Complete Summary Procurement and Supply Management

2024




Summary Procurement
& Supply Management
COMPLETE SUMMARY

, Lectures Procurement & Supply Management

Week 1

Lecture 1

Market failures and government interventions
 Efficiency of perfect markets but markets are not always efficient
 Economist analyze this:
 Describe behavior of firms and consumers
 Implications for public policy
 Examples from transport markets

Traffic congestion
 A growth trend over the years
 Traffic and travel time loss increase  growing economy and lower
oil price
 Concentration of size and growth in the Netherlands
 Certain timeframes are extremely busy  traffic is concentrated in
overpopulated places and on certain times

Conclusion traffic congestion
 Average is no problem but due to concentration it is  market fails

Economic approach
 Road is a market
 Demand  trips
 Supply  highway capacity

Value of Time (VoT)
 Important part of the price for a trip

Economic example traffic
 Standard inverse demand function D
 Price is a generalized price, for which time is important  especially
when talking congestion
 Area below D gives B
 D itself gives mb  benefits attached to the last trip added

Supply side
 Travel time rises when demand increases
 Average costs (= generalized price) also rises
 ac = travel time + VoT + other costs
Area G = possible welfare gain
 From N0 to N*
 Benefits fall with area below D = mb
 Costs fall with area below mc

External costs

,  Unpriced costs  imposed on others (environmental pollution or
noise)
 Marginal external costs mec  value of travel time losses caused for
others by last trip added
 mec = mc – ac
 free market outcome not efficient  social surplus S = B – C not
maximized

optimum
 goal  reduce road use from 45 to 30
 economic solution  demand should fall? Price should rise
 road pricing (r)  generalized price becomes ac + r
 optimal toll  r* = mec (N*)

r* = mec
 Every road user pays a toll equal to the external costs he creates for
others
 Congestion is optimized not minimized
 Toll varies during peak hours and off-peak hours

Toll is optimal
 Realizes optimal level of road use
 Realizes optimal composition of road users

Conclusion
 External effect  free market is not efficient & pricing restores
efficiency
 Pricing is inherently more efficient than non-pricing  volume and
composition
 Because of distributional impacts, welfare improvements may not
always be easy to implement

Lecture 2

Market power
 Exists when a firm is large enough (relative to the market) to face a
downward sloping demand function
 Price setting is possible
 Monopoly, oligopoly or monopolistic competition

Causes of market power
 Economies of scale
 Falling average costs when production expands (due to large
fixed costs)
 Bigger firms are more efficient and competitive
 In transport  bigger aircraft / trains / higher frequencies
 Economies of scope
 As economies of scale, but then when multiple products are
offered by a single firm
 In transport  network effects

, Network economies
 Trains
 Hub & spoke

Government policies
 Restricted entry
 Instable markets, wasteful competition, price wars and destructive
competition

Example: Bertrand competition
 Demand P  100  Q = 100 or P > 100  Q = 0
 Cost per firm: 1000 + 10*Q
 Duopoly with price competition  supplier with lowest price gets
whole market, with equal prices both get 50%
 Find equilibrium by testing 2 possible deviations of a price equal to
that of the competitor, p:
 From p to p+1cent  output from 50 to 0 & profit falls with
50*(p-10)  don’t do it if p>10, otherwise do
 From p to p-1cent  output from 50 to 100 & profit rises with
50*(p-1ct-10)-50*1ct  do if p>10.01, otherwise don’t
 Equilibrium rounded  P =10, Q =50
 Profit per firm = -1000  loss

Bertrand illustrates
 Instable markets  both loss  1 bankrupt  monopoly  entry 
both loss etc.
 Wasteful competition  two firms  fixed costs twice
 Price wars  competition with p=mc leads to losses
 Destructive pricing  could occur: p<mc to quickly knock out
opponent
 All four may motivate government intervention
Causes of market power
 Economies of scale and/or scope
 Sometimes also government policies (fear of wasteful or destructive
competition)

Consequence 1 from Market power: Price setting
 Demand function gives for every quantity the price we can charge
 Gives the average revenue
 From average revenue to marginal revenue  first go to total
revenue

Example D =100 -N
 Total revenue  R = 100*N -N2
 Marginal revenue  mr = 100 – 2N
 mr is below D  to sell one more product, we have to lower the price
 we get price P as revenue for last unit sold
 we get lower revenues for all other units