep o and quantity Q o in F igureAt 00 . the value Iba: a consumer places on additional consumption equals themarginal cos ot procittelnu the 200d. If the government taxes Ch is go od or restrictsas sale. Chis link beta' ceo the salue the consumer places on an additional unit andthe cos of producing it is broker. which lowers welfare.Suppose that the goyernment collects a tax of T per un i t of goods s old . I f a cus -tomer pays p. the gos e rnment takes TM that , and the br in rece ivesp T. Thus , thetax creates a wedee uf T between the value that the marginal demander places onthe goo d (as sho wn by the demand curve) and the cos tha t the marg ina l suppl ier i swilline to Mea to produce the eood (as shown by the supply curve). The imposi-tion of the tax reduces the quantity sold from Q o to Q. The price consumers payrises to p", a nd the price firms receive halls to p* T .In ibis aftermax equilibrium , the amou nt sold, Q*, is less iban in the com petitiveequilibrium Q 0 . and the mine consumers place on consuming an additional unit , p*,now exceeds the marginal cosa o f producing i t by T . Consu mers su ffe r a loes o f con-su mer su rplus colla] lo arcas ei and B (the ares benveenp* and pu , to the left of the de-


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Taxrevenues

Deadweigll o s s , DWL

Sta)

Dem :uul .

Efficiency acd \VcIfare 73

P *

p *

f)eca/ 1 ()Will Luis

Q0 larket otapin.

mand curve). Suppliers sufler a loss of produeer surplus equal to arcas < and /) (thearen betweenpo and p t T lo the left o the supply curve). The governntent reveive,aax revenues equal to boxeo .1 and C . Thus, the transfer From consunicr* and pro-ducers to the g overnment (the tax revenues = boxeo A and C ) is leso tiran the combinedloso o f die consu mers and produects. This extra cos to society do e to yeduced aupad is) ,he deadweight loss , which catara is che sum o f the manejes B a n d D in Figure 2 .7 . 1 h

The dendweight loso triangl e can he expressed in te rms ol the elasticines of ttenerind and topply tirt-trheityt asume that the supply curse is perlitetly horizontal linfinitely elasticaThe:i the tleitittei tzte ittsx :rt'eate I t3.p..10. oliere = p* p and elQ Ldt Qa . Thc elasticity of dentand, (upara inter* tequal to1.101(J0 1ip o /p). Define r as 19p, which is the pereentage chance in the prICC dlle 10 Oh: 0 N, TI erendweight loas triando &vals

3 1p 59 1 4P ( u 4u9,, .1p Pazhere R ts De ret entre. p a 00 . and rat meatts apprarintetreh copal Thus. the ti 1 tnettze of the market. N, In addition 10 t and E


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74 Chapter 3 Compensan

Food FighbThe .test )es> rt armo v. itlitUs t Ir.s request For a permh to apeo a caa and bakery in Berkeley'sElinwood District aUer ight months and at least S5,000 in its rruest. To hace gratitudsuch a pznitz. thz lierkulcy Adiustment svuuld hace had tn override a zoning law quotaof sine iv , ntrestaurani sulklislunclus, The yunta ;zas explicitly designed to prolect neigh-borhoci :dares inur y fast tood ebabis tus ; D esserts e ls() faced opposi t ion from alocal rss ;vper ltor . V,Ibv1,11i orked to rally opposition ro Just Desserts' proposedchange tu the entliogSource. ol EirlwoodTun (alni ai/vCafilornianMatch 1 , i 4c,2, 7,

The deadaveight los> triangle is the total loss to society if the government makesgood use of the tax revenues. The DITL triangle is ata etficiencv loss because themarginal cosi orodut.ing E l good is less than the marginal willingness of con-sumen. lo peo rorAs long as Me goa:mimen makes ellieient use of this money. the tax revenuesare not an Mac ieric ia loas. Rather, the tax revenues redeet a redistribution of incomefrom ba.s els and selici< al ibis gafad to those a.vho benefit from the government i suse of diese talud>

