HO5e Ch13 Micro

7/25/2019 HO5e Ch13 Micro

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R. GLENN

HUBBARDANTHONY PATRICK

O’BRIEN

FIFTH EDITION© 2015 Pearson Education, Inc.



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Chapter Outline andLearning Objectives

13.1 Deman an !arginal "evenue #$r a

Firm in a !$n$p$listicall%C$mpetitive !ar&et

13.' H$( a !$n$p$listicall% C$mpetitiveFirm !a)imi*es +r$#it in the ,h$rt"un

13.3 -hat Happens t$ +r$#its in the L$ng

"un13./ C$mparing !$n$p$listic C$mpetiti$n

an +er#ect C$mpetiti$n

13.0 H$( !ar&eting Di##erentiates+r$ucts

13. -hat !a&es a Firm ,uccess#ul

CHAPTER

13

CHAPTER

!$n$p$listic C$mpetiti$n2The Co!etiti"e #ode$ ina #ore Rea$istic %ettin&




Perfect Co!etition "s. #ono!o$istic Co!etition

The !erfect$' co!etiti"e ar(ets in the !re"ious cha!ter had thefo$$o)in& three features*

1. #an' firs

2. +irs se$$ identica$ !roducts

3. o -arriers to entr' to ne) firs enterin& the industr'

The first t)o features i!$ied a horionta$ deand cur"e for indi"idua$firs, )hi$e the third i!$ied ero $on&/run !rofit.

#ono!o$istica$$' co!etiti"e firs share features 1. and 3. -ut their!roducts are not identica$ to their co!etitors.

%o )e e!ect ono!o$istica$$' co!etiti"e firs to ha"e ero $on&/run!rofit, -ut not to face a horionta$ deand cur"e.



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Deman an !arginal "evenue #$r a Firm in a!$n$p$listicall% C$mpetitive !ar&et

13.1

E!$ain )h' a ono!o$istica$$' co!etiti"e fir has do)n)ard/s$o!in& deand

and ar&ina$ re"enue cur"es.




#ono!o$istic Co!etition

!$n$p$listic c$mpetiti$n is a ar(et structure in )hich -arriers toentr' are $o) and an' firs co!ete -' se$$in& sii$ar, -ut notidentica$, !roducts.

The (e' feature here is that the !roducts that ono!o$istica$$'co!etiti"e firs se$$ are differentiated fro one another in soe)a'.

Example: Starbucks sells coffee, and competes in the coffee market

against other firms selling coffee.

But Starbucks’ coffee is not identical to the coffee that other firms sell.




The 8eand Cur"e for a #ono!o$istica$$' Co!etiti"e +ir

%tar-uc(s se$$s caff9$attes )hi$e other firsse$$ caff9 $attes a$so,soe !eo!$e ha"e a!reference for theones that %tar-uc(s

se$$s.If %tar-uc(s raises the!rice of its caff9 $attes,it )i$$ $ose soe, -utnot a$$, of its

custoers.

Therefore %tar-uc(sfaces a do)n)ard/s$o!in& deand cur"e

for caff9 $attes.

The do)n)ard/s$o!in&deand for caff9 $attesat a %tar-uc(s

Figure 13.1



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#ar&ina$ Re"enue ;hen 8eand Is 8o)n)ard/%$o!in&

The first t)o co$uns sho) thedeand schedu$e for %tar-uc(s.

Tota$ re"enue increases initia$$', then decreases %tar-uc(s has to$o)er the !rice in order to se$$ additiona$ caff9 $attes.

Hence ar&ina$ re"enue is initia$$' !ositi"e, then ne&ati"e.

8eand and ar&ina$re"enue at a %tar-uc(sTable 13.1

CFF5 LTTE,,OLD +E"-EE6 7Q 8

+"ICE 7P 8

0

1

2

3

7

5

6:

<

=

10

>6.00

5.50

5.00

7.50

7.00

3.50

3.002.50

2.00

1.50

1.00

>0.00

5.50

10.00

13.50

16.00

1:.50

1<.001:.50

16.00

13.50

10.00

?

>5.50

5.00

7.50

7.00

3.50

3.002.50

2.00

1.50

1.00

?

