ECON 115
Industrial Organization
Industrial Organization
1. The Take-home Final (Final
Essay)
2. What have we learned in
Industrial Organization?
What are the major takeaways?
Industrial Organization
• The Final: write a short essay about a firm’s
or group of firms’ behavior . . .
• behavior that was prosecuted by the
government . . .
• But behavior which can also be explained
as the product of rational activity by the
firm, its suppliers and customers.
Industrial Organization
• This is, in the end, what our course in
Industrial Organization is about: finding
rational (theoretically-sound) explanations
for why firms behave in the myriad ways
they do.
Industrial OrganizationFirms sell
products for
different
prices, giving
discounts
. . . to some
customers and
bundling up
products for
others.
Firms offer
lots of
different
products
Firms offer
different
quality
products
2 competitors
may sell a
level of
output with
prices > cost
Or 2 other
competitors
may set prices =
to their costs
In some
circumstances
a firm has an
advantage
moving first
In other
circumstances
it is better to
be a follower
Sometimes
firms
accommodate
new market
entrants
Or they may
fight entry by
adding capacity
Other times
firms buy or
merge with
competitors
. . . or by
pricing < cost
appear more
efficient than
they really are
Industrial Organization
• This is the stuff of industrial organization.
• To study all these variations . . . and seek
rational explanations for them.
• This diversity is representative of what we
call imperfect competition. Unlike perfect
competition – which exists primarily in
textbooks – imperfect competition exists in
the real world.
Industrial Organization
• It the goal of this course was to use
economic theory to examine imperfect
competition; i.e., the diversity we see in the
real economy.
Industrial Organization
• In this course, we concentrated on certain
parts of the imperfectly competitive
markets: monopolies and oligopolies.
• Monopolies provide the sharpest insights
into how price discrimination and anti-
competitive strategies work.
• Oligopolies are useful in understanding
strategic interactions between firms.
Industrial Organization
PRICE
DISCRIMINATION
Industrial Organization
• Price discrimination means charging different
prices to different consumers for the same good.
• Recall that a monopolist facing a downward
sloping demand curve and employing non-
discriminatory pricing must reduce its price to all
consumers in order to sell more product.
Industrial Organization
• If price discrimination allows a monopolist to
sell more product, it may be seen as increasing
total surplus, thus improving efficiency.
• Of course to price discriminate, the monopolist
must address two problems:
1. Identification: can the firm identify demands of
different types of consumers or in separate markets
2. Arbitrage: can the firm prevent consumers charged a
low price from reselling to consumers charged a higher
price
Industrial Organization
• The firm then must choose the type of price
discrimination
– first-degree or personalized pricing
– second-degree or menu pricing
– third-degree or group pricing
Industrial Organization
• There are three types of price discrimination:
Type Name Example
First Degree Personalized
Pricing
Maximum price charged to each
consumer
Second Degree Menu Pricing Quantity discounts
Third Degree Group Pricing Group discounts (“early bird special”
“senior discount” )
Industrial Organization
• Third-degree price discrimination: Group pricing.
• Consumers differ by some observable
characteristic(s). A uniform price is charged to
everyone in the group. This is “linear pricing.”
• Different uniform prices are charged to different
groups:
– “student discounts” (Characteristic: student ID)
– “senior discounts” (Characteristic: appearance)
– early-bird specials (Characteristic: time)
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Industrial Organization
• Pricing Rule (Elasticity of Demand)
– consumers with low elasticity of demand
should be charged a high price.
– consumers with high elasticity of demand
should be charged a low price.
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Industrial Organization
• Pricing Rule (Marginal Revenue and
Marginal Cost)
–marginal revenue must be equalized in
each market.
–marginal revenue must equal aggregate
marginal cost.
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Industrial Organization
• RULE #3: If demands are linear –
–price discrimination results in the same
aggregate output as no price
discrimination.
–price discrimination increases profit
because allocated more profitably across
two markets.
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Industrial Organization
• From Last Week’s Assignment
– Aggregate Demand: P = 14 – ½ Q
– MC = 4.
– Under Perfect Competition, P = MC.
– ∴ 𝑃 = 4, 𝑎𝑛𝑑 𝑄 = 20
• Under Monopoly, MR = MC
– PQ (total revenue) = Q*(14 – ½ Q) = 14Q - ½Q 2
– MR = d(TR)/dQ = 14 – Q = MC = 4.
