Transcript ppt - Courses

Network Competition
IS250
Spring 2010
[email protected]
Network Competition
 Design for Choice
 Design for Competition
 Loci of Competition
- Who, what, and where
 Models of Competition
- Quantify benefits of competition
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Loci of Competition
A 2x2 Network Model
Edge
Core
Logical/
Service
Internet Service
Providers (ISPs)
Internet Backbone
Operators
Physical
Last-mile access
networks
Wide-area transit
networks
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Models of Competition
 Monopoly
 Perfect Competition
 Oligopoly
 Many other models to capture “messiness” of
the real-world, e.g., incomplete information,
asymmetric information, bounded rationality,
transactional costs, externalities, …
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Preliminaries




Agents: e.g., buyers and sellers
Commodity: goods, services
Market: to facilitate trade
Utility: measure of satisfaction derived
from trade
 Equilibrium: predicted outcome
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Utility
 Seller’s utility = profit () = revenue - cost
- revenue = price * quantity
- cost includes fixed and marginal costs
 Buyer’s utility = valuation - price
- Valuation aka willingness-to-pay (WTP)
 Utility maximization
- Seller i sets Pi and/or Qi to maximize profit
- Buyer j decides which product, if any, to purchase
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Demand
 Willingness to pay (WTP)
w
Marginal WTP: w(q)
…
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q
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Consumer Surplus
 Not every consumer may be served, even if their WTP > 0
 Results in dead-weight loss (DWL)
w
Consumer surplus
Amount paid (producer’s revenue)
p
w(q)
DWL
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q
q
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Supply
 Production cost function: c(q)
 Fixed cost = c(0) = F
c(q)
F
q
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Marginal Cost
 Marginal cost: m(q) = c’(q)
m(q)
Marginal cost curve
Total cost (excluding fixed cost)
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q
q
10
Producer Surplus
 Profit = revenue - cost = p·q - c(q)
 Producer surplus excludes fixed cost
 Example: for constant marginal cost function:
- Profit = (p-m)·q - c(0)
- Producer surplus = (p-m)·q
$
Marginal WTP
Marginal cost
p
m
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PS
q
q
12
Social Surplus
 Also known as social welfare or total surplus
 SS = CS + PS
w
Marginal WTP
Marginal cost
CS
p
m
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PS
q
q
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Monopoly v. Competition
 What are the tradeoffs?
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Monopoly
 Single producer -- free to set prices to
maximize profit (usually at the expense of
social welfare)
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p
Monopoly Example





1
p(q) = 1 - q
p*
Cost: c(q) = c
-
Consumer Surplus
Zero marginal cost
Linear Demand: p(q) = 1 - q
Profit:  = p·q - c
Producer surplus: PS = p·q
Profit maximization:
q
Producer Revenue
q*
1
Dead Weight Loss (DWL)
- Solve the equation d/dq = 0
- q* = 1/2; p* = 1/2
  = 1/4 - c



Consumer surplus, CS = 1/8
Social welfare = CS + PS = 3/8
Q: when will monopolist choose not to produce?
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p
Consumer Surplus
Perfect Competition
1
 No dominant supplier
- Price determined by the
market, i.e., all suppliers
are price takers
D
q
p* = 0
q*=1
 Competition drives price down to marginal cost
-
In example: p* = MC = 0 --> q* = 1
Profit,  = -c
Producer surplus = 0
Consumer surplus, CS = 1/2
Social welfare = 1/2
 Perfect competition maximizes social welfare, but
suppliers cannot recover fixed cost
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Monopoly v. Competition
 What are the tradeoffs?
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Oligopoly
 Competitive market with small number of suppliers
- Duopoly is special case, though common in many
telecommunication sectors
 Common oligopoly models, analyzed as games:
- Bertrand competition: price competition
- Cournot competition: quantity competition
- Stackelberg competition: leader follower game
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p
Stackelberg Game
 Duopoly game played in two steps:
- Supplier 1 (leader) first choose
quantity q1
- Given q1, supplier 2 (follower)
choose q2 as best response
Consumer Surplus
1
p(q) = 1 - q
p*
q
q*
Producer Revenue
1
Dead Weight Loss (DWL)
 Game solved backwards, starting with supplier 2
 Example: qi in [0,1], p = 1-q, ci = 0
- Supplier 2: max 2 = q2(1-q1-q2) --> q2 = (1-q1)/2
- Supplier 1: max 1 = q1(1-q1-q2) --> q1 = 1/2
- (q1,q2) = (1/2, 1/4) is Nash equilibrium
 Q: how does this compare with the cases of monopoly and perfect
competition?
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p
Summary: Monopoly,
Duopoly, and
Perfect Competition
Consumer Surplus
1
p(q) = 1 - q
p*
q
Producer Revenue
q*
1
Dead Weight Loss (DWL)
Q*
P*
Producer
Surplus
Consumer
Surplus
Total
Surplus
Dead
Weight
Loss
Monopoly
0.5
0.5
0.25
0.125
0.375
0.125
Duopoly
(Stackelberg)
0.75
0.25
0.1875
0.28125
0.46875
0.03125
Perfect
Competition
1
0
0
0.5
0.5
0
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Summary
 Degree of competition matters!
 Whereas perfect competition can be ruinous to
industries with low marginal cost (strong
economies of scale)…
 Oligopolistic competition can allow providers a
path to cost recovery and profitability, while also
avoiding the pitfalls of a monopoly
 Actual social welfare realization depends on the
actual shapes of the demand and supply curves
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