Competitive Model

7/24/2019 Competitive Model

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COMPETITIVE MODELErman



TIMING OF THE SUPPLY RESPONSE

• In the analysis o !om"etiti#e "ri!in$% thetime "erio& 'n&er !onsi&eration isim"ortant –

#ery short r'n• no s'""ly res"onse ()'antity s'""lie& is *+e&,

– short r'n• e+istin$ *rms !an alter their )'antity s'""lie&% -'t no

ne. *rms !an enter the in&'stry

– lon$ r'n• ne. *rms may enter an in&'stry



PRICING IN THE VERY SHORT RUN

• In the #ery short r'n (or mar/et "erio&,%there is no s'""ly res"onse to !han$in$mar/et !on&itions –

"ri!e a!ts only as a &e#i!e to ration &eman&• "ri!e .ill a&0'st to !lear the mar/et

– the s'""ly !'r#e is a #erti!al line



PRICING IN THE VERY SHORT RUN

Quantity

Price

S

D

D’

Q*

P1

P2

1hen )'antity is *+e& in the#ery short r'n% "ri!e .ill riserom P2 to P3 .hen the &eman&

rises rom D to D4



SHORT5RUN PRICEDETERMIN6TION

• The n'm-er o *rms in an in&'stry is *+e&

• These *rms are a-le to a&0'st the )'antitythey are "ro&'!in$ –

they !an &o this -y alterin$ the le#els o the#aria-le in"'ts they em"loy



PERFECT COMPETITION

• 6 "ere!tly !om"etiti#e in&'stry is onethat o-eys the ollo.in$ ass'm"tions7 – there are a lar$e n'm-er o *rms% ea!h

"ro&'!in$ the same homo$eneo's "ro&'!t

– ea!h *rm attem"ts to ma+imi8e "ro*t

– ea!h *rm is a "ri!e ta/er• its a!tions ha#e no e9e!t on the mar/et "ri!e

–

inormation is "ere!t – transa!tions are !ostless



SHORT5RUN M6R:ET SUPPLY

• The )'antity o o't"'t s'""lie& to theentire mar/et in the short r'n is the s'm othe )'antities s'""lie& -y ea!h *rm –

the amo'nt s'""lie& -y ea!h *rm &e"en&s on"ri!e

• The short5r'n mar/et s'""ly !'r#e .ill -e'".ar&5slo"in$ -e!a'se ea!h *rm4s short5

r'n s'""ly !'r#e has a "ositi#e slo"e



SHORT5RUN M6R:ET SUPPLYCURVE

X XX

PPPsA

sB

XA* XB*

P*

To &eri#e the mar/et s'""ly !'r#e% .e s'm the)'antities s'""lie& at e#ery "ri!e

Firm 64s

s'""ly !'r#eFirm ;4ss'""ly !'r#e

Mar/et s'""ly!'r#e

X*

S

<6= > <;= ? <=



E@UILI;RIUM PRICEDETERMIN6TION

• 6n e)'ili-ri'm "ri!e is one at .hi!h)'antity &eman&e& is e)'al to )'antitys'""lie& –

neither s'""liers nor &eman&ers ha#e anin!enti#e to alter their e!onomi! &e!isions

• 6n e)'ili-ri'm "ri!e (P=, sol#es thee)'ation7

),*,(),'*,( w v P QI P P Q S D =




• The e)'ili-ri'm "ri!e &e"en&s on manye+o$eno's a!tors – !han$es in any o these a!tors .ill li/ely res'lt

in a ne. e)'ili-ri'm "ri!e




Quantity

Price

S

D

Q1

P1

The intera!tion -et.eenmar/et &eman& an& mar/et

s'""ly &etermines thee)'ili-ri'm "ri!e




Quantity

Price

S

D

Q1

P1

Q2

P2E)'ili-ri'm "ri!e an&e)'ili-ri'm )'antity .ill

-oth rise

I many -'yers e+"erien!ean in!rease in their &eman&s%the mar/et &eman& !'r#e

.ill shit to the ri$ht

D’




Quantity

Price

SMC

q1

P1

q2

P2

This is the short5r'ns'""ly res"onse to an

in!rease in mar/et "ri!e

I the mar/et rises% *rms .illin!rease their le#el o o't"'t

SATC



SHIFTS IN SUPPLY 6ND DEM6NDCURVES

• Deman& !'r#es shit -e!a'se – in!omes !han$e

– "ri!es o s'-stit'tes or !om"lements !han$e

– "reeren!es !han$e

• S'""ly !'r#es shit -e!a'se – in"'t "ri!es !han$e

– te!hnolo$y !han$es – n'm-er o "ro&'!ers !han$e



SHIFTS IN SUPPLY 6ND DEM6NDCURVES

• 1hen either a s'""ly !'r#e or a &eman&!'r#e shit% e)'ili-ri'm "ri!e an& )'antity.ill !han$e

•

The relati#e ma$nit'&es o these !han$es&e"en&s on the sha"es o the s'""ly an&&eman& !'r#es



SHIFTS IN SUPPLY

Quantity Quantity

PricePriceS

S’S

S’

DD

P

P

Q

P’

Q’

P’

QQ’

Elastic Demand Inelastic Demand

Small increase in rice!lar"e dr# in quantity

$ar"e increase in rice!small dr# in quantity



SHIFTS IN DEM6ND

Quantity Quantity

PricePrice

S

S

D D

P P

Q

P’

