managerial economics part iv - market & pricing.ppt

8/10/2019 Managerial Economics PART IV - Market & Pricing.ppt

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Mata KuliahEkonomi Manajerial

Dosen:

Sahang Sapta AS., S.Sos., M.Si


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PART IV

Market, Pricing, & Competition


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Section I

The Market, Pricing, andCompetition Among Firms


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Market Equilibrium

P

Q

D

S


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Perfect Competition Market

Many Sellers and Buyers

Homogenous goods (identical)

The availability of Substitution

Low Barriers to Entry

Price is determined by the marketmechanism

Sellers & Buyers are Price Takers

Normal profit in the Long-Run

Perfect Information about the Market


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Perfect Competition Marketcont.

P

Q

P0 D

Q1Q0

AC

MC

=AR=MRD =AR=MR


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Perfect Competition Marketcont.

Market Efficiency

Global Competition and InternationalTrade

The Efficiency of Free Trade


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Monopoly Market

Single seller and many buyers

No substitution

Unique product

High barriers to entry

The rights of monopoly (or patent rights)

The seller is price makerEconomic profit (super profit)


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Monopoly Marketcont.Perfect Monopoly Curve

P

Q

S=D

P1

P0

Q0

S=D

Q0


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Monopoly Marketcont.Real World Monopolists Curve

P

Q

D


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Oligopoly Market

Some Sellers and many buyers

Availability of substitution

High barriers to entry

The seller is price maker

Economic profit


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Oligopoly Marketcont.

P

Q

D

D1

AC

MC


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Conscious parallelism

Price Leadership Model

Barometric Price Leader

The Low-Cost Price Leader

Price Leadership with Price Differentials

The Dominant-firm price leader


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PRICING FOR LONGER TERMOBJECTIVES

Sales maximization with a minimum profit

targetLimit pricing to deter entry

Deterring entry of a low cost firm

Contestable marketSatisfying: achieving target as a

managerial objective


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Pricing Decision in Practice

Pricing with incomplete information

Markup pricing

Pricing in established market


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Others Pricing Practices

Price FixingPrice Discrimination

Predatory Pricing

Resale Price Maintenance


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New Product Pricing

Price Skimming

Penetration Pricing

Determining Price & Quality Jointly


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Competitive Bids and PriceQuotes

Types of Competitive Bids and PriceQuotes

Incremental Cost, IncrementalRevenues and The Optimal Bid Price


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Competitive Bids and Price Quotescont.

Definition

Competitive bidding occurs in any marketwhere a number of sellers compete for asingle buyer

Example:

Government projectsSuppliers with single buyer

The winners curse concept


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Fixed price bids

Cost-plus-fee bids

Incentives bids


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Incremental cost

Incremental Revenues

The Optimal Bid Price


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PART V

Topics in Managerial Economics


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Topics in Managerial Economics

Advertising & Promotional DecisionProduct Quality & Competitive Strategy

Capital Budgeting & Investment Decision

Game Theory


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Advertising & Promotional Decision

The role of advertising and promotionaldecision in the equilibrium

Uncertainty in Advertising

Predictability & Probability

Advertising as an investment

Advertising to raise barriers to entry


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Product Quality & Competitive Strategy

Michael Porter

Generic Strategy

Cost-Leadership

Differentiation

Focus


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Capital Budgeting & Investment Decision

The definition

Capital budgeting is the decision makingprocess with whether or not the firmshould invest funds in the purchase ofassets or other resources in an attempt tomake profits, and how to chose among

competing uses of funds (or investmentprojects)


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Capital Budgeting & Investment Decisioncont.

Investment project may be to replace orexpand existing plant and equipment, todiversify the firms activities, to amount a

major advertising campaign, and so on. Ingeneral investment projects will involve;revenue generation, cost reduction, or

some combination of the two.


