Industrial Organization, Sintesi del corso di Economia Industriale

Scarica Industrial Organization e più Sintesi del corso in PDF di Economia Industriale solo su Docsity! GAME THEORY Game Theory studies individual and group decision making in presence of strategic interdependence → each agent recognizes that his payoff depends not only on his own actions but also on the action of other individuals. Two forms of games: normal or extensive. Games can be solved: - in dominant strategies → player knows which is best thing to do independently on what the other player does - by elimination of dominated strategies → player knows which is worst thing to do independendently Sequential games can be solved with the method of backward induction, solving the last stage of the game and then going back to the previous stage. MONOPOLY Monopoly pricing implies allocative inefficiency: the price set by a monopolist is greater than marginal costs, in other words, the output set by a monopolist is lower than the optimal output. So competition is a way of achieving the efficiency lost in monopoly pricing. Natural monopoly is the extreme case when the cost structure is such that costs are minimized with one supplier only. Rate of return regolation: - is a mechanism whereby prices are set so as to allow the firm a fair rate of return on the capital it invests - problem: it gives the firm very few incentives for cost reduction - is a low power incentive mechanism → prices vary in the same measure as costs High power incentive mechanism: prices are set beforehand and don’t change at all, even if costs change. DUOPOLY Duopoly is an intermediate market structure between monopoly and perfect competition. According to Bertrand model, duopoly competition is sufficient to drive prices down to marginal cost level → so two firms are enough to achieve the perfect competition price level. According to Cournot model, duopoly output in greater than monopoly output and lower than perfect competition output. Likewise, duopoly price is lower than monopoly price and greater than price under perfect competition. PERFECT COMPETITION The model of perfect competition is based on five assumptions: many suppliers in the market (atomicity), product homogeneity, perfect information, equal access to resources and technologies, free entry in the market. In a perfectly competitive market: - marginal revenue is equal to price → MR = MC but MR = p so MC = p - each firm is price taker → if a firm charges a higher price it sells nothing, if it lowers its price it sells an infinite amount → as a consequence: demand faced by each firm is horizontal - firms don’t earn extra-profits in the long run because of the free entry π = 0 The equilibrium under competition is efficient. OLIGOPOLY COMPETITION Bertrand model: consist of two firms in a market that produce homogeneous product and simultaneously set their prices. It also assume that both firms have the same marginal cost and that the demand is linear. A single firm may eventually serve the whole market. Solution to the Bertrand paradox: product differentiation, dynamic competition, capacity constraints. Bertrand model → competition on price. Cournot model → competition on quantity. In both models, the equilibrium point is given by the intersection of the reaction curves. Cournot model: is the game wherein firms simultaneously choose output levels and then the demand function defines the price. If firms can rapidly adjust their output, then Bertrand better provides the strategic interdipendences. If capacity is a long run decision, the Cournot is the best model. Stackelberg model (Cournot oligopoly with leader and follower): - the leader produces more and get more profits than in the case of simultaneous choise, while the follower produces less and gets less profits (first mover advantage) - the total quantity is greater than in the standard Cournot game - market price is lower and welfare is higher In the case of a Bertrand competition with leader-follower, we have the second mover advantage. The follower observes the price of the leader and charges a lower price in order to serve the whole market. So the best that the leader can do is to charge a price equal to marginal cost. COLLUSION Collusion: - is considered as the most severe form of damage to competition - is an equilibrium characterized by high prices (higher than those of a one-period non-cooperative game) - three types: firms agree on prices, firms agree on splitting the market, firm agree on quantity output - two forms: explicit collusion, when firms coordinate ecplicitly, tacit collusion, when firms find a way to collude even if they act non-cooperatively Firms that compete with each other in several markets have a greater propensity to collude. Factors that facilitate collusion: STRUCTURAL FACTORS - number of companies and concentration: collusion is more likely in concentrated industries (small number of firms) than in fragmented ones, because it’s easier to find agreements - entry: the easier is to enter the market, the number of firms increases, and this make more difficult is to sustain collusion - cross ownership/shareholdig: increase the possibility of rivals knowing each other’s strategy - regularity and frequency of orders: companies receving regular orders are more likely to collude (if