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University of Toronto Scarborough
Economics for Management Studies
Victor Yu

Competitors and Competition This chapter focuses on how market structure affects competitionIt begins with a discussion of how to identify competitors define markets and describe the market structureFirst the chapter discusses a qualitative way to define a markettwo products are in the same market if they are substitutesThis can be determined by looking at the cross price elasticitiesThis chapter also introduces two ways to measure how concentrated the market is the Nfirm concentration ratio and the Herfindal index The chapter then considers competition and financial performance within four broad classes of market structure perfectly competitive markets monopolistically competitive markets oligopolistic markets and monopoly marketsA perfectly competitive market has many sellersThe product is homogeneous and excess capacity existsAs a result any one firm is discouraged from raising its prices and industry profits are driven to zeroMonopolistically competitive markets have many sellers but each seller produces a product that is slightly differentiated from other products in the marketAn oligopoly is a market in which the actions of individual firms have an impact on the industry price level and the profits of other firms in the marketThere are two theories of how firms may behave in these markets Cournot quantity competition and Bertrand price competition Finally this chapter discusses recent research on the impact of market structure on the price level profitability of firms and industries Textbook questions 1 How would you characterize the nature of competition in the restaurant industry Are there submarkets with distinct competitive pressures Are there important substitutes that constrain pricingGiven these competitive issues how can a restaurant be profitable 2 In a recent antitrust case it was necessary to determine whether certain elite schools mainly Ivy League schools and MIT constituted a separate marketHow would you go about identifying the market served by these schools 3 Numerous studies have shown that there is usually a systematic relationship between concentration and priceWhat is this relationshipOffer two brief explanations for this relationship 4 The relationship described in question 3 does not always appear to holdWhat factors besides the number of firms in the market might affect margins 5 How does industrylevel price elasticity of demand shape the opportunities for making profit in an industry How does firmlevel price elasticity of demand shape the opportunities for making profit in an industry 6 The only way to succeed in a market with homogeneous products is to produce more efficiently than most firmsCommentDoes this imply that efficiency is less important in oligopoly and monopoly markets 7 The dancing machine industry is a duopolyThe two firms Chuckie B Corp and Gene Gene Dancing Machines compete through Cournot quantitysetting competitionThe demand curve for the industry is P100Q where Q is the total quantity produced by Chuckie B and Gene GeneCurrently each firm has marginal cost of 40 and no fixed costShow that the equilibrium price is 60 with each firm producing 20 machines and earning profits of 400
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