Policy Space

Policy Space

ASPECTS OF EXTERNAL MARKET ENVIRONMENT Product Demandhow price sensitive, can demand be segmented, advertising, etc. Competitionhow many firms, product heterogeneity, etc. Entryhow easy to enter, can entry be influenced by incumbents, can new markets be created? Strategycan rivals behavior be influenced, is it worth trying to? PERFECT COMPETITION

Most competitive market. Pricingno options. Price discrimination no options. Advertisingpointless. Product attributesoften fixed or standardized. Entryeasy and often rapid. Strategyno point, too many competitors. SO WHATS THERE TO DO? Output choice in SR: Firm Supply. Entry/exit in LR: LR Mkt. Supply.

These are the only strategic decisions to make, plus cut costs as much as you can. DYNAMICS OF PERFECT COMPETITION Entry occurs as long as economic profits are positive. Exit occurs as long as economic profits are negative. So, in long run equilibrium, economic profits are .. It is hard to beat zero economic profit in a sustainable way!! This means firm will have long run negative

economic profits unless it has comparative advantage: its costs are as low or lower than competitors. RELAX ASSUMPTIONS OF PERFECT COMPETITION: PRICING Pricing powermarket powercan extend from product heterogeneity (brands matter) or from having small numbers of competitors. Optimal choice of single price determined by elasticity of firm demand and marginal costs. Fixed costs arent

relevant! Price discrimination, charging different prices to different groups of customers, is an option. This can be done because demand elasticities differ or because costs differ (this technically isnt PD). RELAX ASSUMPTIONS OF PERFECT COMPETITION: STRATEGY This is feasible when you have a small number of firms sharing most of the market. Then your rivals actions can materially affect your finances. With puppy dog strategies, you are nice to encourage

passive behavior from your rival. With top dog strategies, you are aggressive to encourage passive behavior from your rival. Strategies can involve capacity decisions, pricing, output, advertising, and product characteristics. Some are legal and some arent (antitrust). RELAX ASSUMPTIONS OF PERFECT COMPETITION: ADVERTISING Not useful unless price exceeds marginal cost. When does this happen? Can have strategic effects (see previous

slide) or simply increase demand. It can deter entry. What did it do in optometry? Advertising is an input. Optimal input use requires It is also an investment! CREATING AND CAPTURING VALUE Some of these options create value and some only capture value (and may destroy value), and some can do either under different circumstances. However, when there is a lot of competition, it is

necessary to create value in order to capture value. Weve talked about this! If time, we will discuss a practical example where costs, production, product & labor market environment all shape business strategy, and discuss how the firm creates & captures value. TAXONOMY OF MARKET STRUCTURES Perfect competition. Describe characteristics and SR & LR outcomes. Monopolistic competition. Describe

characteristics, strategies, and SR & LR outcomes. Oligopoly. Describe characteristics, strategies, and SR & LR outcomes. Monopoly. Describe characteristics, strategies, and SR & LR outcomes. MEASURING COMPETITION Competitiveness in terms of number of firms can be measured using Herfindahl index or concentration ratio. You will use one or both of these in your dentist assignment. Competitiveness in terms of product heterogeneity

can be measured informally, by measuring substitutability across products, or formally, using demand elasticity or cross-elasticity. Entry barriers influence long run competitiveness. HEALTH INSURANCE MARKET

Competitiveness: # of firms. Competitiveness: product heterogeneity. Entry barriers? What kind of strategies? What kind of outcomes? HOSPITAL MARKETS

Competitiveness: # of firms. Competitiveness: product heterogeneity. Entry barriers? Exit barriers? What kind of strategies? What kind of outcomes? PHARMACEUTICAL MARKETS Two markets, in a way: brand name & generic. In each, think about:

Competitiveness: # of firms. Competitiveness: product heterogeneity. Entry barriers? Is this good? What kind of strategies? What kind of outcomes?

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