– ∴ Q = 10 and P = 14 – ½ *10 = 9
– 𝑃𝑟𝑜𝑓𝑖𝑡 = 9 − 4 ∗ 10 = 5018
Industrial Organization• Now let’s solve Part 3, Group Pricing
– Aggregate Demand: P = 14 – ½ Q
– High Demand Group: P = 16 – Q
– Low Demand Group: P = 12 – Q
• Please note: if you write the HD and LD demands
in terms of Q, then
– Q = 16 - P
– + Q = 12 – P
– = Qtotal = 28 – 2P. Therefore P = 14 – ½ Q
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Industrial Organization• Find the individual Marginal Revenue Curves for the
HD and LD consumers:
– HD Demand: P = 16 – Q LD Demand: P = 12 – Q
– HD MR = 16 – 2Q LD MR = 12 – 2Q
– MRHD = MRLD = MC
– HD 16 – 2Q = 4 Therefore Q = 6 and P = 10
– LD 12 – 2Q = 4 Therefore Q = 4 and P = 8
– Profits = (10 – 4)*6 + (8 – 4)*4 = 36 + 16 = 52>50
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Industrial Organization
• We now move to pricing strategies designed by
monopolies to capture the consumer surplus.
• The primary example of this form of price
discrimination is the quantity discount.
– Annual subscriptions often cost less in than one-off purchases.
– Buying in bulk usually offers a price discount.
• Prices are nonlinear, with the unit price
dependent upon the quantity bought.
• Pricing is nearer to willingness to pay.
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Industrial Organization
• A nonlinear pricing strategy depends upon the information available to the seller. That determines whether to employ first-degree (personalized) or second-degree (menu) pricing.
• Under first-degree price discrimination, the
monopolist charges the maximum price that each
consumer is willing to pay.
– Extracts all consumer surplus
– Since profit equals the total surplus, first-degree price
discrimination is efficient. 22
Industrial Organization• Can a seller achieve a similar outcome if prices
must be announced in advance?
• Yes, with non-linear prices
• Two-part pricing is an example of common
non-linear pricing strategy.
– charge a quantity-independent fee
(membership?), plus a per unit usage charge
• Block pricing is a second example.
– bundle total charge and quantity in a package
• Quantity Discounts23
Industrial Organization
• Second-degree price discrimination & Quantity Discounts:
1. Extract all consumer surplus from the lowest-demand group.
2. Leave some consumer surplus for other groups . . . to satisfy the incentive compatibility constraint.
3. Offer less than the socially efficient quantity to all groups other than the highest-demand group.
4. Offer quantity-discounting.24
Industrial Organization
• 100 wealthy consumers, who value the 1st unit of a good at $15 and a 2nd unit at $10
• 100 moderate income consumers, who value only the 1st
unit at $12. For the producer, MC = 6.
• Solution: $12 for 1, $20 for 2.1. Extract all consumer surplus from the lowest-demand
group (Price for 1 unit = 12)
2. Leave some consumer surplus for other groups . . . to satisfy the incentive compatibility constraint. (CSw
= $500)
3. Offer less than the socially efficient quantity to all groups other than the highest-demand group.
4. Offer quantity-discounting ($2.00 discount per unit if you buy two) 25
Industrial Organization
PRODUCT DIFFERENTION
26
27
Industrial Organization
• Most firms sell more than one product. We
classify product differences as either horizontal
or vertical.
• Horizontal Differentiation: Products differ by
their appeal to different types of consumers.
• Vertical Differentiation: Products differ by the
consumers’ willingness to pay for quality.
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Industrial Organization
• Suppose consumers differ in their tastes;
• A firm may decide it best serves these different
types of consumers by offering products with
different characteristics but similar qualities.
• This is horizontal product differentiation. The
firm designs products to appeal to different
types of consumers.
• Questions:
– how many different types of products?
– how do we model this problem?
29
Industrial Organization• A useful way to formulate answers is to use a
spatial model (Hotelling [1929]) to consider:– Product pricing– Design characteristics– Product variety
• This model provides insights into product differentiation because location can stand-in for:– space (geography)– time (departure times of planes, buses, trains)– product characteristics (design and variety)
• Consumers want products “close” to their preferences in space, time or characteristics.
Industrial Organization
• Here is an example. Assume F = $50,000, N
= 5 million and t = $1.
• Then tN/2F = 50.
• For an additional shop to be profitable, we
need n(n + 1) < 50. This is true for n < 6.
• Therefore, if n = 6, then adding one more
shop is profitable.