they receive an unexpected order they have a strong temptation to deviate) - buyers’ concentration: the greater is the degree of buyer concentration, the stronger is their power, the less sellers are able to collude - evolution of demand: the demand’s stability facilitates the observability of rivals’ strategies (stonger cartel) - symmetry: firms of similar size, with similar characteristics, may find more easily an angreement - multimarket contacts: may facilitate collusion if it reduces firms’ asymmetry or it increases the frequency of contacts between them MARKET TRANSPARENCY→ firms’ ability to detect deviations makes a stronger collusive agreement - demand fluctuations are observable - observability of rivals’ strategy: it increases cartels’ stability through the price transparency and the exchange of information PRODUCT DIFFERENTIATION Firms often sells products that differ in their quality or in other characteristics. Two types of differentiation: - vertical product differentiation, when products differ in quality - horizontal differentiation, when products differ in other dimensions → it depends on customers’ preferences → consumers’ preferences are not over the product per-se but over its different characteristics → net of price, each consumer buys the product which provides the highest utility Horizontal and vertical differentiation often coexist. Firms need to differentiate their products to soften competition and to increase their market power and their profits, indeed when firms produce homogeneous products their profits are equal to zero. Hotelling model: - is a model of horizontal differentiation - each firm is located at the extreme of a unit lenght segment - consumers are uniformly distributed along the segment - the market is fully covered (everyone buys) Product differentiation provides a solution to the Bertrand paradox.* The firm, that prices higher than the other one, still receives positive demand because the products sold by each firm are no longer identical in the eyes of consumers. * In the Bertrand model, the firm setting the lowes price takes all of the market demand. PRODUCT POSITIONING The choice of where to position a product is a strategic one, in physical terms (where to) and in terms of characteristcs of the product. Two effects of product positioning: - direct effect → for given prices, the closer one firm is located to the other one, the greater its demand is - strategic effect → firms choose their location and then compete in prices The direct effect induces firms to locate close to each other, whereas the strategic effect leads them to differentiate. The closer firms are together, the more intense price competition is, the more firms differentiate in product. If firms are located at the same point, products are homogeneous → Bertrand competition, zero profits. Product differentiation allows firms to gain market power → to have some control on the price of their product (in order to escape the Bertrand paradox). Search cost is the cost beared by the consumer, that needs to visit the shop to know the price for a certain product. Switching costs are the costs payed by the consumers to switch between suppliers. The greater the value of search or switching costs is, the greater the market power of the sellers tends to be. ADVERTISING Goods can be classified in two categories: - search good is one whose characteristics the consumer may know before purchase - experience good is one whose features can be discovered only with consumption Advertising can be distinguished in: - informative adv that describes product’s existence, its characteristics and selling terms - persuasive adv that is aimed at changing consumers’ preferences Search goods → Informative advertising. Experience goods → Persuasive advertising. Advertising costs may serve to signal products’ quality even if the campaign is not informative at all. Firms, which product high quality goods, can afford to spend much more in advertising because have more to gain form getting consumers to try their products then low-quality firms. Indeed, high quality firms will receive repeated purchases while low quality firms will not. Advertising may make markets more efficient. Without adv, high quality firms would have not the incentive to produce because their products are, ex-ante, identical to low-quality products. Advertising stimulates the market demand → for a given price, the higher is the amount of adv, the higher is the demand for the good. The elasticity of demand to advertising provides how sensitive is the demand to the amount spent in advertising. The more advertising-elastic is the demand, the more the demand increases. The Dorfman–Steiner formula implies that the advertising to sales ratio index is greater: - the greater is the adv-elasticity of demand - the lower is the price-elasticity of demand or the higher is the price-cost margin The lower is the number of firms, the lower is the firm’s price-elasticity of demand. The less competitive is the industry, the higher is the price-cost margin. The advertising to revenue ratio index measures the advertising intensity. The more competitive is the market, the higher is the elasticity, the smaller is the a/R ratio. If adv induces consumers to switch from one brand to another then competition may increase a/R ratio. As