Q’

P’

Q Q’

Elastic Suly Inelastic Suly

Small increase in rice!lar"e rise in quantity

$ar"e increase in rice!small rise in quantity

D’ D’



LONG5RUN 6N6LYSIS

• In the lon$ r'n% a *rm may a&a"t all o itsin"'ts to *t mar/et !on&itions – "ro*t5ma+imi8ation or a "ri!e5ta/in$ *rm

im"lies that P is e)'al to lon$5r'n MC

• Firms !an also enter an& e+it an in&'stry inthe lon$ r'n – "ere!t !om"etition ass'mes that there are no

s"e!ial !osts o enterin$ or e+itin$ an in&'stry



LONG5RUN 6N6LYSIS

• Ne. *rms .ill -e l're& into any mar/et or.hi!h e!onomi! "ro*ts are $reater than8ero –

entry o *rms .ill !a'se the short5r'n mar/ets'""ly !'r#e to shit o't.ar&

– mar/et "ri!e an& "ro*ts .ill all

– the "ro!ess .ill !ontin'e 'ntil e!onomi! "ro*ts

are 8ero



LONG5RUN 6N6LYSIS

• E+istin$ *rms .ill lea#e any in&'stry or.hi!h e!onomi! "ro*ts are ne$ati#e – e+it o *rms .ill !a'se the short5r'n mar/et

s'""ly !'r#e to shit in.ar&

– mar/et "ri!e .ill rise an& losses .ill all

– the "ro!ess .ill !ontin'e 'ntil e!onomi! "ro*tsare 8ero



LONG5RUN COMPETITIVEE@UILI;RIUM

• 6 "ere!tly !om"etiti#e in&'stry is in lon$5r'n e)'ili-ri'm i there are no in!enti#esor "ro*t5ma+imi8in$ *rms to enter or to

lea#e the in&'stry – this .ill o!!'r .hen the n'm-er o *rms is

s'!h that P = MC = AC an& ea!h *rm o"eratesat minim'm AC



LONG5RUN COMPETITIVEE@UILI;RIUM

• 1e .ill ass'me that all *rms in an in&'stryha#e i&enti!al !ost !'r#es – no *rm !ontrols any s"e!ial reso'r!es or

te!hnolo$y

• The e)'ili-ri'm lon$5r'n "osition re)'iresthat ea!h *rm earn 8ero e!onomi! "ro*t



LONG5RUN E@UILI;RIUM7CONST6NT5COST C6SE

• 6ss'me that the entry o ne. *rms in anin&'stry has no e9e!t on the !ost o in"'ts – no matter ho. many *rms enter or lea#e an

in&'stry% a *rm4s !ost !'r#es .ill remain'n!han$e&

• This is reerre& to as a !onstant5!ostin&'stry




A Tyical %irm T#tal Mar&et

q1 Quantity Quantity

SMC

MC

AC

S

D

P1

Q1

This is a lon$5r'n e)'ili-ri'm or this in&'stry

P ? MC ? 6C






SMC

MC

AC

S

D

P1

Q1

S'""ose that mar/et &eman& rises to D4

D’

P2

Mar/et "ri!e rises to P3

Q2






SMC

MC

AC

S

D

P1

Q1

In the short r'n% ea!h *rm in!reases o't"'t to )3

D’

P2

E!onomi! "ro*t A B

Q2q

2






SMC

MC

AC

S

D

P1

Q1

In the lon$ r'n% ne. *rms .ill enter the in&'stry

D’

E!onomi! "ro*t .ill ret'rn to B

Q'

S’






SMC MC

AC

S

D

P1

Q1

The lon$5r'n s'""ly !'r#e .ill -e a hori8ontal line(in*nitely elasti!, at P2

D’

Q'

S’

$S



LONG5RUN E@UILI;RIUM7INCRE6SING5COST C6SE

• The entry o ne. *rms may !a'se thea#era$e !osts o all *rms to rise – "ri!es o s!ar!e in"'ts may rise

–

ne. *rms may im"ose e+ternal !osts one+istin$ *rms

– ne. *rms may in!rease the &eman& or ta+5*nan!e& ser#i!es




A Tyical %irm ()e#re entry+ T#tal Mar&et


SMC MC

AC

S

D

P1

Q1

""ose that .e are in lon$5r'n e)'ili-ri'm in this in&'stry

P ? MC ? 6C




A Tyical %irm ()e#re entry+ T#tal Mar&et


SMC MC

AC

S

D

P1

Q1

'""ose that mar/et &eman& rises to D4

D’

P2

Mar/et "ri!e rises to P3 an& *rms in!rease o't"'t to )3

Q2

q2




A Tyical %irm (ater entry+ T#tal Mar&et

q' Quantity Quantity

SMC’ MC’

AC’

S

D

P1

Q1

Positi#e "ro*ts attra!t ne. *rms an& s'""ly shits o't

D’

P'

Entry o *rms !a'ses !osts or ea!h *rm to rise

Q'

S’




q' Quantity Quantity

SMC’ MC’

AC’

S

D

P1

Q1

The lon$5r'n s'""ly !'r#e .ill -e '".ar&5slo"in$

D’

P'

Q'

S’

$S

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Competitive Model