• But if n = 7 then adding another shop is
unprofitable. 30
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Industrial Organization
• What does the condition on n [n(n + 1) < tN/2F] tell us?
• Simply, we should expect to find greater product
variety when:
– there are many consumers (N/).
– set-up costs of increasing product variety are low
(/F).
– consumers have strong preferences over product
characteristics and are unwilling to buy a product
if it is not “very close” to their most preferred
product (t in the numerator).
32
Industrial Organization
• BUNDLING AND TIE-IN SALES
33
Industrial Organization• Firms often bundle the goods that they offer.
– Microsoft bundles Windows and Explorer
– Office bundles Word, Excel, PowerPoint, Access
• Bundled package is usually offered at a discount.
• Tie-in sales ties the sale of one product to the purchase
of another: Tying may be contractual or technological
– IBM computer card machines and computer cards
– Kodak tie service to sales of large-scale photocopiers
– Tie computer printers and printer cartridges
• Why? To make money!
34
Industrial Organization
• There are two types of “bundling”
(1) Pure bundling, which is when the products are only offered in a bundle.
(2) Mixed bundling, when you offer the products both individually and in a bundle.
35
Industrial Organization• Two television stations offered two old Hollywood
films
– Casablanca and Son of Godzilla
• Arbitrage is possible between the stations
• Willingness to pay is:
Station A
Station B
Willingness
to pay for
Casablanca
Willingness
to pay for
Godzilla
$8,000
$7,000
$2,500
$3,000
$7,000
$2,500
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Industrial Organization
Station A
Station B
Willingness
to pay for
Casablanca
Willingness
to pay for
Godzilla
$8,000
$7,000
$2,500
$3,000
Total
Willingness
to pay
$10,500
$10,000
Now suppose
that the two films are
bundled and sold
as a package
How much can
be charged for
the package?
$10,000
If the films are sold
as a package total
revenue is $20,000
Bundling is profitable
because it exploits
aggregate willingness
pay
37
Industrial Organization• If we extend our examples to include costs,
should a firm offer products individually, in a bundle only or both individually and bundled?
• There is no simple answers:
– mixed bundling is generally better than
pure bundling;
– but bundling is not always the best strategy
• Each case needs to be worked out on its
merits.
38
Industrial Organization• Here are some basic observations:
– Bundling is a form of price discrimination
– Bundling does not always work. Pure
bundling is not necessarily better than no
bundling.
• It requires there are reasonably large differences in
consumer valuations of the goods
– However, mixed bundling is always more
profitable than either no bundling or pure
bundling.
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Industrial Organization
• What about tie-in sales?
– “Like” bundling but proportions vary.
– It allows the monopolist to make
supernormal profits on the tied good.
– Different users charged different effective
prices depending upon usage.
– Facilitates price discrimination by
making buyers reveal their demands.
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Industrial Organization2nd Degree Price
Discrimination
Example: Quantity
Discounts
3rd Degree Price
Discrimination
Example: Group
Pricing
Product
differentiation
Example: A new
product.
Bundling and
Tie-sales
Example:
Combo
Products
Consumers can’t be
identified; must force
them to reveal their
true selves. (Self-
select).
Consumers can be
identified by some
observable
characteristic.
Consumers want
products “close” to
their preferences in
space, time or
characteristics
Consumers
willing to pay
more in the
aggregate.
Rule: leave some
consumer surplus “on
the table” to induce
high-demand groups
to buy large quantities.
Rule: charge
consumers with
low elasticity of
demand a high
price; equate MR
for all groups.
Rule: add a new
product (n + 1) if:
n(n + 1) < tN/2F
N = size of market
F = setup $
t = preference for a
new product
Rule: must
examine profits
on a case by
case basis.
41
Industrial OrganizationFROM THE REAL ECONOMY
2nd Degree Price
Discrimination
3rd Degree Price
Discrimination
Horizontal
Product
differentiation
Bundling
Starbucks Latte:
Tall: $2.85 (24¢)
Venti: $3.95 (20¢)
Oreos (Walmart)
15oz: $2.98 (20¢)
20oz: $3.50 (18¢)
Theaters:
Adult: $10.00
Senior: $7.00
Matinee: $6.00
Insurance:
Student Discount
Good Driver
Fit
Civic
Accord
Pilot
Odyssey
McDonalds
Burgers & Fries
Big Mac (‘68)
Egg McMf (’71)
Drive Thru (‘75)
Microsoft“Office”
Word, Excel and
Power Point.
