Management of industrial clusters. Tutorial

Long-term period, the firm can change all factors of production, and the industry can change the number of their firms. The firm seeks to expand production, lowering average costs. In the case of increasing the performance of average total costs are reduced. By decreasing performance, they grow. If there is a positive effect of scale, the long-run average cost curve has a significant negative slope; if there is constant returns to scale, it is horizontal; in case of negative economies of scale curve goes up (fig. 1.5).

Production growth in the longer term, entry into the industry new firms can affect the price of resources. If the industry uses non-specific resources, the resource price may not rise. In this case, the costs remain unchanged.

However, in most sectors additional demand for a resource causes its price will rise. There are industries and with decreasing costs in the long run. This decline is usually associated with the growing scale of production, whereby the demand for resources is relatively reduced. In this case there is a decrease in the price of the resource.

In conditions of perfect competition in the long term (fig. 1.6) the maximum profit is achieved when the validity of the equation: MR = MC = P = AC.

Fig. 1.6. Average and total costs in the long term

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Price P1 enables firms to cover costs, i.e. the condition of breakeven (fig. 1.7):P1 = ATC.

The exit of firms from the industry will occur if P < ATCmin.

Fig. 1.7. The balance of competitive firms in the long run

Long-run average cost curve (ATC) is formed on the basis of shortterm average costs from different periods. In the long period firms operate in condition of minimum expenses.

A competitive market has the following characteristics:

1.Resources are used as efficiently as possible. This is because firms will produce the maximum amount of products as long as the marginal cost of the resource will not be equal to its price.

2.Perfect competition forces firms to produce products with minimum average costs and sell it for a price that matches the costs. Therefore, the market set prices low. In this market, win consumers reaches a maximum.

Monopoly

The other extreme market environment is an absolute monopoly.

In this case there is a single firm, and it completely determines the price of the product, varying the volume of the issue. We say that the monopoly has full market power, i.e. in its market fully, there is no competi-

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tion. The product monopoly is unique, it has no substitutes. Barriers to market entry are high and do not allow new firms to enter the markets.

Sources of barriers to entering may be different:

1)savings due to increased scale of production. Such industries are called natural monopolies (municipal utilities, gas and electric companies, metro, railway). The increase in the number of firms in the industry causes an increase in average costs. The characteristic feature of natural monopoly is the reduction in the average cost of up to complete saturation of the industry demand.

2)legal barriers. The state creates formal barriers to issuing patents and licenses, there is a legal monopoly;

3)possession of unique natural resources (the exclusive right to a

resource);

4)legislative prohibition to engage in certain activities (for example, the state monopoly on the production and sale of alcoholic beverages, weapons);

5)high initial capital when you need to make large one-time investments in fixed capital, which in the case of industry, it is impossible to return.

In terms of pure monopoly an industry consists of one firm, i.e. the concept of "firm" and "industry" are the same. Hence, the demand curve for the product of the monopoly is the market demand curve. A monopolist can determine the production volume and to assign a price (fig. 1.8).

Fig. 1.8. Determination of price and output under conditions of pure Monopoly

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To maximize profit, the monopolist produces such a volume of production at which MR = MC. Price exceeds marginal revenue (P > MR).

In the case of simple monopoly (not resorting to price discrimination) marginal revenue is always below its price. When demand is elastic, the value of marginal revenue is positive and total revenue increases. When demand is inelastic, marginal revenue is less than zero and total revenue falls. When demand is unit elastic, MR = 0, total revenue is maximum.

When demand is elastic, marginal revenue is greater than zero (MR>0), and total revenue increases. And when demand is inelastic, marginal revenue is less than zero (MR<0) and total revenue falls. Marginal revenue is less than price at all levels of the issue:

MR < P

The gap between price and marginal revenue occurs because the firm is selling the whole products manufactured during this period at the same price.

