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    Competitor Identification/ MKT Definition: - Prerequisite For Analyzing Competition

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    Aditi Jain
    This document discusses concepts related to analyzing competition including competitor identification, market definition, and market structure. It covers: - Identifying competitors by looking at substitutes and distinguishing between direct and indirect competitors. - Defining the market based on whether firms constrain each other's ability to raise prices collectively or if they would choose to raise prices by at least 5% acting together. - The Antitrust approach focuses on own-price elasticity and looks at factors like the Department of Justice. - Market structure refers to the number and size of firms and is measured by concentration ratios and the Herfindahl index.

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    Competitor Identification/ MKT Definition: - Prerequisite For Analyzing Competition

    Uploaded by

    Aditi Jain
    25 views22 pages
    This document discusses concepts related to analyzing competition including competitor identification, market definition, and market structure. It covers: - Identifying competitors by looking at substitutes and distinguishing between direct and indirect competitors. - Defining the market based on whether firms constrain each other's ability to raise prices collectively or if they would choose to raise prices by at least 5% acting together. - The Antitrust approach focuses on own-price elasticity and looks at factors like the Department of Justice. - Market structure refers to the number and size of firms and is measured by concentration ratios and the Herfindahl index.

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    MARK 7375-Lecture 2

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    © Attribution Non-Commercial (BY-NC)

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    This document discusses concepts related to analyzing competition including competitor identification, market definition, and market structure. It covers: - Identifying competitors by looking at substitutes and distinguishing between direct and indirect competitors. - Defining the market based on whether firms constrain each other's ability to raise prices collectively or if they would choose to raise prices by at least 5% acting together. - The Antitrust approach focuses on own-price elasticity and looks at factors like the Department of Justice. - Market structure refers to the number and size of firms and is measured by concentration ratios and the Herfindahl index.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    25 views22 pages

    Competitor Identification/ MKT Definition: - Prerequisite For Analyzing Competition

    Uploaded by

    Aditi Jain
    This document discusses concepts related to analyzing competition including competitor identification, market definition, and market structure. It covers: - Identifying competitors by looking at substitutes and distinguishing between direct and indirect competitors. - Defining the market based on whether firms constrain each other's ability to raise prices collectively or if they would choose to raise prices by at least 5% acting together. - The Antitrust approach focuses on own-price elasticity and looks at factors like the Department of Justice. - Market structure refers to the number and size of firms and is measured by concentration ratios and the Herfindahl index.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as PPT, PDF, TXT or read online from Scribd
    Download as ppt, pdf, or txt
    of 22

    Competitor Identification/ Mkt Definition

    Prerequisite for analyzing competition:


    - identifying your competitors - defining your market

    Competitor Identification
    Identifying competitors by identifying substitutes Substitutes are products whose crossprice elasticities of demand are positive There is a distinction between direct and indirect competitors Similar products in different geographic markets may not be substitutes

    Discussion question

    What do you think is the Antitrust approach to market definition?

    Market Definition
    Market definition describes the market in which a firm competes Two firms are in the same market if they constrain each others ability to raise price Suppose all firms collectively set prices to maximize combined profits. Would they choose to raise prices by a least 5%?

    Market definition
    If the own-price elasticity of a group of firms collectively is small, then this group of firms constitutes a well-defined market

    Antitrust agencies (Dept of Justice) looks at the above

    Market Structure and Competition


    Market structure refers to the number and distribution of firms in a market Common measures are N-firm concentration ratio and Herfindahl index The Herfindahl index of an industry depends on the nature of competition in the industry

    A typology of competition
    Perfect competition:
    - many sellers - homogenous products -well-informed consumers can costlessly shop around

    A typology of competition
    Monopoly: -no competition for output Monopolistic competition:
    -many sellers -each sells a differentiated product

    Oligopoly:
    -few sellers, so the actions of one firm materially affects the others

    Discussion question

    What is more important: the attractiveness of an industry, or the position of a firm in an industry?

    Industry attractiveness vs firm position


    Firm position is more important What explains variation in firm profitability?

    Source of variation
    Business-specific effects Industry Corporate parent Year

    % variation explained
    32 19 4 2

    The remaining unexplained percentage is random error

    A Tool for Assessing Industry Attractiveness: Porters Five Forces


    Threat of new entrants Bargaining power of suppliers Rivalry among existing industry firms Threat of substitute products Bargaining power of buyers

    Performing the 5-forces analysis


    Assess each force by asking Is it sufficiently strong to reduce/eliminate industry profits? Internal rivalry -begin by defining market
    -price competition drives down prices -non price competition drives up costs -industry prices do not fall by themselves, so you ask Who will reduce it and why?

    Forces that drive down prices


    Many sellers Stagnant or declining industry Firms have different costs Excess capacity Undifferentiated products Large/infrequent sales orders Strong exit barriers Prices/terms of sale unobservable Prices cannot be adjusted quickly

    Threat of new entrants


    Entry is pervasive. Consider industry with 100 firms in 2005 Between 2005-2010, 40 new firms will enter 30-40% turnover of firms, with 12-20% of volume Entrants/exiters are smaller than estb. firms Most entrants do not survive 10yrs Entry and exit vary by industry, and are highly correlated

    Barriers to entry
    Structural -control of essential resources -economies of scale or scope -marketing advantages of incumbency Strategic

    Strategic barriers to entry


    First analyze entry conditions and choose entry-deterring strategy Entry conditions can be -Blockaded -Accommodated entry -Deterred entry

    Entry deterring strategies


    Limit pricing -charge a low price before entry occurs

    Predatory pricing -charge a low price after entry occurs


    Capacity expansion

    Limit pricing
    Incumbent sets a low price Entrant infers that post-entry price would be low as well And so will not enter Is the potential entrants inference about postentry pricing rational?

    Limit pricing
    Uncertainty about incumbents post entry price might rescue limit pricing Uncertainty may be about -Incumbents objectives
    -Incumbents costs

    -Level of market demand Does limit pricing really occur?

    Predatory pricing
    Predatory firm sets a low price to drive (existing) competitors out of the market It then recovers any losses from the low price by being a monopolist It appears that predatory pricing is irrational in any finiteperiod interaction Yet, firms still do it

    Role of uncertainty and incumbents reputation for toughness in understanding paradox

    Capacity expansion
    Do large or small firms have higher incentives to do it?

    Is it motivated just by efficiency, or by strategic desire to gain pricing-power through preemption?

    Supplier power/buyer power


    Upstream suppliers have power if -they are concentrated -customers have relationship specific investments -buyers do not buy large volumes -they can forward-integrate easily -they can price-discriminate Buyer power is just flip side of the above

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