Inhoud
1 Introduction............................................................................................................................. 2
2 Review of Microeconomics...................................................................................................... 2
3 Game Theory........................................................................................................................... 8
4 Cournot and Bertrand Competition......................................................................................... 9
5 Stackelberg Model................................................................................................................. 18
6 Product Differentiation and Product Variety..........................................................................22
Horizontal product differentiation......................................................................................... 22
Vertical differentiation........................................................................................................... 29
7 Entry Deterrence................................................................................................................... 31
Limit pricing en predatory pricing......................................................................................... 33
Product proliferation.............................................................................................................. 34
Long-term contracts.............................................................................................................. 35
Bundling................................................................................................................................ 37
Anti-trust............................................................................................................................... 39
8 Mergers................................................................................................................................. 40
Horizontal Mergers................................................................................................................ 41
Vertical mergers.................................................................................................................... 45
Conglomerate mergers......................................................................................................... 49
9 Advertising and information.................................................................................................. 50
Advertising as an entry barrier.............................................................................................. 51
Advertising and monopoly power.......................................................................................... 52
Advertising mechanisms....................................................................................................... 54
Advertising and welfare........................................................................................................ 57
10 Research and development................................................................................................. 57
The incentive to innovate:..................................................................................................... 60
11 Patents and Patent Policy.................................................................................................... 64
Patent length......................................................................................................................... 65
Patent breadth...................................................................................................................... 65
Monopoly power and sleeping patents.................................................................................. 66
Patent licensing..................................................................................................................... 67
Use cases beyond IP protection............................................................................................ 68
12 Technology life cyclus......................................................................................................... 69
First movers.......................................................................................................................... 69
Second followers................................................................................................................... 71
Industry life cycle.................................................................................................................. 71
Technology life cycle............................................................................................................. 71
1
, Product life cycle................................................................................................................... 72
1 INTRODUCTION
Perfect competition: Firms in perfect competition loose all their market share when they
raise prices. This is not the case in monopolistic competition, where firms don’t offer the same
product, there firms do product differentiation.
Monopolistic competition: Exists when many companies offer competing products or
services that are similar, but not perfect, substitutes. Firms in monopolistic competition can
raise or lower prices without inciting a price war, often found in oligopolies.
Oligopoly: An oligopoly is a market structure with a small number of firms, none of which can
keep the others from having significant influence. -> voorbeeld oil company (handvol
bedrijven) , airline manufacturing,
Monopoly: A situation in which a single company or group owns all or nearly all of the market
for a given type of product or service
How to obtain market power (4 manieren om marktmacht te krijgen):
- Product differentiation and variety
- Advertising and information
- Horizontal or vertical relations
- R&D and Innovation : bv. Door nieuwe varianten krijg je first mover advantage
Market Power means:
Strategic interactions with rival firms on pricing, contract design, quantities, game
theory, R&D and innovation + Mergers and anti-trust
2 REVIEW OF MICROECONOMICS
Market demand:
Definition: Market demand curve describes the relation between the price consumers
are willing to pay per unit of the good and the aggregate quantity of the consumed
good
Firms and their managers care about market demand; explicitly or implicitly it is
necessary to have an idea of the market demand for their product, and many of your
future jobs will be about taking actions to:
Increase the demand for a product
Price correctly given the product and market conditions
These are key elements of a business plan!
Linear demand function : P = A – BQ
o A = maximum willingness to pay (WTP)
o B = the constant slope of the demand curve
o P1 = the max any consumer would pay for the Qth unit of the
good
2
, o We gaan uit van normale goederen : if P decreases, Q increases
o No giffen goods (the more you earn, and the price increases than Q will increase)
o No inferior goods (ex. Fastfood, the more you earn, Q will decrease)
o It describes relation between consumers and producers
Price elasticity of demand:
|ϵ|< 1 Demand is inelastic Increasing price increases revenues
|ϵ|> 1 Demand is elastic Increasing price decreases revenues
|ϵ|=1 if price reduces (increases) by 5%, then quantity increases (reduces) by 5 %
= procentuele verandering van q (idem voor p)
For any linear demand curve, demand will be price elastic in the upper half of the curve
and price inelastic in its lower half. At the midpoint of a linear demand curve, demand is
unit price elastic.
Firm’s demand:
From the perspective of the firm, how much of my product can I sell given the price I
ask?