>5.50

7.50

3.50

2.50

1.50

0.50 @0.50

@1.50

@2.50

@3.50



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Ho) a Price Cut Affects +ir Re"enue

;hen %tar-uc(sreduces the !riceof a caff9 $atte, itcan se$$ oreout!ut.

Its re"enue

increases -ecauseof the additiona$sa$e at the ne)!riceB this is theoutput effect of the

!rice reduction.

4ut its re"enue decreases a$so. In order to se$$ theadditiona$ caff9 $atte, it ust reduce the !rice on a$$ cu!s it)i$$ se$$. The $oss in re"enue on the 5 cu!s it )ou$d ha"e

so$d an')a' is the price effect of the !rice reduction.

Ho) a !rice cut affectsa firs re"enue

Figure 13.'


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#ar&ina$ Re"enue

%tar-uc(s ar&ina$re"enue for se$$in& theadditiona$ caff9 $atte iseua$ to the &reen areainus the !in( area*the out!ut effect inus

the !rice effect.%ince the out!ut effectis Dust eua$ to the!rice, marginal

revenue is lower than

price.

+or an' fir )ith a do)n)ard/s$o!in& deand cur"e, thear&ina$ re"enue cur"e ust therefore -e -e$o) thedeand cur"e.

Ho) a !rice cut affectsa firs re"enue

Figure 13.'


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8eand and #ar&ina$ Re"enue Cur"es

The &ra!h sho)s the%tar-uc(s deand andar&ina$ re"enue cur"es forcaff9 $attes.

After the 6th caff9 $atte,reducin& the !rice in order to

increase sa$es resu$ts inre"enue decreasin&ne&ati"e ar&ina$ re"enueBthe out!ut effect eua$ tothe hei&ht of the deand

cur"eB can no $on&er offsetthe !rice effect the "ertica$difference -et)een deandand ar&ina$ re"enuecur"esB.

The deand and ar&ina$re"enue cur"es for aono!o$istica$$' co!etiti"e

fir

Figure 13.3



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H$( a !$n$p$listicall% C$mpetitive Firm !a)imi*es+r$#it in the ,h$rt "un

13.'

E!$ain ho) a ono!o$istica$$' co!etiti"e fir aiies !rofit in the short run.



Profit #aiiation

ust $i(e a !erfect$' co!etiti"e fir, a ono!o$istica$$' co!etiti"efir shou$d not si!$' tr' to aiie re"enue.

Each additiona$ unit of out!ut incurs soe marginal cost .

Profit aiiation reuires !roducin& unti$ the ar&ina$ re"enuefro the $ast unit is Dust eua$ to the ar&ina$ cost* M ! M" .

This sae ru$e ho$ds for a$$ firs that can ar&ina$$' adDust theirout!ut.



Profit #aiiation sin& a Ta-$e

The 1st, 2nd, 3rd, and 7th caff9 $attes each increase !rofit* M # M" .

The 5th does not a$ter !rofit* M ! M" .

The 6th and su-seuent caff9 $attes decrease !rofit* M $ M" .

#aiiin& !rofit in aono!o$istica$$'co!etiti"e ar(et

Figure 13./



Profit #aiiation sin& Fra!hs

%tar-uc(s se$$s caff9 $attes u! unti$M ! M" .

This se$ects the !rofit/aiiin& uantit'. Then the deand cur"esho)s the !rice, and the %& cur"e sho)s the a"era&e cost.

%ince 'rofit ! (' ) %&* x +, )e can sho) !rofit on the &ra!h )ith

the &reen rectan&$e.

#aiiin& !rofit in a

ono!o$istica$$'co!etiti"e ar(et

Figure 13./



Identif'in& Profit Fra!hica$$'

4e carefu$ to !erfor these ste!sin the correct order*

. -se M!M" to identif the profit/maximi0ing 1uantit.

2. 3raw a vertical line at that

1uantit.

4. &he vertical line will hit the

demand curve: this is the

price.

5. &he vertical line will also hit

the %& curve: this is the

average cost.6. &he difference between price and

average cost is the profit (or loss* per unit.

