Industrial Organization

Cartel stability - important factors

- Seller concentration and number of firms - Detection of cheating - Sanctions - Buyer concentration (low = stable) - Entry - Expected fine should be lower than the expected outcome of a cartel

What commitments can Competition authority require for Mergers?

- Selling of industrial plants; selling to a competitor. - Selling of intangible rights; sell trademarks. - Influence on firm's infrastructure. - Providing information and increase transparency.

Strategic Entry Barriers

- Switching costs - Brand proliferation - (Network externalities) These strategic barriers tries to lock-in the customers.

Limitations/critique of Limit pricing

- Sylos-Labini assumption often unrealistic. And not relevant in emerging markets. - Difficult to coordinate an LP strategy if there are several dominant firms on the market. - Is LP the cheapest price strategy? Is predatory pricing cheaper?

Strategic entry barriers: Limit pricing

A form of low-price strategy used by an existing company to intimidate potential competitors away (pre-entry strategy). - Existing firms set the price just low enough, so potential competitors does not expect to get their AC covered. - Prevent potential competitors trying to enter the market. LP usually does not violate Competition Act.

Correct Market and Industry definition includes:

A market contains both a product- and geographic dimension. - Product: close substitutes or complementary products in consumption and production. - Geographical: change in a product's price in one geographic location significantly affects the price in another location Important to define the market correctly, otherwise a misinterpretation of the size of the firms dominance in an industry can happen.

Horizontal Mergers: Profit maximising motives - Cost savings

A merger delivers cost savings that otherwise would not be possible through internal expansion. - Economies of scale - More effective management (scale economies of management). - Rationalisation: overheads are distributed on multiple plants, transportation costs are lower, Economies of Scope, etc. - Elimination of expensive and ineffective production capacity. - Lower R&D costs - Reduction in cost of input -> larger buying power. If prices fall, sales and profit increases after a merger -> signs of cost savings.

What is advertising?

A method of providing consumers with information about the product. Advertising used to persuade consumers to understand / believe that there are real differences between products. Advertising over a longer period can create image, establish a brand and create loyalty -> intangible capital -> comparative advantage.

Average revenue (AR)

AR = TR/Q

Switching costs

Are costs incurred when a buyer switches between suppliers, but not incurred when remaining with the original supplier.

AFC

Average fixed costs: FC/Q

AVC

Average variable costs: VC/Q

Product differentiation is used as...

Barrier of entry (an alternative to price strategy). A strategy could be to supply enough types of a product to keep the competition, that produces substitutes, out of the market.

Bundling (+ motives)

Bundling is when products, goods or services can only be purchased together, even though it would be natural or usual to trade them separately. 1. Product type; determines whether the separate sale is natural. 2. Trade practices; determine whether separate sales is usual. Motives: - Profit maximisation (market power, cost advantages) - Strategic tool (marketing, price discrimination, entry barriers)

Tying

Buyer agrees to buy certain but different products as part of one trade, e.g copiers -> color cartridges. Copier: the tying market, Color cartridges: the tied market. Bundling is a violation to Competition Act, §11 and §6

Chicago School

Claims that free markets best allocate resources in an economy and that minimal or even no government intervention is best.

Cost saving motives for vertical integration: Assured supply

Companies can choose to secure supplies of inputs through backward integration - the purchase of suppliers.

Bertrand model - price competition (+ strategy assumptions + setting of price + critique)

Competition on a market with with only two firms that produce the same identical products. - Market barriers to entry exists - Firms have same marginal cost - No capacity contraint Strategy assumptions: - Zero conjectural variation (takes the rival's price as given) - Set their prices sequentially - Acts after assessing the rival's strategy P_c = MC_A = MC_B Critique: - Rare that two companies have identical products - There are often capacity constraints

Strategic product differentiation

Distinguishing characteristics due to actions of suppliers. E.g. creation of a brand, extra service, etc.

Marris's growth maximization model

Explains the growth of the firm. Point A: The optimum point for the owners, where the profit are highest. Point B: Where the managers gets the highest growth. Managers are interested in growth, but it may lead to declining profitability..

Natural product differentiation

Features/differentiation which arise from natural attributes. Not planned but can be used strategically. E.g. the place of production (swiss made watches).

What is Dorfman-Steiner Condition used for?

Finding the optimal level of advertising

FC

Fixed costs: costs associated with fixed inputs in production and do not vary with output.