If I am the only firm [monopoly], the firm’s demand function coincides with market
demand function
If I have no market power [perfect competition], the firm’s demand function is flat
(individual firms cannot affect price through quantity supplied)
If I am not the only firm but I do have some market power, my firm’s demand is
generally negatively sloped and also depends on others:
o The number of competitors
o Their products
o Their prices
o Their marketing
o …
Cross price elasticity of demand:
=> substitutes : Price for good 1 goes up, quantity demanded
for good 2 goes up (coffee and thee)
=> complements : Price for good 1 goes up, quantity demanded
for good 2 goes down (milk and coffee)
Als je meerdere producten hebt, als de ene zijn prijs verandert wat gebeurt er dan met
het andere merk (meerdere in de markt bv. German en apple watch)
What price should we set and what quantities could we sell?
o The demand function with intercept (what the highest buyer would pay)
o – if it has a negative effect on Q
o + if it has a positive effect on Q
o Always assume ceteris paribus: all others are equal
3
, What is the firm’s own price elasticity at a price of x?
o An increase of 1% in price leads to a 1.55%
reduction in quantity sold
o If Apple increases price with 1%, revenues
will go down
∆ Q AW
o = partiële afgeleide of the demand function to P AW
∆ P AW
Important to define markets: moeilijk om te bepalen tot welke markt je behoort
Profit Maximization: => main goal
Profit =
Profit max condition: => (eerste afgeleide = 0)
= MR = marginal revenue
= MC = marginal cost
Profit maximization => MR = MC (is zo voor alle marktstructuren)
Perfect competition:
When there are many firms in the market
Firms and consumers are price-takers, output levels don’t affect market price
The marginal revenue a firm receives is equal to the market price, which is equal to
marginal cost (first order condition for profit maximization), so price is equal to
marginal cost
Economic profit equal to zero = there is no money left after each input is paid a normal
competitive return
AC minimum: daar plaats je de prijs
Long run equilibriuim: P = MR = MC = AC, economic
profit equal to zero
Short run equilibrium: can deviate, suppose firm sets
𝑃>𝑃_𝐶 and 𝑄>𝑄_𝑐, then 𝑃>𝐴𝐶 ~ economic profit, attracts
entry, supply shifts to the right, price goes down…
Op KT: zullen er andere bijkomen omdat ze zien dat het
goed gaat om in die sector te werken -> daardoor kom
je toch weer op de balans terecht waar de economische profit toch weer 0 is
Monopoly:
Only one firm in the market
Market demand is the firm’s demand
Output decisions affect market price
At prices P1 (P2) consumers buy quantities Q1 (Q2)
L is the loss in revenue from the reduction in price from P 1 to P2
G is the gain in revenues from the sale of additional units
Marginal revenue from a change in price is G-L
Als ik mijn prijs verlaag dan zal je meer verkopen : wat gebeurt er-> de red area zal hij
niet meer krijgen , die verliest hij maar hij gains the green area, hij zal een plaats
kiezen waarbij de trade off tussen de groene en rode area optimaal is
So how does a monopolist set price and quantity?
4
1 Introduction............................................................................................................................. 2
2 Review of Microeconomics...................................................................................................... 2
3 Game Theory........................................................................................................................... 8
4 Cournot and Bertrand Competition......................................................................................... 9
5 Stackelberg Model................................................................................................................. 18
6 Product Differentiation and Product Variety..........................................................................22
Horizontal product differentiation......................................................................................... 22
Vertical differentiation........................................................................................................... 29
7 Entry Deterrence................................................................................................................... 31
Limit pricing en predatory pricing......................................................................................... 33
Product proliferation.............................................................................................................. 34
Long-term contracts.............................................................................................................. 35
Bundling................................................................................................................................ 37
Anti-trust............................................................................................................................... 39
8 Mergers................................................................................................................................. 40
Horizontal Mergers................................................................................................................ 41
Vertical mergers.................................................................................................................... 45
Conglomerate mergers......................................................................................................... 49
9 Advertising and information.................................................................................................. 50
Advertising as an entry barrier.............................................................................................. 51
Advertising and monopoly power.......................................................................................... 52
Advertising mechanisms....................................................................................................... 54
Advertising and welfare........................................................................................................ 57
10 Research and development................................................................................................. 57
The incentive to innovate:..................................................................................................... 60
11 Patents and Patent Policy.................................................................................................... 64
Patent length......................................................................................................................... 65
Patent breadth...................................................................................................................... 65
Monopoly power and sleeping patents.................................................................................. 66
Patent licensing..................................................................................................................... 67
Use cases beyond IP protection............................................................................................ 68
12 Technology life cyclus......................................................................................................... 69
First movers.......................................................................................................................... 69
Second followers................................................................................................................... 71
Industry life cycle.................................................................................................................. 71
Technology life cycle............................................................................................................. 71
1
, Product life cycle................................................................................................................... 72
1 INTRODUCTION
Perfect competition: Firms in perfect competition loose all their market share when they
raise prices. This is not the case in monopolistic competition, where firms don’t offer the same
product, there firms do product differentiation.
Monopolistic competition: Exists when many companies offer competing products or
services that are similar, but not perfect, substitutes. Firms in monopolistic competition can
raise or lower prices without inciting a price war, often found in oligopolies.
