Market Structure & Competition
MARKET STRUCTURE AND COMPETITION EXERCISES
Exercise 1:
The own firm’s price elasticity is a measure that evaluates how the firm’s demand changes when it alters the price of the good or service offered, given that the rest of the variables remain fixed. While the cross-price elasticity measures how a firm’s demand changes when some other firm alters its price. Therefore, the second term considers the existence of interrelated firms in the market, that is, the fact that one firm’s actions affect its own outcomes, but also other firms’ in the same market outcomes.
By calculating the cross-price elasticity it is possible to determine whether and how much firms are interrelated, that is, whether they compete in the same market, and thus, determine whether their products or services are substitutes.
Exercise 2:
The Ivy League is an athletic conference composed by 8 teams from 8th private institutions of higher education in the Northeaster United States. On the other hand, the MIT is a private technological research university located in Cambridge.
In order to determine whether these excellence schools compete in the same market, different approaches can be used:
SSNIP criterion: It states that different firms compete in the same market if a merger between some of the potential competitors leads to a small but significant (higher than 5%) non-transitory (more than one year) increase in price. It also assumes that if one of the firms competing in the market increases the price many of its consumers will switch and do business with some of its rivals. In this case, considering that the service offered by the schools is completely different, the Ivy League offers a higher education complemented with the development of a athletic professional career, while the MIT offers the development of technological research, their service performance and occasions for use will differ, and therefore, the group and characteristics of the consumers attended by these firms are also
Exercise 1:
The own firm’s price elasticity is a measure that evaluates how the firm’s demand changes when it alters the price of the good or service offered, given that the rest of the variables remain fixed. While the cross-price elasticity measures how a firm’s demand changes when some other firm alters its price. Therefore, the second term considers the existence of interrelated firms in the market, that is, the fact that one firm’s actions affect its own outcomes, but also other firms’ in the same market outcomes.
By calculating the cross-price elasticity it is possible to determine whether and how much firms are interrelated, that is, whether they compete in the same market, and thus, determine whether their products or services are substitutes.
Exercise 2:
The Ivy League is an athletic conference composed by 8 teams from 8th private institutions of higher education in the Northeaster United States. On the other hand, the MIT is a private technological research university located in Cambridge.
In order to determine whether these excellence schools compete in the same market, different approaches can be used:
SSNIP criterion: It states that different firms compete in the same market if a merger between some of the potential competitors leads to a small but significant (higher than 5%) non-transitory (more than one year) increase in price. It also assumes that if one of the firms competing in the market increases the price many of its consumers will switch and do business with some of its rivals. In this case, considering that the service offered by the schools is completely different, the Ivy League offers a higher education complemented with the development of a athletic professional career, while the MIT offers the development of technological research, their service performance and occasions for use will differ, and therefore, the group and characteristics of the consumers attended by these firms are also