\lanv or the desa fifilmas. As arecritica] rola n. acate Jt

15 It rtrmsexEspny ti tins c rr zscl

-opertios af compeillion are dite lo free entry and exil ohato the rest of Ibis hindi. case of entry and exit plays ae market so al:abre and IR subsequent performance of

ent as tOose already ha the market calmen easily enter.poner by eetting price: aboye marginal coso

I Examle32

In maro ithinsnies, goa ernments or groups of lavarais collectnely set licensing re-quirements that meso ICE Can: ( see Example 3,2). Ata example oan entry restrictionis the hin on the number taxicabs allowed in mane cebes throughout the world.Sucia (muy resfifilions elevare pelees aboye competitive levels.Figure 38 illustrutes hoh a restriction fan entry leads tu a price aboye the long-run competitirc equilihrium price. In Ibis market. a large nutnber of firms eouldproduce \vial ideuncal cost curves, as panel a showsFigure 3.81a iihows ovo long-ron supply curves for a market whcre all firms haveidentical cosi* ha the idasence of a governmem restriction en entry. there are 150firms in lhis markel1110 compettive equilihrium is determined bv the intersection


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n i - ,orano I hura

rm.-ninsapote,I 50 fu 1 1 1 s

1 5 1 . 1 q c VILLI ke ; ou tpu t

t.n[rr 1Cd Fs 75

FIGURE 3 8 L ryl: rnt Entiy Rextr ictiorla/ Typical Firm r arkers

of the supply curve for 150 firms and the market demand curve. The earailibriainprice is p o and each flan is produeing at the minimum o i t s long-run average escurve ,AC*.1f the government restriets the number of limas in the markei to 100, 1 1 1 2 10i:e-ruta supply curve hes to the left of the original one. With deis restriction on crin t.the new equilibrium price is p*. The entry restriction, therefore, restras in cis:-sum ers ' pay ing a pr ice . p*. higher han the unrestricted competitive price, y analconsu ming o nly Q *, which i s Icss than the u nresr r icted compet it iva quant i ty . 0 , ,The shaded arca DWL in Fiare 3.8b is the lose avelfare from residen ng eraryrellects the loss of consumar su plus from payinap* rather Hura p o that i s not cisnetraed by the firms.The entry restriction is inefficient for two reasons. First, there is a loss in efil-ciency due to restrieting ou tput from. 00 to O*. Second, the average cos t o produc-non is g reater with entry restrictions. With free entry, cada firm produ ces g o zare] raeaverage and marginal cost of production is p o . With the restriction, t iri tas pro duceL y* u ni ts a t a marginal cos t o fp* and ata average cos t aboye p o in Figure 3.8a. Thearca between the neo su pply cu rves to the left of Q* in Figu re 3.8b is a mensureincreased cost. The entire shaded arca in Figure 3.8b is the deadaseight loascaus ed by both so urces o f ineff iciency from th e entry restr iction.A firm that is among the 100 firrns allowed into the market is better off iban ifdiere were no entry restrictions. The elevated price raises the profirs of cuera o


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76 CivipleiMese Itio thans (the si n I ieure 3.S'al aboye the levet that would have ex-asted had the equiliairuani mi. be: ot tants, 150, been allowed T enter. \Villa free en-try. cach badil promaiii.s berage costs, and profits are zero ntryrestrictions ale :L'a.e a lin n the mili -amimon o a gond A tax bovieNer, transfersnom consum ir. and Iirnducers lo the emernment In contrast. (he entrymin. onsume , te Mins that \vetar able to ()petate in thisMinket