Strategic entry barriers: Brand proliferation

Flood market with own products in various flavours, with closely related but distinguished attributes. Entry barrier: only small segments of potential new entrants to compete on. Disadvantage for existing firms: reduces economies of scale. Cost disadvantage of new entrants decrease.

Free-rider problem

For an industry, the problem of firms not joining that cartel because they can benefit from the cartel's activities without joining (earning a higher profit). Free-riders supply until MC = P Also called imperfect cartels.

The Number Equivalent (measures of concentration)

For easy interpretation of HH you can calculate the Number Equivalent (n*). n* gives the hypothetical number of equally-sized firms. E.g. if HH = 0,333 then n* = 3. You could interpret the industry to have 3 equally-sized firms.

High- and low market concentration

High market concentration: a few large firms have a large market share and are influencing the market and keeps gaining market share. Low market concentration: many firms, where the big firms does not have a significant influence on the market. More towards perfect competition.

Three types of mergers

Horizontal: independent companies at the same level in the product chain produce 'same or similar products' merge into one. Vertical: Companies at different levels in the product chain merges into one, e.g. suppliers buying customers and vice versa. Conglomerate: Merger of independent companies producing different products, in different markets - Motives often involve economies of scope or diversification.

Lemon Problem

If on the market both high and low quality products (e.g. used cars) simultaneously sold and consumer do not know a used car's real quality, consumers will not want to pay a high price for quality car (because they don't know whether it is good quality/worth it); but conversely also pay too much for the car of poor quality (lemon).

Dorfman-Steiner Condition - Monopoly (Version 1)

If sales are very sensitive to increased advertising, it can be more worthwhile to use an advertising strategy - everything else being equal and given the price elasticity. Is the price elasticity high, it is perhaps better to compete on price.

Dorfman-Steiner Condition - Monopoly (Version 2)

If the company has a high markup, can get a larger reward to increase sales - for example using advertising. Therefore, an advertising strategy attractive.

Horizontal Mergers: Non-Profit maximising motives - Managerial discretion

In large modern companies ownership and control often separated (Berle- Mean). Eg. listed companies with many owners, and perhaps weak boards If management can pursue its own goals -> conflict of interest. Can shareholders really be sure that management will optimise the company's long-term value, i.e .the market price?

Consumer Transparency (CT)

Increase in CT implies that consumers are better informed and can respond faster and stronger to price and quality signals/changes. The faster and stronger the consumer responds, the greater the incentive for the companies to compete on price and quality - hence, companies have incentives for breaking cartel agreements (e.g. a big potential gain by lowering the price, without the cartel members knowing about it).

Producer Transparency (PT)

Increase in PT increases the info about competitors' prices, discounts, capacity, etc. Increase in PT makes it easier for producers to align their interests and actions.Hence, PT is a important factor for effective cartel agreements.

Limit Pricing: Large scale entry-threat

Incumbent sets P * and produces Q*. If new firms would then enter the market, the price will fall along residual demand curve, given that incumbent continues to produce Q*. But this are prices below the average cost curve. Hence entrants make losses, no matter if they are small or big firms. à Better for them to stay out of the market - provided Sylos-Labini assumption holds (Incumbent always produces Q*).

Return in investment

Industry profit after tax relative to the value of the fixed assets (net profit after taxes divided by total assets). Limit value = Return on investment in excess of 50% percent higher than the average for all industries

Advertisement motives

Informative: - Creates real information about the product. - Creates accurate information about product attributes and quality. - Real welfare improving (efficient allocation of society's resources). Persuasive: - Advertisements with content that is not necessarily correct. - Advertisements that try to persuade the consumer to buy one product over another. - Misleading and confusing and lead to an inefficient allocation of society's resources

Joint venture

Is an association between two or more otherwise competing firms. Joint venture can also be used to enable a group of new firms to band together to overcome entry barriers.

Collusion

Is best seen as a way of easing the competitive pressure through unified/mutual action. Firm no longer need to speculate about the likely reactions of rivals.

Conduct (SCP)

Is the behaviour of the companies. - Business objectives - Pricing policies - Product design and branding - Advertising and marketing - R&D - Collusion - Merger

Conduct - differentiated products

Likely that product design and branding and R&D is a part of the company behaviour. Pricing policies not that important.