For the characteristic of monopoly power is often used an indicator that determines the degree of market concentration. He's called the Herfindahl-Hirschman index (Nd):

where S1 – the share of the largest firms in the production of the entire industry;

S2 the specific weight of the next largest company in the production of the entire industry;

Sn - the share of the smallest firms in the production of the entire industry.

A monopolist can be in two situations. In one case, he may assign a single price to all buyers, whereas in the other it is available for price discrimination.

Price discrimination is that the same products the firm sells to different customers at different prices, depending on their solvency. This occurs under the following prerequisites:

-if the seller has a fairly high degree of monopoly, providing him control over production and prices;

-if it is possible to segment the market is to divide buyers into different groups with different degree of elasticity of demand on price;

-if someone who buys cheaper goods, can not then resell it more expensive.

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Types of price discrimination:

-the volume of purchases (wholesale and retail);

-socio-demographic characteristics of buyers (age, income, social

status);

the markets (internal and external);

-the average number of purchases per period (seasonal discounts,

sales).

Firms practicing discrimination, appropriate a significant portion of consumer surplus when setting prices above the equilibrium level. In the limiting case of the discriminating firm seeks to absorb consumer surplus. The monopolist will not only get profit, normal for the monopolist, but also additional profit.

Monopolized market has the following characteristics:

1.Resources are used with minimal efficiency. This is because a firm will produce fewer goods and sell them at a higher price. So, those consumers whose demand is equal to zero if you set the monopoly price but would be satisfied in a competitive market, will not have access to the product. This leads to the fact that part of welfare is completely lost to society, and do not get any monopoly, not consumers. Such losses are called loss of dead weight.

2.Monopoly gives the firm incentives to invest in cost reduction of their production, because the market there is no competition from other firms.

3.Monopoly allows firms to produce the least amount of product and sell it to the highest bidder. The monopoly gives the firm the maximum possible profit, but offers the consumer the least benefit from the transaction.

Monopolistic competition

An intermediate case between competition and monopoly market is monopolistic competition. It is characterized by the following features:

-on the market there are many firms. Each firm in the market is so small that none of them is significant dependence on the actions of others. Collusion between firms almost impossible. Each firm does so at their own risk, determines its pricing policy;

-barriers to entry of firms into the industry is relatively small. Economies of scale is not of great importance, and the capital required to start a business, small;

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- goods are differentiated, that is, the product of one firm differs from the products of competitors. Therefore, each firm may slightly raise prices without losing its customers. Some buyers attach great importance to the special characteristics of the goods offered by the firm.

This type of market characteristic for the food industry, the production of clothing and shoes, book publishing, retailing and services. The basis for product differentiation can be differences in quality, service, advertising. In this case, it is difficult to find two firms that produce the same product. Important not only the price but also non-price factors: advertising, terms of sale, the purchase of goods in installments, the presence of a warranty repair.

Combining elements of monopoly and competition defines the basic features of behavior in this market.

The demand curve is less elastic than in pure competition, but more elastic than pure monopoly. The degree of elasticity under conditions of monopolistic competition depends on the number of competitors, and depth of product differentiation.

The volume of output at which the firm's profit maximum is determined by the intersection of the curve of marginal costs and marginal revenue, and price specified in the demand curve.

Within a short span of time the company can get the profit and bear the loss. However, the absence of high entry barriers in an industry where firms receive sustainable economic profit, leads to the fact that there rush other firms. As a result, in a long period of time creates a situation similar to perfect competition: economic profit is zero.

Oligopoly

Another intermediate type of market is an oligopolistic market. It is characterized by the following features:

few firms in the industry. Usually their number does not exceed ten;

-high barriers to entry in the industry. They are associated with economies of scale. In addition to economies of scale, oligopolistic concentration generated by the patent monopoly, the monopoly control over rare sources of raw materials, high cost advertising;

-universal interdependence. Each of the firms in the formation of his economic policy has to take into account the reaction from competitors. Specific factor pricing under conditions of oligopoly is the strategic plan of the reaction of the oligopolist to the expected actions of competitors.

