ECONOMICS 3200M

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ECONOMICS 3200M

• Winter 2006
• Professor Lazar

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ECONOMICS 3200MLecture 1January 6, 2006
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Course Requirements

• Three tests
• February 10 March 13 April
• 30 30 40
• Format 3 questions of 6 short essays
• Open book No cell phones, no wireless
  communication devices
• No excuses for missing first two tests see
  Course Outline

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Other Ground Rules

• No taping of lectures
• No cell phones in class
• Responsible for all chapters in text except
  chapter 18
• Listen before you write Lecture notes for each
  week will be posted by the end of the week

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Office Hours

• Fridays 11-1
• N205J, Schulich
• Phone [phone]
• Email flazar_at_yorku.ca

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Text

• D.W. Carlton and J.M. Perloff, Modern Industrial
  Organization, 4th Edition, Addison-Wesley, 2005

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Objectives

• Focus of the course Examine real-world
  competitive behaviour, and highlight the
  theoretical limitations of traditional
  microeconomic theories
• Study different market structures
• Consider how these structures develop and evolve
  over time
• Implications for competitive behaviour

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Disclosure Personal Bias

• Theoretical underpinnings of competition policy
  and competition law have not yet incorporated the
  work of Professor Michael Porter. Porters work,
  which builds upon that of Joseph Schumpeter, one
  of the great economists of the 20th century,
  emphasizes that companies strive to create a
  competitive advantage.
• Those that succeed outperform their competitors
  and are most likely to dominate their markets.
• The laggards eventually exit the industry.
• Competition policy tends to inhibit companies
  from freely developing competitive advantages
  because the successful companies are likely to be
  constrained in their ability to exploit their
  advantages.
• The long-run consequences of this are much more
  significant than the supposed loses in consumer
  welfare resulting from a reduction in the number
  of unsuccessful competitors.

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Disclosure Personal Bias

• According to Schumpeter, the competitive gales of
  creative destruction, the product of
  entrepreneurs, drive the capitalist system
  forward and produce the dramatic improvements in
  standards of living.
• If one were to compare the top 25 companies on
  the Fortune 500 list in 1970 and the list in
  2005, one would find that there has been a
  dramatic turnover in the list.
• And in 35 years time the list will be much
  different yet.
• All of these changes have taken place and will
  take place without the intervention of
  competition policy.

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Introduction

• Theory If, then
• If perfect competition, then PMC
• If monopoly, then, PgtAC
• If no entry barriers and zero exit costs, then
  markets contestable and PAC
• If economies of scale to Q0 and diseconomies of
  scale beyond Q0 , then AC curve is U-shaped
• If oligopoly, then ???
• If heterogenous product, then Monopolistic
  competition
• If economic profits, then entry occurs

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Introduction

• Problem Many paths to the if, thus many paths
  for then
• Example Monopoly
• How was monopoly created?
• Government, natural monopoly, successful
  strategies, superior management, luck
• Entry barriers created as part of process?
• Depends on how monopoly created
• Strategies to sustain monopoly?
• Rent seeking public vs.private sector

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Introduction

• Problem Competition
• Passive/active?
• Rivalry the goal of competition is to kill
  your competitors
• Compare to concept of competition in perfect
  competition model
• Michael Porter Determinants of rivalry
• Concentration and balance (Herfindahl-Hirschman
  index, concentration ratios) facilitate
  collusive behaviour, deter entry, dominant firm
• Threat of entry, exit barriers
• Product differentiation brand identity,
  switching costs, reputation
• Informational complexity
• Intermittent overcapacity airlines, steel
• Bargaining power of buyers
• Industry growth

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Introduction

• Problem Competition
• Michael Porter Competitive strategy
• Establish profitable and sustainable position
  factoring in bargaining power of suppliers and
  buyers, threat of entry, threat of substitutes,
  intensity of rivalry
• Strategies for achieving competitive advantage
• Cost leadership
• Differentiation
• Niche
• Role of management and luck
• Gamblers ruin and industry concentration

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Introduction

• Problem Competition
• Sustainability of competitive advantage
• Barriers to imitation not insurmountable, thus
  firm must create moving target by investing to
  continually improve position
• Well executed offensive strategy best defense
  against attack by challenger
• Role remains for defensive strategy increase
  structural barriers to entry, increase
  probability of retaliation retaliate when entry
  attempted

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Introduction

• Problem Market definition
• Identification of buyers, sellers potential
  entrants, potential sources of supply
• Geographic scope
• Local, regional, national, international
• Trade barriers, information
• What constitutes a substitute product?
• Cross-price elasticities measurement, critical
  values
• MRgt0 elastic range of demand curve, thus high
  degree of substitutability with products that are
  not included in market

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Introduction

• Problem Market definition
• Entry barriers ease, speed of entry
• Entry by outsiders (who are they?) entry by
  insiders
• Height, perception of entry barriers
  reputation,economies of scale/scope, learning
  curves, access to distribution networks,
  switching costs, firm specific capital (patents,
  trade secrets, management skills, location)
• Strategic behaviour of incumbents entry
  accommodation or deterrence
• Time period for defining markets time required
  for adjustments in buyer/seller behaviour in
  response to certain size price change