tiai. S '. and Willig1982 I nimen Pie pi P...2 un the competitive markets we have beenanalyzine.mane Brins al c ailbable cir ttering the market and producing. nohirrn is ableto earn more iban ina nom:, ia prrints itt the lona run. That is.libere is freeentry roto and anal arksit In sonh cosisa firms have an incentive lo enterwillenever price eVcccds \ eraee casi Markets mith Free entra and exit are Calle('perfeelly e/oite.ouOie (Reunid. Palito, and \Villie 1942).Residentral garhatac voiledion Tila)) h e mi example of a contestable market.There are econonties cil s. ale in nrovidinu residential garbage collection in a singleumin (sea ti.xample Mit It would he inefficient for more tiran one Mita to traversethe same mute to pick un garbage 9 lOwti can sohcP bicis from garbage collectionfirins and CilocHe lowesi bdder. Conlileiition arriana bidciers ensotes that thetorra is sened tit the low est pissible cosa. oven though only one firm actually pro-\Mes the ,ienIn contra,:_ al a bar that is noitected 'ruin entry. price remains aboye mar-ginal cito becituse an enter the iiiiirket and drive dOUn price. fhus. restric-tions iitr ,tre ca l1.1; many markets are noi perfeetly coMpelitiVO SOIhat price: aro

tilI. cur ya dOlieoli la N leed lo define wilill

atan hy ahui , , , . A L Millon dalililion Of a barrior to entry is any-thine thal nnes cris lOreprenell from instantaneousl:, creanny a neo. iirm in a

p.:11 In haceneek, tires c o.iid ;.ediu CliaPta IV

)[ c. t dJ n,g cr nI oon dn ce r m ara so thatr. pan nar2uial f pica dec notilcIcru d, 1 1er: n5 le 'mance 2arbage col-

nJ to ella lt: a separata (re for die,albage pie ked up twicetine seherne,.; are said-


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: hcet. chis delinition 111;1. flor he usclill, hoo:ct'etnynitet has a barrier tu entrya L ndei das de H I V 2 . 1 : 1 Hbuilding a pialo is an entre bar rien vtr ldit any macsciinch entry Cakes time has a hall - I C S tu entro .Unfortunately, the reno /x/n/art- lo gnur 1, oftent sad to rcre to nhCheentering and the trine it takes ro ente tn occur. Becialke the ter n o has se,eral:naunings. confusion has resulted sometimes. even though the proponeni, o' Iloearious delinitions agitee that higher coses of entry raise prives.1 he economie theories discossed in Chis huele predio[ the erosion uf profikentry only: in he long run. dho.. une reasonable approach is tu focos un long-ronhdrriers to entro, which prevent neto firma from entering a 11181:CI eyen Mough aneicist ing fi lma caros long-ron profits .I itere are many Ilrins that can enter with identical cosi cure: and Lace identd-vi ,rices. loen no une Orm can succeed lo Ola long ron al earning Proiht l'it \cosas hithout indueing additional entry. Only by having some tohantage ( P . C Ecan a tirm caro persistemly hieher protits tiran other actual nr p O I C 1 1 -1;al firms. Recause long-ron pro5ts can only: persist la hm loh mi advantage ocerttoiential cloratos. a lottical definido] olla long-ron barrita* tu carey is u coso Maiintist be incurred be a new entrant that incumbents not tor no; liad.12Ente' Harder:. A good example of a long-run harrier to entr is a putent.most inicio systems. the gOVCIalITICOI granle {In im co lor Che 1110nOpOly liei te calIhe invention liar a tixed period or inneA palero credle, _;11 cra,Tftwal, alhal:jabarrer to entre. TO LVIONIC lavairpa an Incumben1 lirm

I vial an; has tu enher iment around the palear itiense t ['ron] te awir-r.n1 roan a Berause te incumbent tan has the right ro esclude @mane limo:h2 patead it can pred cm entre. The ineumbent nrobably rad to ini.est in T . C::C;17L1-1:1d deaelopment in order to acotare the patent. If ihe sane avenue M . o:se:icht and

neo availahle once a patear has heen evaluad, the potennal con mirucas a cos Chal is greater [han that of the incumben[. ir

an incumbent may use a variety of strategies designad t o oise the cost of entre.i oro:inch require the illellMbefa to exploit some asymmetry between it and a pc-lential entrant in order to sise the cost toa menda' entrant aboye its thvn. Whenis stiecessitil, the incumben( tino can creare a long-ron barrier tu corma 1 beserinegic responses are stodied in detall in Chantar I.deinrIsn ddrred Frnin tingler ee 0Iso con \Ve ,eirn. usi 10 71 colotunet 0/cunde\ di0cussed ir luipter 16 on p rent, tire hnItle/ o:: a pote;

r a l Ios nr,e :ce 110,1 lee ill.tCtCI e Id1.en i I n a .1 nr.in qIunibeni does 1)01 ]1,1: ,Liptcr .0 ro:n1:s r, oifsolong beis kene n: lir .n: no,Ilde. nisutirs I , din In. meo ,oh tirrs no su, sigo anidnin, imo he c.. : ,ti1.11 redil. lo Itheneril, Ti n a sa [el> rnrbably ssou:d a.se 'ir In l,,C1,C vi t) -