McDonald’s Extra
Value Meal.
Computer Bundle:
Laptop, Flash Drive,
Case, Printer
(Costco)
42
Industrial Organization• Question: in the real world, how do firms identify
different groups demand functions, individuals’ desire for
different products or consumers’ willingness to pay?
• Entrepreneurship = alertness to market opportunities.
• Competition is an ongoing process of discovery.
“Entrepreneur
means acting man
in regards to
changes occurring
in the data of the
market.” Ludwig
von Mises
“The entrepreneur
brings into mutual
adjustment those
discordant elements
which resulted from
prior market
ignorance.” Israel
Kirzner
“I wish to
consider
competition . . .
as a procedure for
discovering
facts.” Freidrich
Hayek
43
Industrial Organization
OLIGOPOLIES AND
GAME THEORY
44
Industrial Organization
• We now turn to a common type of market, where firms
interact with a few competitors – oligopoly market.
• Each firm has to consider its rival’s actions with
regards to prices, outputs, advertising, etc.
• This kind of strategic interaction is analyzed using
game theory. To understand games, we
– assume “players” are rational
– distinguish between cooperative and non-
cooperative games
– distinguish between simultaneous versus sequential
games
45
Industrial Organization
• Need a concept of equilibrium
– Players (firms) choose a strategy.
– The strategy combination determines
outcome.
– The outcome determines pay-offs (profits?).
• Equilibrium first formalized by Nash: No firm
wants to change its current strategy given
that no other firm changes its current
strategy.
46
Industrial Organization
• There are three dominant oligopoly models
– Cournot
– Bertrand
– Stackelberg
• They are distinguished by:
– The decision variable that firms choose
– The timing of the underlying game
47
Industrial Organization• The Cournot model begins with a duopoly.
• Two firms making an identical product
• Demand for this product is:
• P = A - BQ = A - B(q1 + q2)where q1 is output of firm 1 and q2 is output of firm 2
• Marginal cost for each firm is constant at c per unit
• To get the demand curve for one of the firms we treat
the output of the other firm as constant, so for firm 2,
demand is P = (A - Bq1) - Bq2
• You then find q2 by finding the second firm’s marginal
revenue function and setting it to c.
48
Industrial Organization• For our problem, P = 14 – ½ q1 – ½ q2
• Firm 2’s demand function is: P = (14 – ½ q1) – ½ q2
• TR = Pq2 = (14 – ½ q1 )q2 – ½ q22
• MR = (TR)’ = (14 – ½ q1) – q2 = MC = 4
• ∴ q2 = 10 – ½ q1 This is Firm 2’s Reaction Function.
For Firm 1 it’s q1 = 10 – ½ q2
• Their intersection is the Nash Equilibrium
• q1 = 10 – ½ q2 = 10 – ½ (10 – ½ q1 ) = 5 + ¼ q1
• ∴ q1 = 20/3 By symmetry, q2 = 20/3. Qtotal = 40/3
• Price = 14 – ½ (40/3) = 14 – 6.67 = 7.33
• Qperfectcompetition = 20 > 40/3 (13.33) > Qmonopoly = 10
KEEP49
Industrial Organization
q*1 = (A - c)/2B - Q-1/2
How do we solve this
for q*1?The firms are identical.
So in equilibrium they
will have identical
outputs
Q*-1 = (N - 1)q*1
q*1 = (A - c)/2B - (N - 1)q*1/2
(1 + (N - 1)/2)q*1 = (A - c)/2B
q*1(N + 1)/2 = (A - c)/2B
q*1 = (A - c)/(N + 1)B
Q* = N(A - c)/(N + 1)B
P* = A - BQ* = (A + Nc)/(N + 1)
As the number of
firms increases price
tends to marginal cost
50
Industrial Organization
• In “Cournot” prices are set by market mechanisms.
• An alternative approach is to assume that firms compete in prices. This is the approach taken by Bertrand. This leads to dramatically different results.
• Take a simple example:
– Two firms producing an identical product . . .
– choose the prices at which they sell their products.
– Each firm has constant marginal cost of c
– Demand is P = A – BQ
– In terms of Q = a – bP with a = A/B and b= 1/B
51
Industrial OrganizationThese best response functions look like this:
p2
p1c
c
R1
R2
The best response
function for
firm 1The best response
function for
firm 2
The equilibrium
is with both
firms pricing at
c
The Bertrand
equilibrium has
both firms charging
marginal cost
(a + c)/2b
(a + c)/2b
52
Industrial Organization
• The Bertrand model makes clear that competing on
price is different from competition in quantities.