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Focus on programs or projects

The models

Discounted cash flow (DCF Model)

NPV

IRR

Profitability index

Payback period

Average rate of return


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CAPM

APT

Portfolio Theory


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Discounted Cash Flow Model


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Discounted Cash Flow Modelcont. where

DPVis the discounted present value of the future cashflow (FV), or FVadjusted for the delay in receipt;

FVis the nominal value of a cash flow amount in a futureperiod;

iis the interest rate, which reflects the cost of tying upcapital and may also allow for the risk that the paymentmay not be received in full;

dis the discount rate, which is i/(1+i), i.e. the interest rate

expressed as a deduction at the beginning of the yearinstead of an addition at the end of the year;

nis the time in years before the future cash flow occurs.

Where multiple cash flows in multiple time periods arediscounted, it is necessary to sum them as follows:


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Discounted Cash Flow Modelcont.


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Internal Rate of Return


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Internal Rate of Returncont.

Decision criterion

If the IRR is greater than the cost ofcapital, accept the project.

If the IRR is less than the cost of capital,reject the project.


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Internal Rate of Returncont.


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Payback Period

Payback periodin capital budgetingrefers to the period of time required for thereturn on an investment to "repay" the sum

of the original investment.For example, a $1000 investment which

returned $500 per year would have a twoyear payback period.

The time value of money is not taken intoaccount.


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Payback Period

Payback period intuitively measures how longsomething takes to "pay for itself."

All else being equal, shorter payback periods

are preferable to longer payback periods. Payback period is widely used because of its

ease of use despite the recognized limitationsdescribed below.

it does not account for the time value of money,risk, financing or other important considerations,such as the opportunity cost.


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Capital Asset Pricing Model


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Capital Asset Pricing Modelcont.

where:

E(Ri) is the expected return on the capital asset

Rf is the risk-free rate of interest such as interest arisingfrom government bonds

i(the beta) is the sensitivity of the expected excessasset returns to the expected excess market returns, oralso ,

E(Rm) is the expected return of the market

E(Rm)Rf is sometimes known as the market premium(the difference between the expected market rate ofreturn and the risk-free rate of return).

E(Ri)Rf is also known as the risk premium


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Arbitrage Pricing Theory

where

ajis a constant for assetj

Fkis a systematic factor

bjkis the sensitivity of thejth asset to

factor k, also called factor loading,jand is the risky asset's idiosyncratic

random shock with mean zero.


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Portfolio Theory


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Corporate Financing

Banking and Corporation

Other Debt Instrument

Capital Market


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Section II

Other Models and QuantitativeApproach in Managerial

Economics


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Other Models and QuantitativeApproach in Managerial

Economics

Sensitivity AnalysisGame Theory

The Application of Statistical Models in

Managerial Decision Making


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Sensitivity Analysis

Sensitivity analysis (SA)is the study ofhow the uncertainty in the output of amodel (numerical or otherwise) can be

apportioned to different sources ofuncertainty in the model input.


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Game Theory

Game theory adalah cabang dariMatematika dan diterapkan pada IlmuPengambilan Keputusan yang melibatkan

multiple player.Game theory juga sangat berguna dalam

Ilmu Manajemen Stratejik.

John Von Neumann, Frederick V Hayek,John Forbes Nash, Robert Aumann


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Game Theory

Prisoners Dilemma

Jika tidak ada yangmengaku =>

hukuman 1 tahun Jika mengaku maka

hukuman 5 thn

Jika tidak mengakutapi diketahui berbuatsalah 10 thn

Bad Guy 2

BadGuy

1

Cooperative

Defect

Cooperative

-1, -1 -1, 10

Defect -10, -1 -5, -5


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Game Environments

Players planned decisions are called strategies. Payoffs to players are the profits or losses

resulting from strategies.Order of play is important:

Simultaneous-move game: each player makes decisions withknowledge of other players decisions.

Sequential-move game: one player observes its rivals moveprior to selecting a strategy.

Frequency of rival interaction

One-shot game: game is played once. Repeated game: game is played more than once; either a finite

or infinite number of interactions.