7. Show the profit or loss with the rectangle with height (' ) %&*

and length (+8 ) 9*, where +8 is the optimal 1uantit.

#aiiin& !rofit in a

ono!o$istica$$'co!etiti"e ar(et

Figure 13./b



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-hat Happens t$ +r$#its in the L$ng "un

13.3

Ana$'e the situation of a ono!o$istica$$' co!etiti"e fir in the $on& run.


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Ho) the Entr' of e) +irs Affects Profits of Eistin& +irs

%u!!ose deand is re$ati"e$' hi&h,so that %tar-uc(s can a(e a !rofit in the ar(et for caff9 $attes.

This !rofit )i$$ attract ne) firs )ho )i$$ co!ete )ith %tar-uc(s,reducin& the deand for %tar-uc(s caff9 $attes.

8eand fa$$s unti$, in the $on& run, no !rofit can -e ade* ' ! %& .

Ho) entr' of ne) firs

e$iinates !rofits

Figure 13.0


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#ono!o$istic Co!etition* %hort Run, +ir #a(in& Profit

In the short run, a ono!o$istica$$' co!etiti"e fir i&ht a(e a!rofit or a $oss.

The situation )here the fir is a(in& a !rofit is a-o"e.

otice that there are uantities for )hich deand !riceB is

a-o"e %& this is )hat a$$o)s the fir to a(e a !rofit.

The short run and the $on& run for aono!o$istica$$' co!etiti"e fir

Table 13.'a

Re$ationshi! -et)een Priceand #ar&ina$ Cost

%hort Run' G M

%hort Run' G %& %hort RunEconoic !rofit

Re$ationshi! -et)een Priceand A"era&e Tota$ Cost

Profit and oss


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#ono!o$istic Co!etition* %hort Run, +ir #a(in& oss

o) the fir is a(in& a $oss.otice that there is no) no uantit' for )hich deand !riceB isa-o"e %& this fir ust a(e a short/run, econoicB $oss, noatter )hat uantit' it chooses.


Table 13.'b


%hort Run' G M

%hort Run' %& %hort RunEconoic $oss


Profit and oss

# $i ti C titi R +i 4 (i E



#ono!o$istic Co!etition* on& Run, +ir 4rea(in& E"en

In the $on& run, the fir ust -rea( e"en.otice that the %& cur"e is Dust tan&ent to the deand cur"e.The -est the fir can do is to !roduce that uantit'.

There is no uantit' at )hich the fir can a(e a !rofit the %&

cur"e is ne"er -e$o) the deand cur"e.


Table 13.'c


on& Run' G M

on& Run' J %& on& RunKero econoic !rofit


Profit and oss

f L



Kero Profit in the on& RunL

ur ode$ of ono!o$istic co!etition !redicts that firs )i$$ earnero !rofit in the $on& run.

Ho)e"er firs need not !assi"e$' acce!t this $on&/run outcoe. The'cou$d*

M Inno"ate so that their costs are $o)er than other firs, or

M Con"ince their custoers that their !roductNe!erience is better than that of other firs, either -' actua$$' a(in& it -etter in soeuniue )a', or a(in& custoers !ercei"e that it is -etter, !erha!sthrou&h ad"ertisin&.

Thin( of the $on&/run as Othe direction of trend deand )i$$ continueto fa$$ to the ero econoicB !rofit $e"e$, unless the firm is able to do

something about it .

# (i Th Ri d 8 $i d Ri f %t - (



#a(in&the

Connection

The Rise and 8ec$ine and Rise of %tar-uc(s

+ro the id/1==0s to the id/2000s,%tar-uc(s achie"ed stron& !rofits -'differentiatin& its !roduct and e!erience fro other coffeehouses.

As other firs started to iic its e!erience,%tar-uc(s !rofita-i$it' )ent do)n.

4' 2013, %tar-uc(s had en&ineered aturnaround, )ith inno"ations $i(e )i/fi,custoiation of drin(s, a $o'a$t' !ro&ra,sart!hone/-ased !a'ents, o"erseas

e!ansion, and hi&her/ua$it' drin(s.But like all monopolisticall competitive firms,

Starbucks will have to continue to innovate,

or the long/run outcome of 0ero economic

profit will catch up to it.



