Installment_05

Can be defined on the basis of …

• products that share some characteristics

• Geographic area

SSNIP = SMall but SIgnificant and Non-transitory Increase in Price

1. Selection of an initial market

   • e.g. bananas => a potential banana market

2. Hypothetical price increase

   • the test analyzes what would happen if the price of bananas were increased by a small but significant amount (5% - 10%) on a lasting basis

3. Analysis of consumer behavior

   • if costumers switch to other products or suppliers, making the price increase unprofitable, the market is expanded to include these substitutes / suppliers

     • => not a monopolist

4. Repetition of the test

   • this process is repeated until a market definition is found in which the monopolist could profitability increase the price

Procentage change of quantity demanded cost by 1% change in the price.

Price increase of 1% => decrease of demand by 1% => Einheitselastisch

Price increase of 1% => decrease of demand by 0,5% => unelastisch

Price increase of 1% => decrease of demand by 2% => elastisch

• own-price-elasticity

  • how does the demand change if its own price increases

• Cross-price elasticity

  • how does the demand of product 1 change if the price of product 2 increases

• physical characteristics of the product & consumer preferences

• Intended use of the product by the costumer

• cellophane fallacy

  • If a high price in a product leads to the fact, that you as a costumer think an other product seems to be more competitive than it actually is

2 types of markets

• temporal markets / seasonal markets / multiple markets

  • Markets can change depending on the season or time (e.g. winter jackets)

• After-markets / secondary markets

  • markets which exist after the primary sale of a product (e.g. spare parts or accessories needed after the initial purchase)

• there a many sellers in the market, which

• Each seller offers a differentiated product => the costumers prefer a product over an other

• horizontal differentiation

  • Attributes that are not directly related to quality or performance of the product, but instead based on consumer preferences

    • E.g.: size / packaging / color of a product

• Vertical differentiation

  • when the product is better or worse than an other product. => so it is superior in at least one product characteristic

    • E.g.: stronger stitching in a shirt => every potential consumer will value this feature even if they disagree how much they are willing to pay for the shirt

1. In the short run monopolistic competitive firms make a profit

2. These profits incentivize other firms to enter the market

3. This continuing entry until profits are down to zero in the long term

• only a small number of firms compete in the market

• Firms respond to the activities of their competitors

1. Firms compete on price, when products are identical

2. Firms compete on price or quality etc., when products are differentiated

• companies compete by setting the quantity of goods produce (they do this independently)

• Joint output of all firms determines the market price

• prices below monopoly price but above perfect competition

• Prices fall with the number of firms in an oligopoly

Companies compete by setting the quantity of goods produced, the firms do this independently

• identical Products: Two are enough for competition

• Differentiated products: Different prices for the products

=> the lowest price of the two firms win the competition. In a long run: Price = marginal costs