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Simultaneous-Move, One-ShotGames: Normal Form Game

A Normal Form Game consists of:

Set of players i {1, 2, n} where nis a finitenumber.

Each players strategy set or feasible actionsconsist of a finite number of strategies.Player 1s strategies are S1={a, b, c, }.

Player 2s strategies are S2={A, B, C, }.

Payoffs.Player 1s payoff: 1(a,B) = 11.

Player 2s payoff: 2(b,C) = 12.


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A Normal Form Game

Strategy A B C

a

b

c

Player 2

Player1 12,11 11,12 14,13

11,10 10,11 12,12

10,15 10,13 13,14


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Normal Form Game:Scenario Analysis

Suppose 1 thinks 2 will choose A.

Strategy A B C

a

bc

Player 2

Player1 12,11 11,12 14,13

11,10 10,11 12,1210,15 10,13 13,14


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Then 1 should choose a.

Player 1s best response to A is a.

Strategy A B C

a

b

c

Player 2

Player1 12,11 11,12 14,13

11,10 10,11 12,12

10,15 10,13 13,14


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Suppose 1 thinks 2 will choose B.

Strategy A B C

a

bc

Player 2

Player1 12,11 11,12 14,13

11,10 10,11 12,1210,15 10,13 13,14


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Then 1 should choose a.

Player 1s best response to B is a.

Strategy A B C

a

b

c

Player 2

Playe

r1 12,11 11,12 14,13

11,10 10,11 12,12

10,15 10,13 13,14


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Normal Form GameScenario Analysis

Similarly, if 1 thinks 2 will choose C.

Player 1s best response to C is a.

Strategy A B C

a

bc

Player 2

Play

er1 12,11 11,12 14,13

11,10 10,11 12,12

10,15 10,13 13,14


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Dominant Strategy

Regardless of whether Player 2 chooses A,B, or C, Player 1 is better off choosing a!

a is Player 1s Dominant Strategy!

Strategy A B C

ab

c

Player 2

Player1 12,11 11,12 14,13

11,10 10,11 12,12

10,15 10,13 13,14


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Dominant Strategy in aSimultaneous-Move,One-Shot GameA dominant strategy is a strategy resulting in the

highest payoff regardless of the opponents

action. If a is a dominant strategy for Player 1 in the

previous game, then:

1(a,A) > 1(b,A) 1(c,A);

1(a,B) > 1(b,B) 1(c,B);

and 1(a,C) > 1(b,C) 1(c,C).


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Putting Yourself in your Rivals

Shoes

What should player 2 do?

2 has no dominant strategy!

But 2 should reason that 1 will play a.

Therefore 2 should choose C.

Strategy A B C

a

b

c

Player 2

Player1 12,11 11,12 14,13

11,10 10,11 12,12

10,15 10,13 13,14


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The Outcome

This outcome is called a Nash equilibrium:a is player 1s best response to C.

C is player 2s best response to a.

Strategy A B C

a

b

c

Player 2

Player1 12,11 11,12 14,13

11,10 10,11 12,12

10,15 10,13 13,14


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The Application of StatisticalModel in Managerial Decision

Making

Variance and Standard Deviation

Regression Model

Time Series Analysis


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Variance & Standard Deviation

Population Variance

i

N

i

X

N 1

2 1

222 11

ii XN

XN

Population Standard Deviation

22 1

i

XN


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Regression Model

Model Regresi adalah model statistikuntuk melihat pengaruh antar variabel

The model

Y = b0 + b1X1 + e

Koefisien determinasi

Probability of F-statistics -> p-value


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Regression Modelcont

Multivariate Regression Model

The Model

Y = b0 + b1X1 + b2X2 + + bnXn + e


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Time Series Analysis

Time Series as a natural phenomenon

Time series analysis

The model

tttt exbby 110


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The End

Thank You

managerial economics part iv - market & pricing.ppt

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