real-world competition and technology 17 real-world competition and technology it is ridiculous to...
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Real-World Competition and Technology
17
Real-World Competition and Technology
It is ridiculous to call this an industry. This is rat eat rat; dog eat dog. I’ll kill ’em, and I’m going to kill ’em before they kill me. You’re talking about the American way of survival of the fittest.
— Ray Kroc (founder of McDonald’s)
CHAPTER
17
Copyright © 2010 by the McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
Real-World Competition and Technology
17
Managers’ Incentives and the Need for Monitoring
• Managers have an incentive to keep costs down, but their salaries are included in costs
• To address this problem, firms sometimes give managers incentive-compatible contracts in which the incentives of each of the two parties to the contract are made to correspond as closely as possible
• This creates a monitoring problem which is the need to oversee employees to ensure that their actions are in the best interest of the firm
• Employees’ incentives differ from the owner’s incentives
17-2
Real-World Competition and Technology
17
What Do Real-World Firms Maximize?
• Firms have complicated goals that reflect the organizational structure and incentives built into the system
• Although profit is one goal of a firm, often firms focus on other intermediate goals such as cost and sales
• Some firms do not push for cost efficiency and become lazy monopolists
• Lazy monopolists are firms that do not push for efficiency, but merely enjoy the position they are already in
17-3
Real-World Competition and Technology
17
The Lazy Monopolist and X-Inefficiency
• Lazy monopolists are not profit maximizers
• They perform as efficiently as is consistent with keeping their jobs
• The result is called X–inefficiency where firms operate far less efficiently than they technically could
• Such firms have monopoly positions, but they don’t make large monopoly profits which can result in earning normal profits or even a loss
17-4
Real-World Competition and Technology
17
How Competition Limits the Lazy Monopolist
• New firms or international competition can push lazy monopolies to be more competitive
• Corporate takeovers, or the threat of one, can improve efficiency
• A corporate takeover is when another firm or group of individuals issues a tender offer (buy the stock) to gain control and install its own managers
• Nonprofit organizations may display lazy monopolist tendencies
17-5
Real-World Competition and Technology
17
How Monopolistic Forces Affect Perfect Competition
• Laws, social values, and customs in the United States do not allow perfect competition to work because our government emphasizes other social goals besides efficiency
• The Robinson-Patman Act and several state laws prevent firms from charging a price that is too low
• The U.S. has laws, regulations, and programs that prevent agricultural markets from working competitively
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Real-World Competition and Technology
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Movement Away from Competitive Markets
S
D
P
Q
PL
PM
L M
A BC
If suppliers of O-L can keep suppliers of L-M out of the
market, price increases to PL
O
Profit increases by A
Deadweight loss is B+C
Consumers lose A+B in consumer surplus
The suppliers kept out of the market lose C in
producer surplus
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Real-World Competition and Technology
17
How Competition Forces Affect Monopoly
• Competitive forces work to break down monopoly by using political or economic forces
• Lobbying to change the law protecting monopoly
• Developing a similar product without violating a patent
• Reverse engineering is the process of a firm buying other firms products, disassembling them, studying them, and then copying them within the limits of the law
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Real-World Competition and Technology
17
How Firms Protect Their Monopolies
Monopolies spend money to maintain their monopoly by:
• Advertising
• Lobbying
• Producing goods that are difficult to copy
• Not taking advantage of their monopoly position and charging a lower price
• Firms will buy monopoly power until the marginal cost of maintaining the monopoly equals the marginal benefit
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Real-World Competition and Technology
17
Establishing Market Position
• It is argued that modern competition is a winner–take–all competition
• In winner–take–all markets, the initial competition is on establishing market position
• The winner who achieves a monopoly can charge significantly higher prices without facing any competition
17-10
Real-World Competition and Technology
17
Technology, Efficiency, and Market Structure
• Technological development is the discovery of new or improved products or methods of production
• Because the global market is significantly larger than a domestic one, globalization provides an incentive to develop new technology
• Dynamic efficiency refers to a market’s ability to promote cost-reducing or product-enhancing technological change
• Market structures that best promote technological change are dynamically efficient
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Real-World Competition and Technology
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Market Structure and Technology
• There is no incentive to develop new technologies because they earn no profits to fund research
• Even if they did innovate, competitors would gain from the new technology without having to pay for it
Perfect competition
• Because of market power, monopolistic competition is more conducive to technological change
• Due to ease of entry, they lack long-run profits, so their ability to recoup their investment is limited
Monopolistic competition
17-12
Real-World Competition and Technology
17
Market Structure and Technology
• Monopolists have profits but little incentive to innovate since they are protected by barriers to entry
Monopoly
• May be the market structure that is most conducive to technological change
• If competitors are innovating, it will force them to do so as well
• They receive economic profit, oligopolists have the money to carry out research and development
Oligopoly
17-13
Real-World Competition and Technology
17
Network Externalities, Standards, and Technological Lock–In
• Network externalities occur when greater use of a product increases the benefit of that product to everyone
• Network externalities lead to market standards and affect market structure
• Standards are created when a firm’s standard is accepted and dominates the market
• Technological lock-in is when prior use of a technology makes the adoption of subsequent technology difficult
• First-mover advantage helps explain the high stock prices of start-up technology companies
17-14