77


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e i ,111111

78 (Chameri Comp.:Ni ,

lyit Ra >sir p onsidetation in undersianxling a tirinls, incentive toenser ti Mai KCI i s , lle lirms ability to exit the market Ir it is costly toexit a Mal el. thrUCCUUE.Cs 10 enser are reduceci. It is costly lo exit a market iithereare sunk , List. dial calima he rex os ered For cyaniple, suppose that a brin in a mar-ket anua Tos. \els sooiivalized equipment that is ditlieult to resell. A brin contena-platinit entra lato nijil otal markezs ror dociors4 and ask horalurte et , c1L , Ie a sinede tiren amen,. Ibey then ii51. how muchmore the iarket las r nc thrce..traL more hrms lo enser Tlrey tind shascomp2111: in aus educe prive and pronts. Altlioneh india) entranntcan chal i is. a log ra pl Ice nte of LUO addiU0I131 firms appears tu produce com-petitioni l 'ley also obtain a nva slIre CU: CUrlk costs by comparing the size at whiehexit OCCW IC the size al a i slaraentry oceurs. The Iarger a SUI11,, cos. the smaller isthe mathL:sze th,h r s s sic c)rnmed te the market srle that induces entry.

The eidoirisal i.eesists that itere is muera eniry and CNit and llar en-irants tem! to h yll ra tas o f entry and esa are roughly equal in stablein dust : " 1 / 4 nd Samuelson iad that entrantsare misil inal Ha] Lie UMUICCIUUDIC CUIUSU>. Illey produce17 pelcd: in, ristit fin ar, and aexotint for aboco 11 percent ofindusir p , 1 1 xttind brins. which produce 11 percent of


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industry output. only produce nc-fifth the 0119%1 oi 111C a enlge J. .. DCS1 1 11 1 V. 1.11C f011t largest fintas in au industry stav 1 1 1 1111 Crear 1/a as er ige 107 0 ryears (Caves I lb/81 (Inch 1987). using Dun and Bradstreet data for oU sector, ni gjust manufacturing). tinds that about hall of al new entraras fiad tvithin fit e veisand that despite Mon Ingh rato of failure. emrants over a portad oa test vea, s are 1 1significant source for the ereation of (net) new tofis. I lott et er, emulo) t110111 W en-traras rICC0110111 for a disproportionately small share uf total employment and datesnot generare a chsproportionately higher share of employment &nogal) (Davis. I lal

%kan ger. and Sentir< I

Identifving Bar riel., ro Unir-NBain11956i proneered the modem approach to analy /in): barriers :o ene - s. 1Ic ideasMiel airee such barriers.

Absoluto cos advaotaee Economies of large-sealc production (hin nquire hube earsiiirl espendi Produel differentialion: relate(' produers llar hure tYirciue characreritaissthat consumers do not view 1112111 as perfect substituid: (lot eyatn p le .-1.sple1 1 1 011101.11Crl , 1 1 1 1 C 1101 perfect substitutes for IBM computer+)