MR in Monopoly model

MR = demand curve * 2 (Double as steep as the AR (market demand curve)). MR = P + (△P/△Q) * Q

Williamson's model (theory of managerial utility maximization )

Managers derive personal utility from things other than profits or sales: - Staff (power) - Perks - Discretionary profit (job security) S1: Profitmaximization - supply where the profit is highest, but does not maximise the managers output. S2: Maximization of the managers output.

Motives for diversification

Market power: - Diversifying activities provides the opportunity to cross-subsidise its products, use profits from one market to support a second and more difficult market. - Diversification allows to finance predatory competition (predatory pricing) in one or more markets. - Diversified firms can easier take advantage of economics of scale and scope.

Contestable markets

Markets in which entry and exit are easy enough to hold prices to a competitive level/normal profits even if no entry actually occurs Market are vulnerable for 'Hit-and-run entry' Assumption: there are low/no sunk cost for entering the market - criticised for this assumption.

Conduct - homogeneous goods (few companies)

Maybe seeking to create cartels, collusion.

Herfindahl-Hirschman (HH) Index (+ meaning of closer to 0 or 1?)

Measures concentration based on the sum squared market shares of all firms in the industry. Here we sum the squared market shares (s_i^2). Contrary to CR, you do it for all N firms in the industry -> HH index more precise. Closer to 1: a sign of few large firms on the market. Closer to 0: many small firms HH will have its lowest value if there are N equal-sized firms. So, HH will be equal to 1/N

Hannah & Key index

Measures concentration based on weighted sum of squared market shares of all firms in the industry. It is a generalization of the HH index. The bigger alpha, the more weight is put on the large firms. E.g. if alpha is 3 instead of 2

Concentration ratio (+ meaning of closer to 0 or 1?)

Measures share of the industry's largest n firms in total industry size measures such as sales, assets, employment. Easy to compute since we only need information on the larges n firms and aggregate industry. For CR you simply sum up the markets shares for the n largest firms. In practice often n = 4 so CR(4) Closer to 1: more market power for the big firms -> less intense competition. Closer to 0: the big firms has low market shares -> more intense competition (CR -> 0 = perfect competition)

Competition Act - §12

Merger Control - decide whether to above of prohibit a merger

Monetary costs and opportunity costs

Monetary costs: paying wages, paying for materials Opportunity costs: return that could have been earned if another investment was made.

Vertical integration: Market power - Forward integration, coupled with price discrimination

Needs three thing to work: 1. Producer has some monopoly power (in more than one market). 2. Different price elasticities of demand in the different markets. 3. No side-trading possible, i.e. byuers cannot by-pass the monopolist

Dorfman-Steiner Condition - Oligopoly (with no reaction from competitor + reaction)

No reaction: 1. Captures change in industry sales due to firm A's advertisement (+) 2. Shows change in firm A's market share because of its advertisement (+) - keeps advertising since they take market share from competitor. Reaction: 1. shows change in industry sales due to B's advertisement (+) 2. shows change in firm A's market share because of its advertisement (+) 3. shows change in A's market share due to B's advertising (-)

Semi-collusion

Occurs in cases where it is difficult to formulate specific agreements covering all aspects of the firms' behavior. E.g. firms can choose to collude in some activities (such as R&D, marketing, etc.) and compete in other activities.

Hit-and-run entry

Occurs when a firm temporarily enters a market and then leaves when abnormal profits are exhausted. Feature of a contestable market.

Vertical Product Differentiation

One or more product on the market with varying quality across products (or perceived varying quality by the consumers). E.g. cheap coke vs. Coca-Cola.

Decreasing returns

Output increases less than proportionately to the increase in all inputs (K and L) (diseconomies of scale)

Increasing returns

Output increases more than proportionately to the increase in all inputs (K and L) (Economies of scale)

Constant returns

Output increases proportionately with an increase in all inputs (K and L)

Predatory Pricing (PP)

PP is a post-entry strategy, which is used to squeeze competitors out of the market by setting its prices lower than average variable costs. With this method incumbent looses profits in the short-run, but long-run profits can be maximized, if incumbent subsequently increases its price. PP pricing must be 'credible/strong commitment' to be profitable. Not allowed according to §11

Monopoly Versus Perfect Competition (surplus)

Perfect comp: - Consumer surplus = A + B + C - Producer surplus = 0 - Total surplus = A + B + C - Dead-weight loss = 0 Monopoly: - Consumer surplus = A - Producer surplus = B - Total surplus = A + B - Dead-weight loss = C

Edgeworth - price competition with capacity constraint

Same assumptions as in Bertrand model. Equilibrium = not stable One firm can increase price to earn more profit, without loosing all customers. The firms are taking advantages of the rival using all its capacity, to increase their prices.

