-> Time: made of several period

• At the beginning of each period firms has to decide whether remain active or not.

=> Maximum profit levels: ;

A.Perfect Competition:

-> DEF: no market power for firms.

-> PERFECT COMPETITIVE MARKET: market where firms are price-taker

• They do not determine the price to which sell their products, price is settled by the market by the interaction of demand and supply.
• Firms do not realize any extra-profit (in the long-run). 

-> HP:

• Atomicity
• Product Homogeneity
• Perfect Information (every agent, firms and consumers) know the price charged by every firm: consumer can know the prices
• Firms have access to all production technologies (for simplicity one can assume the extreme form of technology symmetry, but it’s not necessary)

+ technology simmetry: the tecnologies are the same

• No entry and exit barriers (free entry and exit): firms may entry and exit easily

-> Firms are…

…PRICE-TAKER:

• 🔺PRICE: Since products are homogenous => if some companies rise the price => consumers will buy the products from competitors => D = 0 (perfect information)
• 🔻PRICE: then customers will try to buy all the products from that company but that wouldn’t be able to serve the entire market due to its limited production capacity (atomicity)

…DON’T VE EXTRA-PROFITS:

• Extra profit => attract firms from other industries to acquire the technology required (equal access to technology) and enter into the market (no barriers)

• TR: Total Revenue = p * q
• TC: Total Costs

-> In economics we consider the  opportunity costs in using resources. We ve to distinguish accounting perspective and economic one.

-> EXAMPLE: we can devote our time in E (entrerpreneuer) and M (Manager). Choosing E we gain 30k while M gain 50k and as profit both 20k. Being in PC with no extraprofit means that firms can’t gain anything more by employing niputs in other alternative. Then E = 30k, M = 30k while Profit = 0 both.

Equilibrium:

• : Marginal Costs
• : Average Costs

-> Max Productive Efficiency: The maximum quantity of the good produced at the lowest possible cost.

• A is more efficient from a productive pov if the quantity produced by A is the same of B.

-> Max Allocative Efficiency: The maximum quantity of the good sold at the lowest price

• Same input level, but the quantity produced & sold in A is higher than the one in B.

AC: Average Cost Curve

MC: Marginal Cost Curve, reppresent the supply curve for each company.

-> If they intersect, for construction MC has to intersect with AC in the minimum of it.

MES: Minimum Efficient Scale

MOS: Minimum Optimal Scale

-> In long run equilibrium Price is given by the intersection with MC and AC.

AD: Aggregate Demand

AS: Aggregate Supply: orizzontal sum of the individual supply and the individual supply firms are based on their MC curve.

-> In PC, MC is based on the curve of each single firm.

-> The Price corresponding to  MES is the price that allow each firm to produce one more unit!

Extra Profit Case:

-> Defined the MES = 9 & P=11, firms would increase it, to make extra profit, till P’=14.

-> The AS sould move too bcse other firms want to join extra profit.

=> In the long therm the equilibrium quill be restored

B.Potential Competition:

-> DEF: A contestable market is a market where firms from other markets/sectors can perform a hit and run competition with no costs of entry and exit.

-> HP:

• No requisites on the n° of firms in the market (no automicity)
• No entry and exit barriers (no sunk costs and non-redeployable investments).
• Perfect information for consumers (they are able to react immediately to price differentials between companies)
• Time requested for the incumbent to retaliate to the entry of the new firms (by lowering price) is superior to the time needed for the entrant to make all the investment necessary to operate in the focal market.

Contestable Market Theory:

-> DEF: Companies with few rivals behave in a competitive manner when the market they operate in has weak barriers to entry. The theory assumes that even in a monopoly or oligopoly, incumbents will act competitively when there is a lack of barriers, such as government regulation and high entry costs, doing everything they can to prevent new entrants from one day putting them out of business.

Results:

• Incumbent Firm(s) are forced to settle a price near to the average cost in order not to “turn on” the signal of extra-profits.
• As a matter of fact, every extra-profits will be captured and exploited by new entrants with a hit and run competition
• If the market is contestable, the n° of firm is a poor predictor of the market power, and even a market with only 1 firm may behave more similarly to perfect competition rather than monopoly

-> Perfect Competition and Contestable Markets are difficult to observe in the real world.

Only useful as benchmark models for comparing results (in terms of efficiency and social welfare) of more realistic market structures, where firms do have market power (oligopoly, monopoly).

C.Monopoly:

-> DEF: only one firm is in charge of serving the entire market and faces the aggregate demand curve.

-> CHAR:

• Price Setter (❌ price taker)
• Quantity is the decision variable
• Objective function: maximise profit

📌Price will be close the marginal cost the higher is the elasticity of demand.

