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Competitive Intelligence

Competitive Intelligence. Week 2 Microeconomics. Why Do Firms Compete. The market is a pie (Demand) Firms want a piece of the pie (Market Share) In order to get a piece of the pie, firms have to provide value and be cost competitive . Last Week.

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Competitive Intelligence

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  1. Competitive Intelligence Week 2 Microeconomics

  2. Why Do Firms Compete • The market is a pie (Demand) • Firms want a piece of the pie (Market Share) • In order to get a piece of the pie, • firms have to provide value • and be cost competitive

  3. Last Week • Strategy = f (Business Conditions, Industry structure, Monopoly Power) • Business Condition = f (Country’s Infrastructure, Technology, Governments) • Infrastructures = f (Transportation, Communications, Finance, Institution) • General principles (i.e. economies of scale and vertical integration) • Localized applications

  4. This Week • Demand function (D) • Elasticity (εp) • Total (TR) & marginal revenue (MR) • Total (TC) and marginal cost (MC) • Market structure and pricing

  5. Y and X Y P = f(Q) or Q = f(P) Demand What are the dependent (Y) and independent (X) variables? Y = b – aX, where b is the intercept and a is the slope of the curve. X Demand Function

  6. Demand function Intercept Y = b – aX or P = b - aQ Price D1 P1 dP P2 dQ Slope = dP/dQ Quantity Q1 Q2 Demand Function

  7. Y and X Y P = f(Q) or Q = f(P) Demand P = b – aQ aQ= b – P Q = b/a –P/a X Demand Function

  8. Estimating the Demand Function P = f(Q) Demand Function

  9. Demand function P = f(Q) P = f(Q)  P = b – aQ Intercept (b) = 40 Slope (a)  dP/dQ Slope (a)  5/-10  -.5 P = 40 - .5Q Demand Function

  10. Demand function Q = f(P) Q = f(P)  Q = b – aP Intercept (b) = 80 Slope (a)  dQ/dP Slope (a)  -10/5  -2 Q = 80 – 2P Demand Function

  11. Switching fromP = f(Q) to Q = f (P) • P = 40 - .5Q • .5Q = 40 – P • Q = (40/.5) – (P/.5) • Q = 80 – 2P Demand Function

  12. Demand estimation with Excel • Scatter chart  Trend line  Linear  Formula • Insert function  Statistical a)  Intercept (Y’s and X’s) and b)  Slope (Y’s and X’s) • Analysis Tool Pack: • First time: Options  Add-ins  Analysis Tool pack • Subsequently: Data  Data Analysis  Regression Demand Function

  13. Demand Elasticity Demand Elasticity

  14. Demand Elasticity Wikipedia: Price elasticity of demand Price P2 P1 D1 D2 Q2 Q1 Quantity Demand Elasticity

  15. D1 or D2? Price D1 D2 Quantity Demand Elasticity

  16. Demand and revenue functions Q = 80 – 2P orP = 40 - .5Q Demand Elasticity

  17. Price Elasticity (Own) Q = 80 – 2P Demand Elasticity

  18. Price Elasticity Price PE>1 D1 Quantity

  19. Price Elasticity Price PE<1 D2 Quantity

  20. Price Elasticity Price PE > |1| Lower Prices D1 PE < |1| Increase Prices Quantity

  21. Optimal Revenue and Ep Lower prices

  22. Other Elasticities Q = f [(E(Price), E(Advertising), E(Substitution), E(Complementary)] Q = k - a1x Price + a2 x Adv - a3 x Subst + a4 x Compl. Q = K - a1 x Price

  23. Other elasticity in relation to price elasticity Q = f [(E(Price), E(Advertising), E(Substitution), E(Complementary)] Price Advertising, Complementary Price Substitution Quantity Q(2) Q(0) Q(1)

  24. Some Ep examples Wikipedia

  25. Revenue Function

  26. Revenue function Q = 80 – 2Por P = 40 - .5Q Revenue Function

  27. Total, Average and Marginal Revenue Functions Total Revenue P = b – aQ TR = PQ TR = (b-aQ)(Q) TR = bQ – aQ2 dTR/dQ = b – 2aQ TR Q Average and Marginal Revenue P D = AR Q Q2 Q1 MR