Horizontal Product Differentiation

Same quality but different characteristics. Depends on the consumers preferences. E.g. pizza with thick or thin crust.

Entry ratio

Share of new entrants as a percentage of number of firms in the industry. Entry below 3% in manufacturing and 8% in others -> the industry is assigned 2 points (bad rating)

SRAC

Short-run average costs: TC/Q = AFC + AVC

SRMC

Short-run marginal cost: △TC / △Q = △VC / △Q

Condition for inputs in Production in the short-run/long-run

Short-run production is capital fixed but labor can vary. q = f(K^bar / L) Long-run production can both capital and labor vary. q = f(K,L)

Profit maximazation implies (short- and long-run)

Short-run: MR = P = SRMC Long-run: MR = P = SRMC = SRAC = LRMC = LRAC (min.point)

Signalling commitment

Signalling commitment. By incurring a sunk investment (sunk cost) the incumbent can credibly signal to the market that in case of entry there will be a price war - and incumbent has an advantage when it comes to price war, due to sunk investment in e.g. overcapacity -> incumbent can prevent entry. Use of Game Theory to study optimal strategies of entrants and incumbents.

Conduct - market with high technological growth

Strategic collaboration is likely

Buyer concentration

The amount of buyers there are on a market and their market power. If the buyers have a high market power, the buyers will most likely find alternative suppliers if a cartel is setting their prices high. Lower buyer concentration (a lot of buyers, with low market power) facilitates cartel stability.

Seller concentration

The amount of sellers there are on a market and their share in the market. High seller concertation is when there are few sellers with a high market share each. High concentration and small number of firms contributes to cartel stability.

Random growth hypothesis

The growth of companies in a period is random and can't be explained by systematic determinants. Past growth is not a reliable indicator of how a firm will perform in the future. A firm's growth is independent of its size, according to the Law of Proportionate Effect (LPE).

Joint profit maximization in a three-firm cartel (+ assumptions)

The intersection of MR with ∑MC in panel 'industry' determines the cartel prices. Assumptions for this figure: • All firms in the industry are members of the cartel • Each firm produces identical product • Firms produce under a different cost structure • No threat of entry

Concentration ratio - CR_4 (+ adjusted for imports)

The market share of largest four firms must not exceed 80%. If we adjust for imports the concentration ratio typically decreases (limit value 50%). But it is related to the issue of correct market definition - many big firms operate in a global scale.

Vertical integration: Cost saving / The Transaction cost approach (TC)

There are costs associated with transactions in the market: a. Monitoring the market b. Negotiation costs. c. Search costs, finding the right dealer d. Implement contractual obligations e. File lawsuits (costly) if necessary to complete transactions If TC in market are high, vertical integration might be the better option rather than buying inputs/services on the market -> more internal control.

Trade association

Tried to improve the economic situation of their members, but not necessarily through requiring market power/monopoly - they provide members with industry data on sales, productive capacity, employment, etc.

Conduct - some market power (large and few companies)

Use of pricing policies to separate competitors from the market.

VC

Variable costs: costs associated with inputs that can be varied depending on level of output.

Uncertainty as a motive for vertical integration

Vertical integration can eliminate uncertainty for both upstream and downstream. Lower uncertainty = lower costs.

Strategic alliances

Voluntary arrangements between firms that involve the sharing of knowledge, resources, and capabilities with the intent of developing processes, products, or services. Motives are same as mergers (... and cartels). Primarily cost savings. Must be approved by competition authorities.

When is LRAC lowest?

When LRAC = LRMC

Horizontal Mergers: Profit maximising motives - Market power

- Prevent competition to grow by buying other firms. - Eliminate existing competitors by buying them - less competition. - Acquisition of entrants with new technology or existing competitors with patents. - Gain access to new markets through acquisition. - Build a stronger brand - Increase market concentration (if few large firms on the market). - Access to customers, knowledge, infrastructure, etc. If revenues are reduced and prices rise, combined with increasing profit after the merger -> points towards market power.