An absolute cosi adtantage allows ata incumben i Mur te ciar rsr.u.kvithout toar of entre. For example, suppose Ilion A can produce al 3 consmci srisror S2 per 111111, Svhereas all Oler potencial tirar curtid produce at osi o tu.; I aA can set its price at vfirch is ahoye lis per unir cosi, earn an u:lustra*, Menpralit. and yet not tbar ente. Because it is less crear that the other tnrn barriemour definido ) of long-run entry barriers. IC1 as C W:1111111C tht la in more letal.If both an incumbent and a new Cffirdra can enjoy the same hendir ,: ineconomies o seale. tyhy should ata ineumbent he ablc to earn excess prolitsu So meargue that a 11CW enirant would hace dilicully raising money tor be unwilling to h-1 1.1St ltS OWII money) to finance a largo expenditure. Ir is not neeessarily trae thatis more diffleult to raise money for largo than small prorects capital marketsgcork properly (banks and others are ts Ming to loan money Ihr profitahie acirt loesraising capital should he ni) more difYieult for a prolitable laroe-scale project ilisiihar a profitable small-scalc project. There should he mana Mestor ,iltr puieets.

But is it reasonable that the scale of a tina has no clec' on the incemit ec ir cmter? Ir larue .sunht com.; are assoetated cs ith entry and ir C101 \ is 1.111SIICaCSS lal. :1entrant's losses are latee. In such a setting. thrcats uf su - alegre behavior For 311,-pie, vigorous price effitingi may prevent new entra. 1 he prender che risk of coto rits-tering strateeie bellas ior and the greater the potential loss. the more poteni it 1 1 1 ' .

79


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eso CiaraCompetiducal of rateare entrar dcterrence. In :mei) a case, the [leed for laree-seale invest-ment that nwolares largc soya; eosts could well preside a disincentia e for a potentialentran because it aa ould have su much te lose (see Chapter 8).Produci driTerentimion (filos produce similar but not identical products) cancreare a long-ruii barrier to entry. For example, consumer goodwill teward estab-lished brand [lames non malee it more diffieult for a new brand to enter. Of course,an od:image mav acune to the iirst fimo te introduce a new product. That firm mayhave a first-mover ad \ antage: the first film to enter incurs lower marketing costsbecause it faces no rra ala 1 see Chapter II). Later firms fase higher marketing eostsPer:alise n'ea moit ermipete iroainst the firstis If the presence of the ineumbentraises the marketinb coso uf the second brin to enter. Men the lirsi iinn has a per-minium advantage long-rirri barrier ro entryand can maimain high priees. 1 9tomers. they mar be rellanan ru switch te a new brand (SchmalenseeTire tiza ot Enti a ftutu iersulustryA [l amber of medico, ere Utied tu asscss long-ron barriers to entry Some econo-mists ose sohjective r rudgments prediet 110\V CIUTIC Uit it would be for a new fum toentera market. Triesc :2Sti l lUdiCH Can he hased un how freguendy entre has occurredin the past.Other measures uf borriers tn entro are hased un the answers lo questions likethe fbiloWillT Whit abould be [he cos disadynntage if a new entrarles plant washall the size of the incombenkst How mien higner are the entrant's crisis becauseof the incombenhs potenis or reunir& expernset Tables 3.2 and 3.3 reproduceBain's charaeterization of the e rent of barriers to entro in certain industries.llanas (1976) ezamined the vare of entry inri Mose industries that Bain and laterMann (1966) considered dilficuil to enten and found that severa of Mese industrieshad significant entry The entra barriers identified by Bain and Mann that did seemto resulto ent r y \ven: 'hose having te do with product difTerentiation. Only long-ronharriers te en:ry can nrevent erices from eventually fallng to equal marginal cos.From a practicar Kim Carreto if the long ron is very long, knowing that profitswill eventualiv be deben tu ZefC may net matter much to incumbent firms. Largeshort-ron profits are siill desrrabre. The rime it tabes for entro to expand outputenough ta climinate mimo:dly hiela profits may be atore informatibe Man the sizeof the lene-ron entro barrier.The speed \ion wincla entra maro vinimos industries erodes ay differaeross competitivo and orinen innetitiaz industries. Most researchers liad that prolirerosion tabes Ion t m L;Cincentralcci industries (Stigler 963) and la Ingh-profit in-

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:pcli ndd tn ,flendy i L1 1 anh

Inat pre, '1,111Ntry TOM


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Rainiv Barden lo Entct

Industrywomol , Iles

[work:HesI iquorhocs

SoapSteeTroetrir.Tiro, and lube,ConicritFlaco'