• Under standard Bertrand Competition, P = MC
• ∴ P = 4 and Q = 20, equal to Perfect Competition.
COURNOT: Pmonopoly > Pcournot > Pcompetitive
BERTRAND: Pmonopoly > Pbertrand = Pcompetitive
• Since many firms compete on price rather than
quantity, this is a challenge to the Cournot
approach.
53
Industrial Organization
• Bertrand also says competing on price doesn’t
result in P = MC if certain conditions are present
such as differentiated products or capacity
constraints.
• RE: capacity constraints, at P = MC there will be
more customers than both firms can satisfy. If Firm
1 sets its price at cost, Firm 2 will raise its price
because it can get all the customers it can handle at
a higher price. Therefore, P = MC is not a Nash
Equilibrium.
54
Industrial Organization• In the Problem, each firm’s capacity
constraint = 5 customers.
• If the firms set the highest price where they
each can be assured of 5 customers this would
be a Nash Equilibrium.
– An even higher price may not assure them of all
the customers they can handle;
– A lower price “leaves money on the table.”
• P = 14 – ½ Q. Using the capacity constraints,
• Qtotal = 5 + 5 = 10
• Price = 14 – ½*10 = 14 – 5 = 9.
55
Industrial Organization
• Both the Cournot and Bertrand models are
examples of simultaneous games.
• We assume both firms move simultaneously
and the market interaction is “once-and-for-all.”
• In a wide variety of markets firms compete sequentially.
• One firm makes a move. For example it may
– introduce a new product or ad campaign –and
• The second firms sees this move and responds.
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Industrial Organization
• Sequential games are also called dynamic games. These games –
– may create a first-mover advantage; or
– create a second-mover advantage; or
– may allow an early mover to preempt the market.
• Therefore, sequential move games can generate very different equilibria from simultaneous move games.
57
Industrial Organization
• The most common model of a sequential game is the Stackelberg Model.
• The standard Stackelberg duopoly model is similar to the Cournot model in that it is output (quantity) based.
• However, firms choose quantities sequentially rather than simultaneously.
58
Industrial Organization
• Choosing output sequentially means
– the leader sets its output first, and visibly, and
– the follower then sets its output.
• The firm moving first has a leadership advantage.
• It can anticipate the follower’s actions and can
therefore manipulate the follower.
• However, for this to work the leader must be able to commit to its choice of output.
59
Industrial Organization
• In the problem, we assume there are two firms with
identical products.
• Marginal cost for each firm = 4.
• Firm 1 is the market leader and chooses q1
• Firms 1 also knows how Firm 2 will react because
Firm 2 will maximize profits by equating its marginal
revenue [MR = (A – Bq1) – 2Bq2] to MC.
• This is the same reaction function we calculated in the
Cournot problem, q2 = 10 – ½ q1
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Industrial Organization
• Firm 1 knows Firm 2’s reaction function.
• Since Firm 1 moves first and can set quantity at
whatever level it wishes, Firm 1 puts Firm 2’s reaction
function into its Demand Curve, then calculates its
Marginal Revenue, sets it to MC and determines it’s
profit-maximizing Quantity.
• Firm 1’s Demand Function: P = 14 – ½ q1 – ½ q2
• Plugging in #2’s reaction function:
• P = 14 – ½ q1 – ½ (10 – ½ q1) = 9 – ¼ q1
• Therefore TR = 9q1 – ¼ q12 MR = 9 – ½ q1
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Industrial Organization
• If MR = 9 – ½ q1 = MC = 4 ∴q1 = 10.
• This is the same quantity produced by the profit-
maximizing monopolist.
• Plugging q1 = 10 into Firm 2’s reaction function, you
get q2 = 5. Qtotal = 15. Price = 6.50
• Under Stackelberg, when two firms and compete on
quantity, there is a definite 1st mover advantage.
• The overall market is better off under Stackelberg
then under Cournot because Qtotal is larger (15 >
13.33) and price is lower (6.5 < 7.33).
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Industrial Organization
• It is crucial that the leader can commit to its output
choice.
• Without such commitment Firm 2 would ignore
any stated intent by Firm 1 at the monopolist profit
maximizing point (here 10 units) and the only
equilibrium would be the Cournot equilibrium.
• So how does Firm 1 commit?