Types of product differentiation

- Vertical - Horizontal

SCP

Structure-Conduct-Performance paradigm

Total revenue (TR)

TR = P * Q

TC

Total cost: variable costs + fixed costs

Vertical Integration - Upstream and downstream

Upstream: Ownership of production of the inputs it uses (backward integration). Downstream: Ownership of production units that use, distribute, sell the company's output (forward integration).

State-sponsored collusion

When governments may either meet the demands of a groups of producers, or they impose/implement cartelization of a group of firms.

Marginal revenue (MR)

change in total revenue when producing an additional unit of output

Baumol's Model (sale revenue maximization model)

q1: the owners desire for the quantity sold, where the profit is maximised. q2: The revenue where the profit minimum is. q3: The managers desired revenue, where total revenue is maximised (indicator for success, bonus, etc.)

Average product of labor (APL)

ratio of total output of quantity to labor employed

Economies of scope

Cost savings that arise when a firm is producing two or more products using the same set of inputs.

Strategic entry barriers: Switching costs (SC)

Costs associated with switching brand / supplier. SC consist of: - Search costs - Learnings costs - Installation/deinstallation Often highest in tech products or changing bank.

Price level

Price index compared to the EU9 (EU9 = 100). Limit value = Price index in excess of 3 percent higher than EU9 price index

Problems with concentration measures

- Tricky to define the relevant market. - The existence of multi-product or diversified companies.

Name the 3 Managerial Theories

- Baumol's sale revenue maximization model - Marris's growth maximization model - Williamson's theory of managerial utility maximization

Entry barriers, definition

- Conditions that allow existing firms to earn abnormal profits (P > AC) - Entry barriers are cost of production, which existing firms does not have, but new firms can't avoid. Economic advantage for existing companies over potential competitors. - Chicago-school opposes that entry barriers rarely last in the long run.

Determinants of concentration

- Economies of scale: If MES_q = total demand (D), a single firm can serve the market -> monopolistic. If MES_q,1 + MES_q,2 + ... + MES_q,N = total demand, N firms serve the market -> perfect competition (if N is large). - Barriers to entry Entry is likely to reduce concentration, assuming the entrant is smaller than the average size of existing firms. Entry at a large scale (one big firm) increases concentration Exit is likely to increase concentration (fewer firms on the market) - Sunk cost High sunk costs is seen as an entry barrier. Therefore, it is an important factor in market concentration. - Regulation Disallowing mergers

Absolute cost advantage as a barrier to entry (+ opposite view)

- Experience on the market / with production - Unique, rate, value-generating and not replicable resources. - Availability of patents and/or process patents. - Exclusivity for key inputs. - Vertical production linkages. - Capital/financing conditions - more risky to lend money to new firms. Opposite view: - Absolute cost advantages can be acquired too expensive. - Second mover advantage - existing firms has done all the work.

Motives for conglomerates

- Exploiting economies of scope. - Utilise internal processes/capital. - Increasing market power. - Cost savings. - Foreign competition and globalisation.

Predatory Pricing (PP) is a bad strategy if

- Few or none barriers of entry. - the firm can't secure income from other products/markets - the competition has deep pockets or backing. - there are high technological growth on the market, can be used to reduce costs or product differentiate.

Strategic Entry Barriers - Price strategies

- Limit pricing (pre-entry strategy) - Predatory Pricing (post-entry strategy)

Sources of product differentiation

- Neutral - Strategic

Structure (SCP)

- Number and size - distribution of buyers and sellers - Entry and exit conditions - Product differentiation - Vertical integration - Diversification

SCP paradigm - Limitations

- Often difficult to decide which variables belong to structure, conduct or performance - Often difficult to define the relevant market or industry for analysis - Most variables are difficult to measure empirically - Hard to tell collusion and economies of scale apart

Advertisement in different market structures

- Perfect competition: advertisement has no effects, given assumptions. - Monopoly: some benefit of using advertisement (keep entrants out). - Oligopoly: strong incentives to advertise.

Motives for tying

- Possibility for price discrimination (low cost for binding product, high price for tied product). - Protection of goodwill (copiers that always work). - Increased market power in the tied product. - Increased competitors' sunk costs (entry barriers).