Scale roduct hsoIuEcoDoMy ifferentiation ost3

I -2

I -2

CapitalRequiretuent

NoTc: Il igher .aceres ind 'c ate greater entry barr,, , urLe: Ruin 1:956 1091

thistries (Connolly and Schwartz 19851 Dunne. Robert , and Santiolsou t N'O , ;Und that differences in entry and exit ratos across mantifacturing industries per ,,r,over tinte. Nloreover, diere is considerable dispersion in entry and estiindustries. They tind that the ratos uf entry and exit in a inarket are Huid} r; talar!

Harrico-nte

Industry herall BarriersAutomohdes on ib ohCigarenes ery hab

\erv highSoapsSubsanmSteeractois erbahHour oderate ro lo'amem oderatt to les

Meal paokiug oderare tn le vTire. oderare te looRayo', oderan' ro lowNao: Industries wilh ery !l'eh barriers coal ele ale prive In

percent or more oboc compet dve level, Sol,,tartidimodo ate-lo-lore entry barders alma Ende.: ti, be ir ec,of competitive leve ls hy 7 pere,.sil and 4 pe7cen: reTecr e.,

Sourue llam 11750: 1701


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82 e 'Inter 3 lorrpon tibatendustriesw ith ros of cxl ln rnuahly half the

mamitheitirinit s. entranty aectsint tor lustry valtte,and exiting Mins acedunt In S to 25 percent of value.

A competitiI e 111a1;:c1 oras Liels desirahle tvelfare properties for reasons in adclitionlyset. mil :est s un eine) The competilit e eimilibrium is notiopti-rilnyhi, -r, t o pri,, or the u long price ti nlbramately. nianygootit (sIT) mili d ti'csh r "batly ()men as pollution and garbage)

muy not he p jets in Jur et 1) txternality oceurs tithen consurners or finnsr - )1. -car 11!:: !LH _k:-:i n. clit E sal E ::ron (Viidi..11 [heir dcl , :1:, do ro othersbuil. ct11:..rile o: a negadte externality, whieh is an

alicomp.ms,liod oy dio yarmo. sor it: ollution is a bad that has no price. Indie absents: 01 troi ts ;nimia r inas do nos pay for the poi-luilon Iryi mrii.t. so i. t nom_ ibc y ost tv socio r.' o - poininott in deciding hosv

t t s mui r o .; ,t , .): ,.. in t o t ie U? 1, 1 trhe i r 0411 -OrtOcket`; -, 1 : I I C 1 1 1 1 // I/// HIO/1:///(// (>01 (thepon me mart:m.1i Cosi Tus d.: ruin:lec ftunt the pollution). AS a result. they produce

more Mil) 15 .1 1 C1,[1. tICIVICICIIIICs insd;S 1sarket failures.An t.11,0itl?Ln.".11/H ent:tus others is a positiNe externality. For ex-

ample, , , hcli bi al1111:i yill,111 in \ ietv of your neighbor. your neighborvoceo es a free benetli I ti o nportatil eLamplc. of positiva externtilities inolye thegenera:Ion and Oisssinimain 21 of tr ortttation, tvhich can benetit rnany pecdtle atonce. \\ hen I I. ir . tf teloped the assenniiii line. other Mins benefited fromhis intim:num, trititout cnlnpensatinc lunt klany CU nSnmCI> lvho don't buy

(r+mint, r i)loEEno: lis ranhnlo of innomobiles and tienda irom Chis in-Mrinatithi 'U 1)21 eas Ino nid, is t'instad> orodueed in industries \vitt) negativo ex-tcr nalr ~ s. lo .luir 11 I`1, .1 1 \ pnlducej in intitistnes ttith positiite externalities.Info) inition :s alar Seso Med as a politie good: a commoility or service \\hose/snsull11 , 1 1 1 / 1 1 ec>on fines not preclude others from algo consutning it. An-(inter exampht in y pyfliy d i, Titsinal tletense. In addoion to being an extery

nysItaion is 11pul+_ bad iiiti ondesirable publie "goodNs ht contrast,rit r :1 ,41 sll Is , h/' 11.1g. is 011s11Il l d by My: ene annot beconsumes H 111 evl n.,ity can he either pro aie or puhlic goodor had \\ e nott otro, ttermainiessoben propert . iights are nos mearly

