The Effect of Competition

2. The Effect of Competition • Monopoly • Oligopoly • Bertrand’s model • Quantity can be easily adjusted. • Cournot’s model • Quantities are chosen first, and can’t be easily altered; then prices are set.

3. Monopolist Market price Demand: p=5-q P* = 3 =4 c=1 Quantity q* = 2

4. 1 2 3 4 5 6 Bertrand model of competition Price LRAC # of firms 07/14/04 B189 - Simon Rodan 4

5. The Oil Super Majors Data are for FY2011

6. Expected Duopoly Profit Market price Demand: p=5-q P* = 3 2=2 2=2 c=1 Quantity q* = 2

7. Cournot’s Duopoly Prediction Market price 1 and 2=3.54 P* = 2.33 Demand: p=5-q =1.77 =1.77 c=1 Quantity Simulation q* = 2.66

8. Cournot’s Duopoly Prediction Market price 1,2 and 3=3 Demand: p=5-q P* = 2 =1 =1 =1 c=1 Quantity q* = 3

9. Potential price 1 2 3 4 5 6 # of firms Cournot model of competition (quantity) LRAC 07/14/04 B189 - Simon Rodan 9

10. Firm Size Industry Profile

11. Industries with few firms are ‘concentrated’ Industries with many firms are ‘fragmented’ However, most industries have both large and small firms Industry concentration

12. Some more examples

13. Assessing concentration • Four Firm Concentration Ratio (CR4) • Add up the sales for all firms in the industry • Add up the sales of the four largest firms in the industry • Divide the second number by the first • OR • Add the market shares of the four largest firms (this is exactly equivalent to the first method)