Product differentiation as entry barrier

- Product differentiation can act as an effective barrier to entry. - Customers are loyal to existing products -> gives extra costs for new firms (high sunk cost for advertising). Product differentiation arise from: - R&D and patents - Service (pre- and post-sale) - Advertising/brand - First mover advantage

Performance (SCP)

- Profitability - Growth - Quality of product and service Technological progress: - Productive efficiency - Allocative efficiency

Motives for advertisement

- To launch/promote new products. - Establish a brand/image (especially important for new businesses). - Give information about price and quality (Lemon-problem). - To increase/maintain market share. - Raising entrants initial costs (raising barriers to entry). - Economies of scale in advertising. - Reduce consumer search costs.

Non-collusive oligopoly models

1. Bertrand model - price competition 2. Edgeworth model - price competition with capacity constraint 3. Price leadership models

Name the other concentration measures

1. Concentration ratio 2. Entry ratio 3. Market share mobility 4. Productivity spread 5. Wage premium spread 6. Return on investment 7. Price level 8. Public regulation on the industry

Price leadership models (2 models) - Be aware of cartel if?

1. Dominant 2. Barometric One large firm (dominant) and a large number of small firms (competitive fringe), that are price takers. Equilibrium at (P_1 ; Q), where the big firm produces q1 and the rest are producing q2. Cartel or not? Be aware if: - Few companies - Large firms - High entry barriers - Low product differentiation, e.g. fuel/Statoil

Monopoly assumption

1. Large number of buyers but a single seller in the market 2. No threat of entrant - there exist significant entry barriers: i. Economies of scale ii. Absolute cost advantage iii. Uniqueness of the product iv. Legal barriers v. Geographical conditions 3. The selling firm in profit-maximising

Perfect competition assumptions (6)

1. Large numbers of buyers and sellers; 2. producers and consumers have perfect knowledge; 3. the products sold by firms are identical; 4. firms act independently of each other and aim to maximize profits; 5. firms are free to enter or exit; and firms can sell as much output as they wish at the current market price.

Competitive environment revolves around there key elements

1. Number and size distribution of firms (seller concentration). 2. Market entry and exit barriers 3. Degree of product differentiation

Cartel

A cartel is a voluntary, written or oral agreement between independent private agents (companies) that determine jointly the value of their action parameters (e.g. prices or quantity), or divide the product market and consumers (geographically) between themselves.

Absolute cost advantage

A cost advantage that is enjoyed by incumbents in an industry and that new entrants cannot expect to match

Oligopoly

A market structure in which a few large firms dominate a market

Market share mobility

Absolute changes in firms' market share between two periods. - Index = 0 - no change in firms and their market share - Index = 100 - all firms with a positive market share exited Limit value = 10%

Product differentiation

Actual or perceived distinctions between closely substitute products

Marginal product of labor (MPL)

Additional quantity of output produced from employing each additional unit of labor

Concentration measure

Aims to reflect the implications/effect of the number and size distribution of firms in the industry for the nature of competition. Both the number of firms and their size distribution are important.

Vertical integration: Market power - Double marginalization

Also called 'Double mark-up' If the production (upstream) and the retail (downstream) are served by two individual monopolist firms. The production charges a mark-up of their output to earn money but the retail also charges a mark-up when selling to consumers -> making the price higher (double mark-up) If a vertically integrated firm that served both functions would make and sell the same product, they could do it cheaper due to only charging a mark-up one time. NB! Only occurs if both stages are monopoly (or oligopoly or cartel).

Resale Price Maintenance (RPM) (+ Service hypothesis)

An arrangement whereby an upstream firms retains the right to control the price at which a product is sold by a downstream firm. RPM is about collusion. Service hypothesis: the fixed (higher) price for retailers due to RPM, can be justified by additional pre-sale services. Effect of service = higher utility for customers -> higher willingness to pay.

Lerner Index

An indicator for market power and competition. It tells us how much P is higher than MC, when the firms are profit maximising. The closer PED are to 0 -> the more inelastic is the demand curve -> the higher price without changes in the demand curve -> sign of market power. On the other hand, if PED is low -> elastic demand curve -> P = MC -> no market power

Competition Act - §11

Det er forbudt for en eller flere virksomheder m.v. at misbruge en dominerende stilling (Abuse of dominant position)

Competition Act - §6

Det er forbudt for virksomheder m.v. at indgå aftaler, der direkte eller indirekte har til formål eller til følge at begrænse konkurrencen.

