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TOPIC 1: MARKET STRUCTURE AND MARKET POWER
1.1. Competitors
Anyone that produces a substitute for a firm’s product.
- Cross price elasticity: Measures the substitution degree of a product for another.
P.E.>1 – The demand is elastic, a change in price is reflected as an even major change in demand. The extent of the variation is higher as higher is the substitution degree of a product for another. We can say two firms are competing when a price increase by one firm, drives its customers to the other firm.
P.E.<1 – The demand is inelastic.
- The company can have several competitors and at different levels (either in input and output markets at the same time).
a. Direct Competitors – Strategic choice of one firm directly affects the performance (sales) of the other.
b. Indirect Competitors – Strategic choice of one firm affects the performance of the other because of a strategic reaction by a third firm (transitive effect).
e.g. Lexus BMW Jeep Grand Cherokee: Lexus decreases price, consequently BMW decreases its prices also. Although Jeep Grand Cherokee does not compete directly with
Lexus it is also affected due to BMW reaction.
1.2. Substitutes
Two products are substitutes when they have:
- Similar performance characteristics
However : Products that belong to the same genre or fall under the same SIC (Standard industry classification) need (Classificação das Actividades Económicas) cannot be substitutes if their performance characteristics are vastly different.
e.g. Mercedes vs Hyundai (they have the same classification but we cannot consider them competitors). - Occasion for use
They may share characteristics and serve the same needs.
However : they differ in the way they are used (they are not substitutes).
e.g. Milk vs Cola, although they are both beverages but they are used in different occasions/purposes. - Sold in the same geographic area
The firm should identify the competitors in each different geographical area. Rather than rely on geographical
1.1. Competitors
Anyone that produces a substitute for a firm’s product.
- Cross price elasticity: Measures the substitution degree of a product for another.
P.E.>1 – The demand is elastic, a change in price is reflected as an even major change in demand. The extent of the variation is higher as higher is the substitution degree of a product for another. We can say two firms are competing when a price increase by one firm, drives its customers to the other firm.
P.E.<1 – The demand is inelastic.
- The company can have several competitors and at different levels (either in input and output markets at the same time).
a. Direct Competitors – Strategic choice of one firm directly affects the performance (sales) of the other.
b. Indirect Competitors – Strategic choice of one firm affects the performance of the other because of a strategic reaction by a third firm (transitive effect).
e.g. Lexus BMW Jeep Grand Cherokee: Lexus decreases price, consequently BMW decreases its prices also. Although Jeep Grand Cherokee does not compete directly with
Lexus it is also affected due to BMW reaction.
1.2. Substitutes
Two products are substitutes when they have:
- Similar performance characteristics
However : Products that belong to the same genre or fall under the same SIC (Standard industry classification) need (Classificação das Actividades Económicas) cannot be substitutes if their performance characteristics are vastly different.
e.g. Mercedes vs Hyundai (they have the same classification but we cannot consider them competitors). - Occasion for use
They may share characteristics and serve the same needs.
However : they differ in the way they are used (they are not substitutes).
e.g. Milk vs Cola, although they are both beverages but they are used in different occasions/purposes. - Sold in the same geographic area
The firm should identify the competitors in each different geographical area. Rather than rely on geographical