Course thesisFirms attempt to avoid or escape perfect competitionWhy?Undifferentiated product (homogeneous, generic, etc)Same product as other companies are sellingLittle or no control over price  equilibrium priceCan change your price, but if other companies are lowering their price, you must lower your price to start in competitionPrice in perfect competition – equilibrium priceEquilibrium price – price at which supply = demandLong term/ economic profit = 0Short term/ accounting profit expected value at 0Expected value – statistical averageCompanies can go over or under 0 but the average is 0If demand increases, new firms can enter without costsIf demand goes up, cant obtain any benefitsIf demand decreases, random chance of “me” survivingRandom chance of firms survivalNo competitive advantageHow?Product differentiation (high rate of failure)People will choose your product over a different company’s productBlack jacket w/ white stripes  make diff colorsMaking homogenous product and new product  raise price and now the company has broken out of perfect competitionProcess enhancement (high rate of failure)Productivity improvementKeep making the homogeneous product but find a less expensive way to produce itUse extra money to improve productivity more, pay off debts, make differentiated product, advertising, keep it, lower price of homogeneous product (gain more customers and force companies out of business)Change business model (money spent with no ideas)New source of revenueInvestmentRiskyCosts before benefitsBenefits may not happen (no guarantee)Even if benefits happen, it may be too little or too lateMultiple sources of moneyCurrent revenueRetained earningsDebt (loans)Equity (sell portion of firm – angel investors)Sale of assets (sell books at end of the term to be able to buy new books for the next term)Expected costs – statistical way of adding up costsCosts (uncertain)Magnitude of costsWhen costs happenE(Rev) = time value of moneyE(Costs)Time value of moneyOpportunity costsCosts of capitalTaxesE(Rev) > E(Costs)Make investmentIncrease economic profitE(Rev) = E(Costs)Maybe make investmentEconomic profit = 0 // no changeE(Rev) < E(Costs)Do not make investmentDecrease economic profitCapital budgeting problem – standard/ starting problemsHeavily debt focused if in perfect competitionTransactions with environmentDEF – exchanging among partiesPartiesSellers (firms, individual/household)Firms sell commercial paper – things firms can sellI/H sell laborBuyers (firms, individual/household)Firms – buy stuff, labor, etcI/H – buy productsThird parties – specialized sellersBrokers - bring buyers and sellers togetherPaid – get a fee, commission, or bothInfrastructure buyers – add efficiencySame benefit for lower priceTypesLegal or illegalIllegal - more risky/ more costsDomestic or internationalInternational – more risky becauseMay not be legal in different countriesDifferent languagesDifferent currencyMarket or transferMarket – firms and environmentTransfer – within the firmPurchase or barterPurchase – money and product exchangeBarter – product and product exchangeSpot or futureSpot – striking a deal and completing the deal within a close time frameFuture – striking the deal and completing the deal are separated, spread out in timeMarketsDEF – Arena (space) within which similar transactions occurSimilar things being exchangedExample – labor, raw materials, finished goods, capital, real property (buildings, land), intellectual property (music, patented processes)Arena  physical or virtualPhysical – buildings, spaces, storesVirtual – online or electronicMarkets are stablePriceAttributeAvailabilityHow are markets stable?Price theory – supply and demandDescriptive assumptionsSet up a set of idealized marketsEntrance costs increase as you go upPrice goes up  influenced by entrance costs and number of sellers# Of product# Of buyers# Of sellersEntrance costsPriceMonopoly1Many buyers and very small1Monopolistic competition1 / segMany buyers and very small / seg1 / segOligopoly1*Many buyers and very smallFew sellers and large (8-10)Perfect competition1Many buyers and very smallMany sellers and very small0InformationPublicPrivateBuyersKnow all sellersKnow pricesBudget constraintPreferences/utility functionsSellersKnow all sellersKnow pricesCosts of making productTheir preferences on profitPublic – all buyers and sellers know all sellers and what price they are askingEveryone knows this informationKeep private (preferences) because if they are known it could make the person vulnerable or they don’t know their preferencesSymmetric information - neither party has an advantageMotivational – self interestYou want an advantage in the market placeCan I get a better deal?How? Informational (seller – budget constraint – play with price)Target profit – asymmetric information (give an advantage)Seller – what peoples preferences areWhat preferences are and what their budget isData mining – find out preferences and budgetAds online based on previous searches/purchasesWant a better deal – asymmetric info (get advantage)Regulatory mechanismsAnything other than the price theory that keeps the market stableInterpersonal trust  contract  international agreementNo trust = markets stop workingContract – agreement among private parties enforceable by lawHigh trust – less complex contract (vise versa)Contract’s complexity  depends on trustInterpersonal trust – no out of pocket costContract – real costsGives protection  follow through with dealWho pays?Buyers  increases the price the buyer paysDemand likely to go down or disappearWant protection but don’t want to pay for itSellers  adds to expenses, increase costsWant protection but don’t want to payGeneral public  taxes increaseCould be any individual or any combination of the threeGreater the costs, someone must payCourse thesis- Firms attempt to avoid or escape perfect competition- Why?o Undifferentiated product (homogeneous, generic, etc) Same product as other companies are sellingo Little or no control over price  equilibrium price Can change your price, but if other companies arelowering their price, you must lower your price to start in competition  Price in perfect competition – equilibrium price Equilibrium price – price at which supply = demando Long term/ economic profit = 0o Short term/ accounting