Wage premium dispersion/spread

Difference in industry wages that cannot be explained by workers' age, work experience, skill etc. Limit value = Wage premium in excess of 15% higher than the benchmark industry

Productivity dispersion/spread

Dispersion/spread in productivity is compared with the average productivity dispersion in the entire economy. Limit value = productivity dispersion more than 25% of the average

Horizontal Mergers: Non-Profit maximising motives - Market for corporate control

If the current management does not maximize the company's present value a take-over is likely: the market believes that the company with the right management would be worth more. A takeover is likely if the difference between the acquirer's acquisition costs are less than the potential benefits of the acquisition.

Monopoly equilibrium

MR = MC

Forms of diversification

Related diversification: a. When the company expands its activity by introducing new products or services that are closely related to the previous (product extension) b. the company from a product or service goes into other markets (market extension) Unrelated diversification (pure diversification): often occurs as acquisitions (conglomerate mergers)

SSNIP Test

Small but Significant and Non-transitory Increase in Price-Test. A method to define the relevant industry/market for the given product. If the product does not constitute an independent market, the SSNIP identifies the product (geographical market), the nearest substitute, and tests whether the two products (geographical markets) together constitute an independent market. The question is whether a hypothetical monopolist who produces the two products will benefit from permanently raising the price by 5-10%. If it is profitable and consumers are not switching to other products, then the two products together constitute an independent market. If not, the procedure continuous by adding the nearest substitute.

Limit Pricing: Small scale entry-threat (with and without limit pricing)

Small entrants, economies of scale for incumbent firms. If the incumbent does not use limit pricing, a lot of small firms will enter the market a supply at a lower price than incumbent firms -> they will take some of the profits from the incumbent firms (bad strategy). If the incumbent uses limit prices, they set the prices, so they are equal to LRAC, so if new firms enter the market, there will be more demand causing the prices to fall. P goes below LRAC entrants can't cover their cost and they will stay completely out of the market (better strategy -> keeps all demand but at a lower price)

Limit pricing - assumptions

Sylos-Lambini: Potential entrants assume that the existing firms will keep their supply fixed, also if new firms enter the market (higher supply -> lower prices). Sunk cost-assumption: There are sunk cost associated with market penetration. Assume perfect information about the demand verse and the cost curve.

Agreements of collusion

Tacit; no formal agreement and direct communication. Explicit; verbal and written agreements.

Minimum Efficient Scale (+ the influence on the industry)

The minimum efficient scale is the least amount of production a company can achieve while still taking full advantage of economies of scale. Low MES: - Small scale entry: You can enter a market with a low output (low capital investments) - More competition High MES: - Large scale entry: You have to enter the market with a high output (high capital investments) - Less competition

Industry Life Cycle (Seller concentration)

The reached stage in the industry life cycle have implications for seller concentration. Introduction: - High investment in R&D - High price and low sales because of lack of customer awareness. - Seller concentration low Growth: - Market expands -> new entrants - Cost savings through economies of scale - Seller concentration still low Maturity: - Demand is stabilised - Existing firms start to create a brand through large scale advertising - Increasing entry barrieres - Seller concentration starts to increase Decline: - Sales and profit decline - Some firms leave the market - Collusion and mergers may take place - High seller concentration

Vertical Integration (Backwards + Forwards)

When a company purchases another company within its supply chain. Backwards integration: when a burger chain buys a farm that makes potato. Forward integration: When an electronic manufacture buys a chain of stores to reach the end consumer.

Cost saving motives for vertical integration: Asset specificity

When firms are interdependent due to investments in specific assets. Especially interesting for bilateral monopoly: upstream firm invested capital to supply the downstream business, and downstream firm is dependent on the upstream product. A vertical integration between these companies can optimize output and increase profits.

Technological conditions as a motive for vertical integration

When integrated production technology can be at the lowest possible cost of production of downstream and upstream tasks/inputs. Criticism: If these synergies exist, then production will probably be integrated from the beginning

Economies of scale as a entry barrier

When new firms has to establish themselves on a market with high economies of scale, an extensive production capacity is needed making it risky to enter. High sunk costs.

Motives for collusion

• Profit maximization • Risk management and enhancement of security • Exchange of information • Unsatisfactory performance due to intense competition (when there are no cartels)

Marginal cost (MC)

△TVC / △Q