(1) Prior reputation
(2) Investment in additional capacity
(3) Place the stated output on the market
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Industrial Organization
• Clearly, in this example, being the first mover
is advantageous.
• But is moving first always better than
following?
• This example was based on “output.”
• What happens if we are looking at price
competition?
64
Industrial Organization
• With price competition matters are different:
the first move does NOT have an advantage.
• Suppose, again, products are identical but the
first-mover commits to a price greater than
marginal cost.
• The second-mover will undercut this price and
take the market.
• Therefore the first-mover will set price at P =
MC. This is identical to simultaneous game
played under Bertrand competition.
Industrial Organization
ANTI-COMPETITVE
BEHAVIOR:
Limit pricing and
quantities
Industrial Organization
• A firm that can restrict output to raise market
price has market power.
• Why can’t rivals compete away those
positions?
• Why aren’t new rivals lured in by high
profits?
• Answer: firms with monopoly power may
– eliminate existing rivals
– prevent entry of new firms
Industrial Organization
• Predatory actions come in two broad forms:
– Limit pricing: prices so low that entry is
deterred.
– Predatory pricing: prices so low that existing
firms are driven out.
• Outcome of either action is the same: the
monopolist retains control of the market.
• Legal action focuses on predatory pricing
because there exists an identifiable victim: a firm
that was in the market but has left.
Industrial Organization
• We are going to consider a model of limit pricing using what was developed previously, specifically the StackelbergModel.
• Recall that the Stackelberg leader chooses output first. We also assume that:
– The entrant believes that the leader is committed to this output choice.
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Industrial Organization
ACe
MC
e
$/unit
Quantity
D(P) = Market Demand
Q1
R1
Assume instead that
the incumbent
commits to output Qd
The entrant’s residual
demand is
Re = D(P) - Qd
Qd
Re
MRe
qe
Pe
Then the entrant’s
marginal revenue is MRe
The entrant equates
marginal revenue
with marginal cost
At price Pe entry is
unprofitable
Qd
Pd
By committing to output
Qd the incumbent deters
entry. Market price Pd
is the limit price
10
Industrial Organization• In our problem, the overall demand curve is
P = 14 – Qi – qe
• The entrant’s residual demand function is P = (14 –Qi) – qe MR = (14 – Qi) – 2 qe Equate it to MC = 4. Therefore the entrant’s reaction function is
qe = 5 – Qi/2
• For a limit price to be effective it must eliminate the entrant’s profits at its profit maximizing level.
• π = TR – TC = Pqe – 9 – 4qe Set it equal to 0 By setting the profit function to 0, we can determine the quantity the incumbent must produce to forestall entry and to establish the limit price.
10
Industrial Organization• π = TR – TC = Pqe – 9 – 4qe Set it equal to 0
• (P – 4)qe = 9 = (14 – Qi – qe – 4) = 9/qe
• = (14 – Qi – 5 + Qi /2 – 4) = 9/(5 – Qi/2)
• = (5 – Qi/2) = 9/(5 – Qi/2)
• = (5 – Qi/2)2 = 9 take the square root of both sides
• = 5 – Qi/2 = 3. Qi = 4, plugging this back into the reaction function qe = 5 – Qi/2, qe = 3.
• Price = 14 – Qi – qe = 14 – 4 – 3 = 7. That’s the limit price.
• At P = 7, TR for the entrant = 7*3 = 21. TC = 9 + 4* qe = 21. Profit is 0. Entry is deterred.
10
Industrial Organization
• There are issues with limit pricing and predation:
– How does the incumbent make it credible?
– Are there more profitable alternatives to limit pricing? (Merging?)
– Are there circumstances that encourage limit pricing? (Asymmetrical information? Pretending to be a low cost competitor?)
– Is there any empirical evidence of predatory behavior? (Perhaps)
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Industrial Organization
• This brings us to the end of our course.
• The primary takeaway is this: in the
“hurly-burly” of the marketplace, when
firms appear to be behaving in peculiar and
somewhat inexplicable ways, there is
often a rational, logically-compelling
explanation for that behavior.
74
Industrial Organization
• This is empowering, because nothing
strengthens one’s faith in economic activity
– and therefore in human existence – than
the belief in rationality.
• There does remain one challenge, which is
what economics is all about . . .
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Industrial Organization
•To be able to
RATIONALLY
figure it all out.
76
Industrial Organization
•Good luck on your
final paper . . .
•And thanks so much
for taking ECON 115!
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