Lecoh Topic1 Vm081 Lh

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Prices and Markets: lecture overheads vm081 1

PRICES AND MARKETS

Topic 1 : Markets

Economics is concerned with the efficient use of limitedproductive resources for the purposes of attaining themaximum satisfaction of our material wants.

Jackson, page 3

Macroeconomics deals with this problem at the aggregatelevel. Microeconomics (this course) deals with the problemat the level of individual units - such as consumers, firms,owners of resources.

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Why is the study of economics important?

to provide a basic understanding of the economic aspectsof societys current problems and issues and theeconomic consequences of policies

to place business managers in a better position toformulate strategies

to provide individuals with knowledge to assist in arange of personal/financial decisions

Jackson pages 4-5

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Positive Economics:

deals with facts and theories

Normative Economics:

involves value judgements and relates to policy

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MARKETS: an overview

Definition of a market using the concepts of demand andsupply substitutability.

Classification of market structure using the concepts of

concentration, product differentiation and barriers to entry.

Market conduct and its relationship to market structure.

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Users of the Market Concept

firms: to identify their competition competition regulators: eg. Australian Competition and Consumer

Commission, Competition Commission of Singapore,

Competition Policy Advisory Group (Hong Kong), Federal TradeCommission (USA),

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The Australian Competition and Consumer Commission(ACCC) and Mergers

The ACCC needs to assess whether a merger would have the effect, or belikely to have the effect, of substantially lessening competition....

In analysing the likely effect of a merger or acquisition, the Commissionhasa five stage evaluation processThe first step is to define the relevant market, in its product, functional,geographic and time dimensions..

Market definition is an integral part of competition analysis. It identifies thesellers and buyers who effectively constrain the price and output decisionsof the merged firm. It identifies the relevant area of competition.

ACCC Merger Guidelines, Sections 5.1, 5.25, 5.26 and 5.35

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Market Definition

A market includes all sellers who are in, or potentially in,competition (that is, selling closely substitutable products)selling to a common group of buyers.

Two main elements of this definition:

demand substitutability

supply substitutability

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Elements of Demand Substitutability

The Product LevelThe firms must be selling products which are closelysubstitutable in consumers eyes - that is, products with a

high cross elasticity of demand.

The Geographic DimensionThe firms must be selling to a common group of buyers -international, national, state, local?

The Functional LevelIs the market at the manufacturing, wholesale or retaillevel?

Elements of Supply Substitutability

current suppliersFirms currently supplying products that are considered tobe close substitutes for each other, and so part of thesame market.

potential suppliersFirms that have the ability to quickly and easily moveinto supplying these products, if given the incentive.

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Market Structure

the competitive environment in the market

Characteristics of Market Structure

ConcentrationThe number and size distribution of firms in a market(measured by market shares or concentration ratio)

Product DifferentiationPhysical (real) or subjective (perceived or imagined)differences in consumers minds between rival firmsproducts

Barriers to EntryThe extent to which it is difficult for new firms to enter amarket and compete with existing firms(eg. patent rights, economies of scale)

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Concentration:Size Distribution of Firms

0

5

10

15

20

25

30

35

40

1 2 3 4 5 6 7 8

Firms

%S

hareofMarketSales

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Barriers to Entry:Economies of Scale

QE - CE: output and unit cost for existing firms in themarket

QN - CN: output and unit cost for new firm trying toenter the market

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Unit Cost$

CN

CE

O QN QE Output

Unit

Cost


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Market Structure

Selling side of Market

1. Pure/Perfect Competition Large number of sellers Homogeneous product Pure Low barriers to entry Perfect Perfect knowledge Perfect mobility of factors of production

2. Monopolistic Competition

Large number of sellers Differentiated products Low barriers to entry

3. Oligopoly

Few sellers High barriers to entry Differentiated or homogeneous products

4. Monopoly

Single seller High barriers to entry

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Market Conduct

firms policies in regard to their operation in the market

For example: price setting

product range

co-operation with rivals

advertisingresearch, innovation

legal tactics

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Market Structure

Basic Conditions

Market Conduct

Market Performance

Documents

Lecoh Topic1 Vm081 Lh