Pricing in Economics and ME Porter's Model

6. A Model to Start Analysis

8. Since market price will settle at the point where only normal profits are earned  output will settle where price= Marginal Cost = Average Cost = Marginal Revenue AC P* Output MC D=MR=AR q*

9. Industry Demand Increase and The Long-Run Industry Supply Curve S 1 S 2 D 1 D 2 Long-run S P Q a) Constant industry costs a b c

10. Industry Demand Increase and The Long-Run Industry Supply Curve continued S 1 S 2 D 1 D 2 Long-run S P Q b) Increasing industry costs: external diseconomies of scale a b c

11. Industry Demand Increase and The Long-Run Industry Supply Curve continued S 1 S 2 D 1 D 2 Long-run Supply P Q c) Decreasing industry costs: external economies of scale a b c

18. Graph- Reflect on the slide P 1 Q 1 MC AC D = AR MR

22. Graph-Reflect and think Output D MR AC MC F

29. Kinked demand for a firm under oligopoly Q O P 1 Q 1 D so demand in response to a price reduction is likely to be relatively inelastic The firm may expect rivals to respond if it reduces its price, as this will be seen as an aggressive move … but for a price increase rivals are less likely to react, so demand may be relatively elastic above P 1 Demand curve kinked at current price:

30. Stable price under conditions of a kinked demand curve Q O P 1 Q 1 D  AR a MR When Q < Q 1, the MR curve corresponds to the shallow part of the AR curve

31. Stable price under conditions of a kinked demand curve continued Q O P 1 Q 1 MR a b D  AR At Q > Q 1 , the MR curve will correspond to the steep part of the AR curve Note the cap between points a and b

33. Stable price under conditions of a kinked demand curve continued Q O P 1 Q 1 MC 2 MC 1 MR a b D  AR

35. Prisoner’s Dilemma: Payoff Matrix Kannan’s strategies Confess Deny Confess Deny Arasi’s strategies 3 years 3 years 2 years 2 years 10 years 10 years 1 year 1 year

37. Duopoly Payoff Matrix: The equilibrium is a Nash equilibrium in which both firms cheat Company A’s strategies Cheat Comply Company B’s strategies nil Cheat Comply Nil -Rs1.0m -Rs1.0m +Rs4.5m +Rs4.5m +Rs2m +Rs2m

42. The Porter Competitive Framework Intra-Market Rivalry Potential Entrants Customers Substitute Markets Suppliers Threat of new entrants Bargaining power of buyers Bargaining power of suppliers Threat of substitute products or services