Toll hist t: propern riglos ti PCII \ 011 k WI: 01'1111\ e exclusite rtahic to use someasset madi a, ti it se; rice_ ()Ter mito compensate you if ihey is YO [o use:tour slot-s i): y c s ops.... y), [Lo pi uperty 1- 11:11N t) a ral ocular ear. hin no:tont dolmen ,- Isyssytt Itel.me, ro s en alone Volt shany the highway withoiliers 1 5, it di rpar:n epe ly richt in a 11011011 O( the highwayNY deson't me 1 iiitoonit liers from oecupying the same space). Cona-


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Conges t iona : 1

Examole 3.3

Highway congestion imposes largo costs on society in rerms of lost time, r \usted niel. and ehcreased poIlution.Califonnans idle away 400,000 hours per day on jamined highways..Aceindin

estimare, by 2005, California trattic delays may Mercase by almost 200 pereent Anafe]e holds that a 500 percenl Mercase by 2005 rsill load lo I I Milicia vellido Inairs el delay

eationally. Annuany, approxirnately two billion par lons of fuel are wasted nationally duc 10-I.CS11011, Toxie emissons are three times as greta for stalted trate as I'or cluelos movuh: ir 55arph. It is not surprising, tiren, that B O pereeut of A merieans believe Mar trafrie tunee:3111m is citeef their communities' mejor problems.Spurce: Mannueci, Carla. "Romper m Bumpe

:etition for space on the highwav can load h) congestion la 1111121111 es tor:,1'11k11 slows 1.1BeYery driver un a highway. Seo ExampWhere property rights are clearly deOned so there ane no externalities. competO e markets are 21 1 111:1C11t. 1201 example. gnu+vlicat does noi aneesneiulthors or anvone vise usually. and tbrmers hace the right to produce 1 1 1 1 1 1 11e.'herir as they ehoosc. In contrast, ir property rights are not tyLt11 cletined,:may he inellicient. For example, if a software company canto: ormect r . Nr C7,1)11 to its computer prograrns and prevent other tions from selling Mem. Meseprourams provide a positive externalicy (the company is not compensareti for iise olits programsl. Asa result, roo fox' resources are des.oted to producing sol nsate. 1, ri-fortunately, externalities are COMI11011. Speeific examples include pollution andtisheres. 2 0

LIAIITATIO \ OF PERI--A 41111 1 1 ;Some markets satisfy most of the assumptions of the perfect eompention mode!.Por example. un the New York Stock Exchange. many peopie huy and seis shit] c s elstock of individual lirms like IBM. lndividuals who own the stock but want bs sel I

ask their brokers lo sets. and those u:ha want to huy ask their brokers lo huyThere are many well-informed participants in the stock market. and the ori, r otparticular stock is determine(' by the l'orces of supply and demand. Mos( indn do-a!s correctly believe that they have no effect on the price of the stock. AUltotr1 Ibismarket comes ciase to satisfyine the surtir - 110ms hm perfect compcm d enot.

S J C S N N w.al. I onli nexo nilearl ton p rlo IT u.xternalipes


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84 Chapter 3 ( oninetek

The model o pi, rice( contpetitien la direetl) relevan( lo only a few markets, andmuch of this book r, ticv, oled to anal zinc the consequences of more realistie 1/10(1-els o' econornic I cho lel In Mese more realistie models, firms are able to influenceprice and their rir nuage in advertising and other marketine activitiesto rm and it finence einue,:iners. and underiake rescarch and developtnent tuproduce more eincienib.