markets become more competitive: - each firm’s margin decreases (a/R ↓) - each firm captures a lower share of the demand-increasing effect of adv (a/R ↓) - each firm induces a shift of consumers demand towards its product (a/R ↑) Impacts of adv on price competition: - advertising increases product differentiation (by informing consumers about product characteristics) and consequently softens competition - advertising price information reduces consumers’ search costs and so increases price competition ENTRY & EXIT → strategic decisions Reasons why an entrant firm may enter the market: Reasons why an active firm may exit the market: - an entrant may be a new brand firm - an entrant could be an established firm that is diversifyng into a new product/market - a firm may close - a firm may interrup the production of a particular product - a firm may leave a particular geographic market Entry firms: - threaten incumbents reducing their market share and intensifying competition - compare expected benefits from entering the market with the cost of entering in that market Entry deterrence: Incumbent may deter entry of a potential rival trough: expansion of product capacity, costs’ reduction, product proliferation, long-term contracts. If entry costs are very: - low: entry accomodation → it’s optimal for the incumbent to allow entry! The entrant will enter, unless the incumbent’s output is very high - high: blockaded entry → the incumbent should ignore the threat of entry and choose monopoly output - intermediate → the incumbent should choose capacity large enough to induce the entrant not to enter Capacity preemption is a credible strategy only if capacity costs are high and sunk. Strategies to induce rivals exit → predatory pricing: - strategy of pricing below marginal cost to injure rival firms and induce their exit - predatory strategy is costly for the predator too - a firm should never get out of the market when it goes under a predatory attack. Therefore a rational firm should never initiate an attack There are three other explanatons why an incumbent might price aggressively: signaling that there is no room for other firms, reputation for toughness so in the future no more entry will take place, growing markets where long-term success requires a significant market share from early on. Non pricing predatory strategies: bundling or tying. Mergers and acquisitions: an alternative way of eliminating competition is simply to acquire the rival firm. Mergers imply an increase in prices, because the market become less competitive, and a reduction in costs due to various types of synergies. In relation to the synergies it generates, a merger may increase or decrease the profits of the outsider. For the outsider there are two effects: - positive → faces little competition - negative → faces a more aggressive firm because has saved a lot of money wuth synergies The smaller the size of the merging firms is, the more likely the total effect of a merger is positive. Mergers seem to happen in rushes or “waves” rather than gradually over time. Often a merger wave is ignited by an exogenous event as market liberalization, development of a new production technology, radical change in the market functioning. The wave may initiate also endogenously, following a merger. The greater the price increase, the less desiderable the merger is. Effects of a merger: - unilateral effect → is a function of the increase in concentration, it implies a greater increase in price - collusive effect → it is possible that the merger implies a switch to a more collusive situatio NETWORK A product exhibits network effects if each user’s payoff is increasing in the number of other users of that product or of products compatible with it. More users of the network → more communication opportunities → higher utility to join the network Firms have to reach the critical mass to ‘ignite’ the network and be successful. PLATFORM A multi-sided platform is an intermediary that facilitates interactions between groups of users, and this generate network effects (direct or indirect). Typology: - exchanges → help ‘buyers’ and ‘sellers’ search for feasible contracts and for the best prices (ex: booking.com) - software platform → allow application developers and users to interact (ex: Android) - matchmaker → help members of one group to find the right match with another group (ex: Meetic) - peer-to-peer marketplace (ex: Airbnb, Uber) - transaction system → provide payment solutions for buyers and sellers to settle transactions (ex: Paypal, Visa) - advertiser-supported content provider → provide contents to attract viewers and sell their attention to advertisers (ex: the Huffington Post) The chicken and egg problem: the platform must attract all sides on board → ex: video-game console need games to attract gamers, but also users to attract game developers → critical mass: the network ignites only if there is a sufficient number of users. Strategies to solve the problem: - start one-sided and then switch to two-sided model - restrict launch to a small market - borrow user base from another network (piggybacking) - design correctly the price structure More sides on board: PROS: - larger indirect network effects and larger scale - diversified sources of revenues CONS: - it may not be economically viable for a side to