Microeconomics AnalysisBasic microeconomics provides the analytical basis for understanding many cases. Some of the issues to address are:Type of marketFind out about type of market. What is 4 or 8 firm concentration ratio? What is minimum efficiency scale?Is market:1)Perfect CompetitionWithout any product differentiation, a firm will be a price taker. A competitive firm’s demand curve is horizontal and it price elasticity of demand is infinite. When the firm’s demand curve is horizontal, each additional unit it sells adds sales revenue equal to the market Revenue = Marginal Cost = Price2)MonopolyAn industry dominated by one firm is a monopoly. This firm has a significant control over prices. A monopolistic outcome maximizes industry profits. A monopolist sets price so that MR=MC=Price *[1+(1/Ed)] where Ed is the elasticity of demand. If demand is highly elastic, there is little advantage of having monopoly power since MR=MC=Price (same as Perfect Competition). Even if demand is inelastic, a monopolistic firm must be careful in setting price. If price is set too high and barriers to entry are not, the market may attract new )OligopolyAn oligopoly is seen in industries that have high barriers to entry and are dominated by a few firms. Firms have some control over prices and all players have the incentive to maintain high prices, as any price cut will be matched by competitors and reduce profits. Game theoretic analyses help understand industry of demand1)How elastic is demand with respect to change in prices?2)Consider long-term and short-term effects on elasticity of pricing issues like:1)Think about what price the market will bear. Also identify substitution effects. Keep in mind that demand may be inelastic in the short run, but is typically more elastic in the long )How do competitors react to price change?3)Consider methods to enhance and support price )Is price too low (might compromise the reputation of the brand) or is it too high (might effect market share)?
Some important concepts for microeconomics analysis are:1)Price discrimination: consider how the firm can enhance and support price discrimination (remember, price discrimination increases profits).2)Double marginalization: consider how total profits in a vertical chain can be maximized by integrating with your supplier. This is possible when a supplier’s pricing decision leads to inefficiencies in a firm’s production )Transfer price: think of any inefficiency caused by artificial transfer pricing within a firm.