  28. Total, Average and Marginal Revenue Functions Total Revenue Revenue TR = (40 - .5Q) x Q TR = 40Q - .5Q2 Q Average Revenue Price P = 40 - .5Q Marginal Revenue MR = 40 – 1.0Q Q Revenue Function

  29. Cost Function Cost Function

  30. Fixed and Variable Costs Output (Q) 0 1 2 3 4 5 6 7 TVC ($) 0 10 16 21 28 40 60 91 TC ($) 12 22 28 33 40 52 72 103 TFC ($) 12 12 12 12 12 12 12 12 Cost Q Cost Function

  31. Average and Marginal Cost P QTC MC AC 0 12 1 22 2 28 3 33 4 40 5 52 6 72 7103 - 22 14 11 10 10.4 12 14.7 10 6 5 7 12 20 31 Q Cost Function

  32. Demand, Revenue, Cost and Pricing Decisions Revenues and Costs

  33. Average and Marginal Revenue and Cost Costs / Revenue AC $3 D=AR Output / Sales Q1 Revenues and Costs

  34. Average and Marginal Revenue and Cost Costs / Revenue MC $7 AC $3 D=AR Output / Sales MR Q2 Q1 Revenues and Costs

  35. Average and Marginal Revenue and Cost Costs / Revenue MC 1 2 3 4 5 AC • MR = MC - Monopoly • MR = 0 – Max Revenue • P= MC - Efficiency • P = AC – Max sales w π • P = AR > 0 Max Sales D=AR MR Output / Sales Revenues and Costs

  36. Total and Marginal Values and Firms’ Strategy Cost / Revenue TC TR Output/Sales Average and Marginal MC AC D = AR Output/Sales Q2 Q1 Revenues and Costs MR

  37. Total and Marginal Values and Firms’ Strategy Max. Revenue Max. Profit Cost / Revenue TC Max. Sales w.Profit Break Even Max. Sales TR Output/Sales Average and Marginal MC AC D = AR Output/Sales Q2 Q1 Revenues and Costs MR

  38. Market Structure Pure Monopoly Perfect Competition Monopolistic Competition Oligopoly Duopoly Monopoly Monopoly power

  39. Perfect Competition (1) Cost/Revenue Abnormal Profits? AC P = MR = AR Q1 Output/Sales

  40. Perfect Competition (2) Cost/Revenue AC P = MR = AR Q1 Output/Sales

  41. Monopolistic or Imperfect Competition • Not to be confused with monopoly!

  42. Monopolistic or Imperfect Competition (1) MC Cost/Revenue AC $1.00 Abnormal Profits? $0.60 D (AR) MR Q1 Q Output / Sales

  43. Monopolistic or Imperfect Competition (2) MC Cost/Revenue AC AR = AC AR1 D (AR) MR1 MR Q2 Q1 Output / Sales

  44. Monopolistic or Imperfect Competition (3) MC Cost/Revenue AC AR = AC AR1 MR1 Q2 Output / Sales

  45. Monopolistic or Imperfect Competition • Restaurants • Plumbers/electricians/local builders • Solicitors • Private schools • HR Plant hire firms • Insurance brokers • Health clubs • Hairdressers • Funeral directors • Real estate agents • Fashion • Hospitality and travel

  46. Oligopoly • Competition between a few • Large number of firms but the industry is dominated by a small number of very large producers • Concentration Ratio – the proportion of total market sales (share) held by the top 3,4,5, etc firms: • A 4-firm concentration ratio of 75% means the top 4 firms account for 75% of all the sales in the industry

  47. Oligopoly Billboard

  48. Oligopoly • Goods could be homogenous or highly differentiated • Price may be relatively stable across the industry – kinked demand curve? • Potential for collusion • Behaviour of firms affected by what they believe their rivals might do – interdependence of firms • Branding and brand loyalty may be a potent source of competitive advantage • Non-price competition may be prevalent • Game theory can be used to explain some behaviour • High barriers to entry

  49. KinkedDemand to the Firm Price Nobody follows, price increase fails Total Revenue B $5 Total Revenue A Total Revenue A Quantity 100

  50. KinkedDemand to the Firm Price $5 Total Revenue A Total Revenue A Total Revenue C Quantity 100

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