-> HP:

• Atomicity: firms are small in the market
• Product Differentiation
• Perfect Information
• Firms have access to all production technologies
• No entry and exit barriers

-> ELASTICITY:

• 🔼 Elastic demand <=> 🔽 Price ≈ MC (like perfect competito
• 🔽 Elastic demand <=> 🔼 Price

-> It maximise  the DeadWeight Loss

-> DOMINANT FIRM: markets with one big firm and set of small ones

-> K: total production capacity of the set of small firms

-> DOUBLE MARGINALIZATION PROBLEM: 1 Monopoly better than 2 in terms of welfare for both firms and consumers

-> TAXONOMY:

Monopolistic Competition

Short Run

Long Run

Natural Monopoly:

-> DEF: an Industry in which multi-firm production is more costly than production by a single firm (Baumol, 1977, p. 810)

Q: demand;

TC: total cost

q:partitioning of Q

Scale Economies:

-> Are a sufficient but not necessary condition to prove subadditivity

At time

Growth:

-> In a natural monopoly not always increase with respect to quantity

Natural Monopoly:

-> To find the minimum efficient scale (MES) ..

More Than a Firm:

• : total cost of a firm that is producing x
• : total cost of an another firm producing q – x

=> To have a natural monopoly we need:

• : only one firm
• : situation more than a firm

Quantity

-> Is defined by consumers

-> We let produce everything to a company bcse it’s better to allocate all the production in one place.

-> PROBLEM: no opportunity to contrast the firm.

Reason to Eliminate it:

-> There are two cases in which the Natural Monopoly can’t be hold anymore:

• DEMAND-SIDE EXPLANATION: demand increase over time, touching AC curve in the north-est
• SUPPLY-SIDE EXPLANATION: MES shift toward the origin

Regulations:

ANTITRUST: collection of laws which regulates the conduct and organization of business corporations to promote fair competition for the benefit of consumers. 2 areas of great importance:

• Anticompetitive practices (e.g. cartels)
• Abuse of dominant position

Ex-Ante Regulation:

-> DEF: specific REGULATORY COMMISSIONs that right from the beginning set invasive and pervasive “rules of the game”.

-> Reasons reiforce the need to regulate network industries rather than only natural monopoly:

1. Inelastic Demand
2. Non-Redeployable Investments (sunk costs)

1.Inelastic Demand:

-> Necessity goods with no or imperfect substitutes have to be regulated to avoid DWL

• Like gas, electricity, telecom

2.Non-Redeployable Investments:

-> DEF: Difficult to assess how much residual value one can get from  the investment in case of exit from the market

• Investments are expensive and highly specific to a given context: this reduces the n° of credible acquirers so high bargaining power of potential acquirer(s).
• Difficult for the potential acquirer to infer the “true” value of the asset: information asymmetries

-> IMPLICATIONs:

• Under-investment, No infrastructure (unless state steps in)
• No (potential) competition
  • Exit-Barriers for Incumbents:
    • Fear to lose all the investments made in case of exit
    • Best to remain in the market even if profitability is low
  • Entry-Barriers for New Entrants:
    • Risk to be locked-in in case of entry
    • Consciousness of the resilience of incumbents

2.Price Discrimination:

-> DEF: when a firm that have some degree of market power price differently for different consumers.

-> CHAR:

• Firms with degree of market power can discriminate.
• Maximise the monopoly profit

-> HP:

• Monopoly
• No fixed and variable costs to bear
• Marginal costs are constant

-> LAW:

Linear curve: p=a−bq

-> AIM: to clear the two A and B areas, helping to recupe the extra profit.

• A: consumers with high willinness to pay for a good, but pay less
• B: DWL, consumers with higher willingness to pay than the Marginal Cost would let them pay.

Forms of Price discrimination:

1. First degree PD (perfect)
2. Second degree PD
3. Third degree PD

1.Perfect Price Discrimination:

-> DEF: charging a different price to each different consumer,

• Allow to the monopoly to recoup the consumer surplus and the deadweight loss
• => Extra profit 🔼: all trading possibilities are exploited in the market.
• People under the interception of MR with MC curve can purchase good reselled.

-> PROBLEM: is utopistic:

• Sellers has to know the precise willingness to pay for each single unit of the good and each customers.
• Difficult to avoid arbitrage (absence of resale)

-> SOLUTIONs:

• E-COMMERCE: allow people to buy with different prices
• AI, Machine Learning, Algorithms, Big Data allow to store information about past and future consume
• Many purchases are in isolation: we don’t know what are the prices for other customers.
• We buy with a click on internet.

2.Second Price Discrimination:

-> DEF: differentiation of group of customers based on the self selection based on the product.