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There are 2 basic forms of behavior of firms under conditions of oligopolistic structures: non-cooperative and cooperative. In the case of noncooperative behavior, each seller solves the problem of determining the price and volume of output.

Consider the cases of non-cooperative behavior.

The Cournot model considers the case where firms compete in terms of production (fig. 1.9). The simplest case of studying the behavior of the two firms in the market.

Fig. 1.9. Model of duopoly Cournot

The Cournot model assumes that the market consists of only two firms that produce homogeneous goods. Each firm takes the price and volume of production of the competitor constant, and then makes its decision. The curve of market demand is known. Both firms make decisions about production simultaneously and independently from each other. Each of the companies involves the release of a competitor's permanent.

Each of the two sellers assumes that its competitor will always maintain its stable release.

Duopolist 1 starts production not knowing how much produce duopolist 2. It takes the value of production of a competitor for an unknown magnitude, and solves its task of maximizing profits. But he also knows that his competitor is completely symmetrical to it solutions of both companies will be identical. Then he can substitute the solution of the profit maximization problem of a competitor in its maximization problem, and to determine the optimal amount of output. what is the maximum profit.

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Equilibrium in the Cournot model can be represented using reaction curves, showing the profit maximizing production volumes to be implemented by a single firm, if the production volumes of competitors.

Fig. 1.10. Curves response

In fig. 1.10 response curve I is maximizing profit the release of the first of the firm as a function of the release of the second. Response curve II is maximizing the profit of the other firm as a function of the release of the first.

Response curves can be used in order to show how equilibrium is established. If you follow the arrows, drawn from one curve to another, starting with the release of q1 = 12 000, it will lead to the implementation of the Cournot equilibrium at point E, where each firm produces 8,000 products. At point E the two curves intersect response.

This is the Cournot equilibrium.

The Cournot equilibrium: each firm correctly calculates the behavior of the competitor and make the best decision for themselves, none of the firms has no incentive to change their output.

Another way of competition between the oligopolists is described in the model of Bertrand, where firms leave the production unregistered, but can change the price level. In this model, as in conditions of pure competition, the firm, which assigns a higher price would lose all customers. So, the company will quote prices equal to their marginal costs, if firms have the same technology. If the technology is different, more efficient firm will set the price so that it will be one penny less than the marginal cost of the com-

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petitor. So it will displace it from the market, and get all the buyers in this market.

There are two different possibilities of firm behavior in oligopolistic market.

1.Uncoordinated oligopoly in which firms do not enter into any contacts with each other and not trying deliberately to find a point of balance acceptable to all.

2.Cartel or collusion of firms that focus not on achieving Cournot equilibrium, and the long-term monopoly equilibrium with the subsequent section of monopolistic profits.

So we looked at the main types of market structures according to the degree of intensity of the competition. We saw that the increased intensity of competition reduces profit, but increases consumer welfare. In addition, we realized that the intensity of market competition factors.

1.The presence of a large number of firms, many buyers and sellers increases the level of competition.

2.The homogeneity of goods and services, i.e. the production of standard products also increases competition.

3.Observed mobility of all resources, which includes the freedom of entry into industry and exit from it. There are no obstacles (technological, legal, financial, etc.) that could prevent the emergence of new firms. The lack of barriers also increases the level of competition in the market.

4.Free access to information about the market, prices, costs, etc. intensifitsiruetsa competition.

Now that we understand what is competitive and non-competitive markets, consider the approach to competition proposed by M. porter in the development of the theory of clusters.

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Chapter 2. The concept of competition for porter

In order to be solved, the problem of improving the quality of life and economic growth should be reflected in the incentives of the companies that make up the economy. Competition is a key incentive to improve both production and business processes of the company, since in its absence the need to invest in improvement activity of the company is missing.

One of the founders of the theory of competition in management is Harvard Professor M. porter. He sees competition as five-factor model, where each of the components has a specific impact on the strategy of the firm.

Five-factor model of competition porter (fig. 2.1).

Fig. 2.1. Five-factor model of competition porter

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