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C$mparing !$n$p$listic C$mpetiti$nan +er#ect C$mpetiti$n

13./

Co!are the efficienc' of ono!o$istic co!etition and !erfect co!etition.

I # $i ti C titi Effi i tL



Is #ono!o$istic Co!etition EfficientL

ast cha!ter )e $earned that !erfect$' co!etiti"e firs achie"ed productive and allocative efficienc .

M +r$uctive e##icienc% refers to !roducin& ites at the $o)est!ossi-$e cost.

M ll$cative e##icienc% refers to !roducin& a$$ &oods u! to the !oint)here the ar&ina$ -enefit to consuers is Dust eua$ to thear&ina$ cost to firs.

Monopolistic competition results in neither productive nor allocative

efficienc.

Effi i f P f t$ C titi +i



Efficienc' of Perfect$' Co!etiti"e +irs

In !ane$ aB, a !erfect$' co!etiti"e fir in $on&/run eui$i-riu!roduces at +PC, )here !rice eua$s ar&ina$ cost, and a"era&e

tota$ cost is at a iniu.

The !erfect$' co!etiti"e fir is -oth a$$ocati"e$' efficient and

!roducti"e$' efficient.

Co!arin& $on&/run eui$i-riu under !erfect

co!etition and ono!o$istic co!etition

Figure 13.a

I ffi i f # $i ti $$ C titi +i



Inefficienc' of #ono!o$istica$$' Co!etiti"e +irs

#ono!o$istica$$' co!etiti"e firs in !ane$ -B !roduce the uantit')here M!M" . The ar&ina$ -enefit to consuers is &i"en -' thedeand cur"e, so MMB* not a$$ocati"e$' efficient.

And a"era&e cost is a-o"e its iniu !oint* not !roducti"e$'

efficient.

Co!arin& $on&/run eui$i-riu under !erfect

co!etition and ono!o$istic co!etition

Figure 13.a9b

I # $i ti C titi 4 d f C L


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Is #ono!o$istic Co!etition 4ad for ConsuersL

The $ac( of efficienc' su&&ests that ono!o$istic co!etition is a -adsituation for consuers.

4ut consuers i&ht -enefit fro the !roduct differentiation.

Example: ;f ou were buing a car, would ou prefer one

a. 'roduced and sold at the lowest possible cost, but not well/suitedto our tastes and preferences< or

b. 'roduced and sold at a higher cost, but designed to attract ou to

purchasing it=

#an' consuers are )i$$in& to acce!t a hi&her !rice for adifferentiated !roduct. %o ono!o$istic co!etition is not necessari$'-ad for consuers.

#a(in& Peter Thie$ and #ono!o$istic Co!etition



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#a(in&the

Connection

Peter Thie$ and #ono!o$istic Co!etition

Peter Thie$ is a -i$$ionaire entre!reneur*a co/founder of Pa'Pa$, and an ear$'

in"estor in in(edIn, K'n&a, and+ace-oo(.

Thie$ recoends entre!reneurs focuson the monopol !art of ono!o$istic

co!etition there are econoic !rofitsto -e ade in the short run if 'ou canOo)n a ar(et accordin& to Thie$, -'*

M Ha"in& -rand, sca$e, or costad"anta&es

M Ta(in& ad"anta&e of net)or( effects

M Ha"in& !ro!rietar' techno$o&'

Thie$s $atest !roDect* in"estin& in Q,a fir a(in& e/ci&arettes.



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H$( !ar&eting Di##erentiates +r$ucts

13.0

8efine ar(etin& and e!$ain ho) firs use ar(etin& to differentiate their

!roducts.

# ( ti d P d t 8iff ti ti




#ar(etin& and Product 8ifferentiation

#a(in& custoers -e$ie"e that 'our !roduct is )orth)hi$e anddifferent fro those of other firs is not a tri"ia$ eercise. It t'!ica$$'

in"o$"es soe de&ree of mar&eting.

!ar&eting* A$$ the acti"ities necessar' for a fir to se$$ a !roduct to aconsuer.

nce a fir ana&es to differentiate its !roduct, it ust continue todo so, or ris( headin& to)ard the $on&/run outcoe of ero econoic!rofit. The !rocess of doin& this is (no)n as bran management.

