Chapter 6 textbook ( 4th edition)

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University of Toronto Scarborough
Economics for Management Studies
Jack Parkinson

C40 Chapter 6 - Economic concept of substitutes: 2 firms directly compete if a price increase by one causes many of its customers to do business with the other. - Products tend to be substitutes when 3 conditions hold: 1) they have the same or similar product performance characteristics describes what it does for consumers 2) they have the same or similar occasions for use describes when, where and how it is used ie orange juice & cola ( not alike 3) they are sold in the same geographic market 2 products are in different geographic markets if they 1) are sold in different locations 2) it is costly to transport the goods and 3) it is costly for consumers to travel to buy the goods. - The degree to which products substitute for each other is measured by the cross price elasticity of demand. The cross price elasticity measures the % change in demand for good Y that results from a 1 % change in the price of good X. - Flow analysis: examining data on consumer travel patterns. Can be a good starting point to identify geographic competitors. - Markets are often characterized according to the degree of seller concentration. Market structures: refers to the number and distribution of firms in a market. - Measures of market structure: 1) N- firm concentration ratio: gives the combined market share of the N largest firms in the market. One problem is that its invariant to changes in the sizes of the largest firms in the market. 2)Herfindhal Index HHI : it equals the sum of the squared market shares of all the firms in the market. Si represent the market share of firm i . Thus in a market with 2 firms that each have 50% market share, 2 2 HHI equals .5 + .5 = .5 the HHI in a Market with N equal size firms is 1N, because of this property the reciprocal of the HHI is referred to as numbers-equivalent of firms. HHI conveys more information than the N-firm concentration ratio. Nature of Range of HHI Intensity of price competition competition PC Usually below 0.2 Fierce Monopolistic Usually below 0.2 May be fierce or light
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