Oligopoly: An oligopoly is a market structure with a small number of firms, none of which can
keep the others from having significant influence. -> voorbeeld oil company (handvol
bedrijven) , airline manufacturing,
Monopoly: A situation in which a single company or group owns all or nearly all of the market
for a given type of product or service
How to obtain market power (4 manieren om marktmacht te krijgen):
- Product differentiation and variety
- Advertising and information
- Horizontal or vertical relations
- R&D and Innovation : bv. Door nieuwe varianten krijg je first mover advantage
Market Power means:
Strategic interactions with rival firms on pricing, contract design, quantities, game
theory, R&D and innovation + Mergers and anti-trust
2 REVIEW OF MICROECONOMICS
Market demand:
Definition: Market demand curve describes the relation between the price consumers
are willing to pay per unit of the good and the aggregate quantity of the consumed
good
Firms and their managers care about market demand; explicitly or implicitly it is
necessary to have an idea of the market demand for their product, and many of your
future jobs will be about taking actions to:
Increase the demand for a product
Price correctly given the product and market conditions
These are key elements of a business plan!
Linear demand function : P = A – BQ
o A = maximum willingness to pay (WTP)
o B = the constant slope of the demand curve
o P1 = the max any consumer would pay for the Qth unit of the
good
2
, o We gaan uit van normale goederen : if P decreases, Q increases
o No giffen goods (the more you earn, and the price increases than Q will increase)
o No inferior goods (ex. Fastfood, the more you earn, Q will decrease)
o It describes relation between consumers and producers
Price elasticity of demand:
|ϵ|< 1 Demand is inelastic Increasing price increases revenues
|ϵ|> 1 Demand is elastic Increasing price decreases revenues
|ϵ|=1 if price reduces (increases) by 5%, then quantity increases (reduces) by 5 %
= procentuele verandering van q (idem voor p)
For any linear demand curve, demand will be price elastic in the upper half of the curve
and price inelastic in its lower half. At the midpoint of a linear demand curve, demand is
unit price elastic.
Firm’s demand:
From the perspective of the firm, how much of my product can I sell given the price I
ask?
If I am the only firm [monopoly], the firm’s demand function coincides with market
demand function
If I have no market power [perfect competition], the firm’s demand function is flat
(individual firms cannot affect price through quantity supplied)
If I am not the only firm but I do have some market power, my firm’s demand is
generally negatively sloped and also depends on others:
o The number of competitors
o Their products
o Their prices
o Their marketing
o …
Cross price elasticity of demand:
=> substitutes : Price for good 1 goes up, quantity demanded
for good 2 goes up (coffee and thee)
=> complements : Price for good 1 goes up, quantity demanded
for good 2 goes down (milk and coffee)
Als je meerdere producten hebt, als de ene zijn prijs verandert wat gebeurt er dan met
het andere merk (meerdere in de markt bv. German en apple watch)
What price should we set and what quantities could we sell?
o The demand function with intercept (what the highest buyer would pay)
o – if it has a negative effect on Q
o + if it has a positive effect on Q
o Always assume ceteris paribus: all others are equal
3
, What is the firm’s own price elasticity at a price of x?
o An increase of 1% in price leads to a 1.55%
reduction in quantity sold
o If Apple increases price with 1%, revenues
will go down
∆ Q AW
o = partiële afgeleide of the demand function to P AW
∆ P AW
Important to define markets: moeilijk om te bepalen tot welke markt je behoort
Profit Maximization: => main goal
Profit =
Profit max condition: => (eerste afgeleide = 0)
= MR = marginal revenue
= MC = marginal cost
Profit maximization => MR = MC (is zo voor alle marktstructuren)
Perfect competition:
When there are many firms in the market
Firms and consumers are price-takers, output levels don’t affect market price
The marginal revenue a firm receives is equal to the market price, which is equal to
marginal cost (first order condition for profit maximization), so price is equal to
marginal cost
Economic profit equal to zero = there is no money left after each input is paid a normal
competitive return
AC minimum: daar plaats je de prijs
Long run equilibriuim: P = MR = MC = AC, economic
profit equal to zero
Short run equilibrium: can deviate, suppose firm sets
𝑃>𝑃_𝐶 and 𝑄>𝑄_𝑐, then 𝑃>𝐴𝐶 ~ economic profit, attracts
entry, supply shifts to the right, price goes down…
Op KT: zullen er andere bijkomen omdat ze zien dat het
goed gaat om in die sector te werken -> daardoor kom
je toch weer op de balans terecht waar de economische profit toch weer 0 is
Monopoly:
Only one firm in the market
Market demand is the firm’s demand
Output decisions affect market price
At prices P1 (P2) consumers buy quantities Q1 (Q2)
L is the loss in revenue from the reduction in price from P 1 to P2
G is the gain in revenues from the sale of additional units
Marginal revenue from a change in price is G-L
Als ik mijn prijs verlaag dan zal je meer verkopen : wat gebeurt er-> de red area zal hij
niet meer krijgen , die verliest hij maar hij gains the green area, hij zal een plaats
kiezen waarbij de trade off tussen de groene en rode area optimaal is
So how does a monopolist set price and quantity?
4