Mam people obseik e thic. r en in pedectl compethice markets, welfare isnonoptimni ir the d:


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umrpHy. 85

Some people u se the te rco competidor to refer lo a market in h a Iew price-sdIting firms compete vigorously for sales. Each tirm tries to obra customers inrself at the expense of its rivals. In this interpretation. competition is use(' to de-acribe rivalry between firms that can ano market price. This use of the tcrin dif-fers from 011f definition, wh cre a perfectly com petitive f irm is a pdce taker rhat canall i t wants at the m arket pr ice.Even though few industries fit the requirements of perfect competition. econc-aUsts uen speak of certain types of industries as beine reasonably competitivo ifhey have certain characteristics. Prive-taking behavior, main firms. and rige cntryi ind exit are often us ed as cri teria to M dge the com petitivencss or a marlaet ec entraeqd exit typically resu lt in fi rrns eventually eaming reno prol i ts . For example. in som est iztes, i t i s very easy tu become a barbe'' , and there are often 'palay indepencient bar-Hel - shops in an atea. Even though harbers are not identical in either quality pricesall consu mers are not aware of all barben shops. mo st economista wo uli l describe?rovi s ion of hai rcu t s by barba sh ops as a reasonably compet it ive marketAnother example of a reasonably competitive market is steel serap. Fina thataaarket voltea used steel, process ir, and selI it tu steel iirirs. Iintry into ;he miel-serap market is easy and quick, the product sold is fairly homogeneous. and :Sea:published quotations of prives. laven though transaction prices undoulatedlyaary from firtn to firm, the large number of sellers acting indepenclentiapuse mos t economists lo label ibi s market a s reasonably co mpet i tive .Some d iscus s ions involv ing pu blic pol icy us e the terco compet ii i i ic in a gni dif-i ierent way : A competit ive market is one that requires no intervention to impran e i isperformance; a noncompetitive market is eme that has some defect that should becorrected. This usage of the tercos competitivo and frioncompetitive can he confus-ng. The eonfusion anises because intervention can sometimes improve the perfor-mance of industries that satisfy all the assumptions o perfect competition--as canaceur, for example, when the government encourages inventive activity. Con-=ersely , the failure of a market to satisfy a ll the ass um ptions o f perfect competitionres not necessari ly mean that some intervention can improve market net - Formalice

NENIA,RVIn perfect competition, all firms produce homogeneous, perfectly divisible outputand face no baniers to entry or exit; producers and consumers have full intbrma-:ion. incur no transaction costs, and are price takers: and there are no extevnaliiie.Mese eonditions hold, use of resources is efficieni. Welfare defined a', con-su rplus plus producen surplus i s maximized .Government interventions in com petitive markets su ela as laxes and reanactionsTri entry and exit reduce the efficiency uf Mese markets. GOVC11111ClIt inter\ cint ionbe he lpfu l . however, t some of the as sum pt ions of perfec t compat i t i a iH do ao th.:Id, For example. where property rights are not elcarly defined or high transaction


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86 t hapter 1

coses pro\ ent negtatated ,olutions pollating Lompetilk e &tus do not pa} for theclanage iher clItHe and prtiduce loo mocee pollution he optitnal government pol-les teduces the

The attnniviah , ,L apavehtion 1O lot bold in manv industries. Subse-L'ocia eitapters drilkelkk tiC and the consequences o departures froniperfect rompekkon

P R OBLE\Vill a tax ot lt1 per mliii ItimiqimIl cliunt., III, opon, u Ihnt ntildh pruld do the les'. entelent lirms in ( 1 3 )reale ola ' .1 1 P 1':any thtn CLin ellle1 he dnIpeunt e equilihrlund 1 1 1 1 . 1 5 1 the

2 The goterininun oad tee cc' Li tour t t tic matean' ettuan, the 1:rtt tiro] to enterrirm thial Lt" ates in a conipen ve 1r lit marhet em SpitIlds O, .ilteindlively, therens to ()tupid. ilut op,Intti l a iini, and e riccm1 ival flor Ii, leat e uarkel emand ecuinuets)there ut i'reo elan uno 111, ., I ti ie feto"Supliese a , onmennd ,, 1. , . la anote; demand curse 00 Nliat isfirm. 111 i L i .l111:41. 1.11 :1.2 :11 '. i. lekieprieeej


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competencia CAPITULO 3

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