exist independently - complexity and conflicts of interests between sides - easier to start with fewer sides and partially vertical integrating into some of the missing sides A market is two-sided if the platform can affect the volume of transactions by charging more to one side of the market and reducing the price paid by the other side by an equal amount. Two types of prices: - usage fee → price paid for using the platform - membership fee → price paid for joining the platform Platform choose functionalities and features to reduce search costs, transaction costs, product development costs. Platform design decisions have an impact on: - the willingness of a costumer to join a platform - the way custumers ineract with each other once they’ve joined ONLINE ADVERTISING → is the most important revenue for a wide range of digital businesses (search enignes, social media, online news) → is essential for new ventures: free apps and services to attract users, and advertiser-support Advertising can be: - informative, reducing information’s costs for consumers - persuasive, altering consumers’ preferences - complementary to the adverised product, increasing its value Forms of online advertising: - search adv: → informative adv → mostly in text form → ads that appears along with the algorithmic results on search engine → advertisers can send targeted ads to groups of customers with specific interests - display adv: → informative, persuasive, complementary adv → banner ads, plain text ads, audio/video ads → initially a way to rise a brand recognition and awareness - classified adv: → informative adv → ads that appears on websites that do not provide other media content or algorithmic search Pricing models for advertising: - cost per mille (CPM), 1€ per thousand displays → traditional pricing model in media - cost per click (CPC), 0.5€ per click - cost per action (CPA) → different forms of action: registration, download, like, follow CPC and CPA are performance-based pricing. Problem with CPC → ad fraud: people clicking on ads excessively without the real intent of actually making any purchase. Online advertising ecosystem: 1. a publisher sells directly advertising space to advertisers (usually large publishers) → this type of adv can be targeted, the publisher uses customers’ information 2. a publisher can contract with intermediaries to sell its advertising space (usually small publishers) → intermediaries can be ad network or ad exchange that are automated platorm that auctions advertising inventory from multiple networks → ad networks collect information about customers’ behaviour to target ads 3. in real-time bidding (RTB) systems, ad exchange acts as intermediaries between supply and demand of advertising space → ad exchange connects on one side to supply side platforms (SSP) and on the other side to demand side platforms (DSP) → data management platforms (DMP) sell data about users to the other players For the effectiveness of the campaign, the recipients should be interested in the firm’s products. Informing potential consumers about the characteristics of the product is unlikely to lead to a purchase. Measure of effectiveness: - click through rate (CTR) is how often visitors click on ads - conversion rate is how often visitors take the conversion action How to increase advertising effectiveness? TARGETING! It reduces wasteful impressions and leads to higher advertising prices. Publishers make higher profits if wasteful impressions are costly. Different types of targeting: Linked to the publisher Not linked to the publisher - targeting based on demographics of audience (age, gender, income) - contextual targeting which consists on matching the ads with the context of the website - geo targeting which determines the consumer’s location to target ads - targeting based on consumer’s online behavior SEARCH ENGINE In the search engine market, the concentration is give by: - economies of scale - indirect network effects → larger is the number of users, more attractive is the search engine to advertisers Should the search engine show more ads? → benefit: higher advertising revenues (in quantity) → costs: less competition between advertisers (lower ad price) and the relevancy goes down (users will click less) → optimanl choice: trade-off between short-run profits and long-run goals Search bias: the platform manipulates (biases) search results strategically, in order to promote its own interests. Incentive for a search engine to bias search results: - lead consumers to more profitable results - increase the price of paid links by relaxing competition between advertisers - favour its own services in case of vertical integration If one publisher (say, Publisher 1) is a stronger competitor on the advertising market, search results biased against this publisher. Vertical integration can increase or decrease bias: - increase bias increasing revenues from own publisher - decreasing bias larger marginal revenues from increasing total demand → less biased results A search engine displays at the same time organic or algorithmic search results and paid or sponsored search results! Decreasing the relevancy or the quality of organic links, induce users to click more on paid links, but a lower quality of organics links means a lower quality of search engine and so lower activity.