1. Introduction to competition

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En provenance du cours de National Research University Higher School of Economics

Industrial Organization: Strategy and Competition in Business

3 notes

National Research University Higher School of Economics

Industrial Organization: Strategy and Competition in Business

3 notes

Industrial Organization is the area of economics that studies the markets as institutions, the state of competition and strategic interaction among firms, the industrial policy and the business decisions firms make within the market framework. The course looks at the markets from three different perspectives: the economic theory, the applied business perspective and the institutional and legal perspective. The focus of the course is split equally between the economic theory and business perspective but there is a significant legal component incorporated in various topics. The course includes economic modeling, game theory, numerous real life examples and several case studies. We explore interesting topics of market organization such as negotiations, antitrust, networks, platforms, electronic markets, intellectual property, business strategies, predation, entry deterrence and many others. The basic objective of the course is to enable the student to understand the structure of markets and the nature of strategic competition. Knowledge in this course will be valuable for the students in acquiring managing and governance skills, enriching their understanding of the institutional framework of business, and improve their analytical ability in negotiations. Prerequisites: The course requires understanding of basic economic modeling, knowledge of intermediate microeconomics (especially production/cost theory), knowledge of basic concepts and methodologies of game theory, intermediate econometrics and basic calculus.

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Static competition

The topic of this lecture is short-run competition. That is, interaction that lasts only for one period. Static competition is not the most usual form of competition but it is not rare, either. Most of the principles that we will present in this lecture will carry over to the dynamic competition analysis later. There are two different kinds of static competition. The first is when strategic variables have a positive causative relationship, as in competition with prices. The second is when the strategic variables are negatively related, as in competition with quantities. We will cover interesting notions such as first-mover advantage, the Bertrand Paradox, capacity constraints, differentiated products, and will introduce the notion of collusion that will be of major importance for our future lectures.

1. Introduction to competition6:57

2. Competition in quantities12:46

3. Application: Linear demand – constant cost11:47

4. First mover advantage12:39

Rencontrer les enseignants

Kosmas Marinakis
Assistant Professor
ICEF and Faculty of Economics Sciences, HSE

Good afternoon. Today, we will talk about static competition.

In our previous lectures, lecture one,

we talked about the principles of the firm,

how firms do business.

And then, in the second lecture,

we talked about game theory,

the game theory foundations that we need in order to understand how competition works.

And we said that we would examine two kinds of game theory,

static games and the theory of dynamic games,

and then we will take this to the competition.

Today, we will talk about the static side of competition,

how firms compete into one-shot games.

So static competition includes a number of models that most of you,

if you have taken the prerequisite courses for this course,

you will already have seen.

Today, we will have a new look, a fresh look,

from a slightly different side of models that probably,

you previously have seen in

your microeconomics course and you probably understand the basics about them.

But now, we're going to see them from a different side.

So, in this lecture,

we'll talk about competition that has no time depth.

Firms make their decisions in one-shot simultaneously, together.

We will talk about collusion,

we will talk about Cournot,

we will talk about Stackelberg games,

and we will also talk about Bertrand games.

Now, in this models,

strategic interaction between firms is possible and meaningful.

This means that every firm must take into account what other firms are doing.

In other words, we are talking about competition that has a strategic component,

meaning that there is interaction for firms.

This means that the number of firms is

such that when I want to understand what I will do,

when I want to think what I will do,

I will have to see what other firms probably will do,

or how other firms will respond to my choices.

This means that the firms are not that many, so,

I can consider their decision because if there are many firms,

you cannot consider all their decisions, but in general,

it means that there is meaningful and possible interaction between the firms.

Secondly, we have barriers now,

that they eliminate the distinction between the short term and the long term period.

This mean that we have seen even in the first lecture,

and you know from your previous microeconomics courses,

that the main difference between the short term and the long term period,

other than having adjustable production factors,

is that in the long run,

we have free entry and exit of firms that will in some cases bring the profit to zero.

Now, in our case here,

we will assume that we have barriers to entry.

In other words, firms are not allowed to exit and enter the business whenever they want,

and therefore, we can maintain profits even in the long term period.

We might have product differentiation or we usually

have product differentiation but in today's discussion,

product differentiation will not make a big difference.

Towards the end of the lecture,

we are going to see some product differentiation cases,

but for now, we will assume that firms have market power anyway.

Now, firms do compete.

That's what firms do,

actually. They always compete.

But they compete with respect to what?

What is the field in which every time the firms compete?

Now, different firms, in different businesses,

compete with respect to different variables.

Like for example, Apple and Samsung,

the firms that they make most of the cell phones that are sold today,

they compete with technological advancement.

They do not tell you buy our phone because it's cheaper.

They tell you buy our phone because it's technologically more advanced.

BMW and Mercedes, they compete with respect to quality.

Again, they don't tell you buy ours because it's cheaper,

or it's faster or it's something like,

it has another characters like that,

they tell you it's better quality car,

especially these two manufacturers.

Coke and Pepsi, they compete with respect to advertisement,

so they advertise as heavily as possible and they try to have as they can,

groundbreaking advertisement in order to attract more customers.

They do not mess with the formula of the product,

they do not even change the logo for several years.

So, their field of competition is advertisement.

Donna Karan New York and Calvin Klein,

they compete with respect to design.

They don't tell you buy our clothes because they will last longer,

they are more resistant to washing in higher temperatures,

stuff like that, they tell you,

by ours because you're going to look better and that.

Mozilla and Chrome, with respect to market share,

they want to have as more users as possible.

Harvard and MIT, they compete with respect to research.

Oil producing nations down at the OPEC in Middle East,

and other different regions of the world,

they're competing with respect to quantities.

Every time that they have a meeting,

we're hearing the news that OPEC decided to increase or decrease the quantity.

They never talk about prices,

even if this is entailed later into the market,

but they never talk about the quality of oil or anything else,

they talk about quantity.

Supermarkets, compete with respect to price.

If you saw an advertisement,

a commercial for a supermarket it will be

very difficult to not find the word pricing there.

They will tell you, come to us,

not because we have more,

very rarely they will tell you we have better

because most of the products there they are the same,

they will tell you, come to us, it's cheaper.

So, in this case,

we have to understand,

when we talk about competition,

what is the competition with respect to?

Which is the strategic variable that the firms compete with?

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