:ran management* The actions of a fir intended to aintain the

differentiation of a !roduct o"er tie.

Ad"ertisin&




Ad"ertisin&

Ad"ertisin& is a critica$ e$eent of ar(etin& for ono!o$istica$$'co!etiti"e firs.

4' ad"ertisin& effecti"e$', firs can increase deand for their!roducts.

4ut the' can a$so use ad"ertisin& to differentiate their !roducts*effecti"e$' a(in& the deand cur"e ore ine$astic.

This a$$o)s firs to char&e a hi&her !rice and earn ore short/run!rofit.

8efendin& a 4rand ae




8efendin& a 4rand ae

#ar(etin& e!erts and !s'cho$o&ists a&ree* a critica$ as!ect ofar(etin& is creatin& a brand name for 'our !roduct.

A successfu$ -rand nae can he$! to aintain !roduct differentiation,and de$a' the a-i$it' of other firs to co!ete a)a' 'our !rofits.

4ut firs ust a$)a's tr' to aintain the !erce!tion of their !roductas -etter than others, a(in& sure that, for ea!$e*

M A hi&h$'/successfu$ nae $i(e Co(e, ero, or 4and/Aid is uniue$'associated to that !roduct, and not to &eneric !roducts,

M ther firs dont i$$e&a$$' use their -rand nae, and

M +ranchisees and others $e&a$$' a$$o)ed to use their -rand naeaintain the $e"e$ of ua$it' and ser"ice 'ou e!ect.



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-hat !a&es a Firm ,uccess#ul

13.

Identif' the (e' factors that deterine a firs success.

;hat #a(es a +ir %uccessfu$L




;hat #a(es a +ir %uccessfu$L

A firs a-i$it' to differentiate its !roduct and to !roduce it at a $o)era"era&e cost than co!etin& firs creates value for its custoers.

%oe factors that affect a firs !rofita-i$it' are not direct$' underthe firs contro$. Certain factors )i$$ affect a$$ the firs in a ar(et.

The factors under afirs contro$Sthea-i$it' to differentiateits !roduct and thea-i$it' to !roduce itat $o)er costS

co-ine )ith thefactors -e'ond itscontro$ to deterinethe firs !rofita-i$it'.

;hat a(es a fir successfu$LFigure 13.;

#a(in& Is 4ein& the +irst +ir in the #ar(et a e' to %uccessL




#a(in&the

Connection

Is 4ein& the +irst +ir in the #ar(et a e' to %uccessL

4' -ein& the first to se$$ a !articu$ar &ood, a fira' &ain a first/mover advantage, findin& its nae

c$ose$' associated )ith the &ood in the !u-$icsind.

%ur!risin&$', thou&h, recent research has sho)nthat the first fir to enter a ar(et often does not

ha"e a $on&/$i"ed ad"anta&e o"er $ater entrants.The Re'no$ds Internationa$ Pen Co!an' )asre!$aced -' 4ic A!!$es iPod )as not the firstdi&ita$ usic !$a'er and He)$ett/Pac(ard, )hichcurrent$' doinates the $aser !rinter ar(et )as

!receded -' its in"entor, ero. The sae can -esaid for dis!osa-$e dia!ers, and )e- -ro)sers.

In the end, !ro"idin& custoers )ith &ood !roductsat a $o) !rice is !ro-a-$' the -est )a' to ensuresuccess.

Coon #isconce!tions to A"oid



Coon #isconce!tions to A"oid

#ono!o$istica$$' co!etiti"e firs !roduce the uantit' )here M !

M" , not the $o)est !ossi-$e a"era&e cost.

se the ar&ina$ cost and ar&ina$ re"enue cur"es to deterineuantit' then use the deand and a"era&e tota$ cost cur"es todeterine !rice, cost, and !rofit or $oss.

A$thou&h our ode$ !redicts ero econoic !rofit in the $on& run, the$on& run i&ht -e de$a'ed indefinite$' -' inno"ati"e firs.

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HO5e Ch13 Micro