• We are talking about which is the best product for the customer.
• Seller can not identify consumer type
• Different quantities (price paid by consumers depends on the quantity of the good consumed: non linear-pricing, bundling)
• Different version of the same product

-> INDICATOR DIMENSIONS:

• Time: if u want to watch a movie as soon as possible you watch it on Netflix, otherway u go to the cinema
• Quantity
• functionality

3.Third Degree Price Dirscrimination

-> DEF: different prices for different groups of consumers, same price within the same group.

• The higher (lower) elasticity, the lower (higher) price

In sub-market i: max  π_i = TR(q_i) – TC(q_i)   o   p_i(q_i) · q_i – TC(q_i)

-> Optimal quantities in the total market bring to non-optimal quantities in uptown and downtown markets:

• Uptown market: is higher than should be
• Downtown market: is lower than should be

Consumer Surplus: area of the triangle + area of trapezoid

 

Versioning:

-> DEF: when there is a product that is developed fully but some features are removed/disabilitated in order to create different version of it.

• Should be as much as possible respected if we want that a positioning work good.

-> OBJ: sell more than one version of the same product (premium & basic) at different prices targeting different segments of consumers (experts & beginners)

• INCENTIVE: don’t make the inexpensive version too attractive to those willing to pay more.
• PARTECIPATION: Basic version should be unattractive for high willingness to pay consumers (incentive-compatibility constraint) but  decent quality that those with relatively low but still sufficiently high willingness to pay wish to purchase it (to “be in the market”).
• GOOD DESIGN: impossible for customers to transform the basic into the premium version (don’t upset “high-wtp” customers.
• SOCIAL WELFARE: generally, if price discrimination increases output it can be beneficial. If output does not increase welfare is reduced.

-> CHAR:

Case iPhone: Bad Design includes Bad Timing.

-> Apple I-Phone first introduced in June 2007: p = 599$. (Very) Initial success: in the first 30 hrs, Apple sold 270,000. In September 2007 sold basicly the same iPhone but to a different price: p = 399$.

-> Translation in the Versinoing Framework:

-> “If they only knew”: incentive compatibility constraint not respected (if they only knew, they would have never bought the immediate version, and wait)

-> “This is like a slap in the face to early adopters,” said John Keck, an executive at an advertising agency in Detroit” (from Wingfield, Wall Street Journal, 2007)

=> Steve Jobs was forced from Wingfield to release a letter of apologies to customers and offer a discount of 100$ for each future product acquisition.

Lections:

1. To show commitment not to lower price too soon in the future (and build a reputation on that), also to limit risks of a sort of “Coase conjecture” (Coase, 1972, J. of Law and Econ) and…
2. …in any case, if you use timing for versioning, combine it with other dimensions.

Two-Part Tariff: versioning on quantity

-> DEF: consumer pay  a different price depending on the quantity of good purchased.

• Is a second degree price discrimination
• The more units buy the less pay.

-> CHAR:

• Tariff entails fixed entry fee (f) and a per-unit price (p)
• Customers self-select depend on their preferences

-> Two-part Tariff:

Prospect Theory:

 -> DEF: people want to avoid losses as much as posible.

• Decoy effect is rooted in the prospect theory: as show at equality of gains or loss we have different values.

Building:

-> DEF: is an offering of two or more distinct but related products as a package at a single price.

• Is a second-degree price discrimination (mixed bundling, but pure is not).
• We should perform bundling when the sum of the dispersion of the willingness to pay of the single components must be greater than the rispersion of the willingness to pay of the bundles.

-> TYPES:

• PURE BUNDLING: sale of a package but not of a single components;
• MIXED BUNDLING: sale of the package and of single components (package price < sum of price of single components).

-> Propositions:

1. Foreclose markets: in case a firm dominates the market, it may bundle its dominant product with the nascent one, forcing customers to buy the bundle and limiting competition that may face in the nascent market.

-> Under scrutiny of antitrust.

1. Pure Bundling >> Versioning: could be triky to estimate the willingness to pay of each version. Bundle reduces the number of things to consider.

-> NOTE:

1. Killer Application: is better to not bundle killer application, superstar products.
2. Mixed vs Pure Bundling: implement but it may lead to greater profits than the pure one (note that the maximizing bundling is different in pure bundling vs. mixed bundling and higher for the latter).
   • Achieve higher profits
   • Could be difficult to estimate the willingness to pay.
3. AUCTION: mechanism to make buyers pay a price that reflect their valuations. This makes it similar to 2° Price discrimination.

-> HP:

• Seller has to sell an item
• Two potential buyers.
• They willingness to pay can assume just two value (100 or 150)
• Seller don’t know the evaluation but know that the each value is equally likely.

-> TYPES:

• ASCENDING (English)
• DESCENDING (Dutch)
• FIRST-PRICE SEALED-BID
• SECOND-PRICE SEALED-BID