Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
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 John Chuang 2 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 John Chuang 3 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, … John Chuang 4 Preliminaries Agents: e.g., buyers and sellers Commodity: goods, services Market: to facilitate trade Utility: measure of satisfaction derived from trade Equilibrium: predicted outcome John Chuang 5 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 John Chuang 6 Demand Willingness to pay (WTP) w Marginal WTP: w(q) … John Chuang q 7 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 John Chuang q q 8 Supply Production cost function: c(q) Fixed cost = c(0) = F c(q) F q John Chuang 9 Marginal Cost Marginal cost: m(q) = c’(q) m(q) Marginal cost curve Total cost (excluding fixed cost) John Chuang 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 John Chuang 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 John Chuang PS q q 13 Monopoly v. Competition What are the tradeoffs? John Chuang 16 Monopoly Single producer -- free to set prices to maximize profit (usually at the expense of social welfare) John Chuang 17 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? John Chuang 18 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 John Chuang 19 Monopoly v. Competition What are the tradeoffs? John Chuang 20 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 John Chuang 21 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? John Chuang 24 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 John Chuang 25 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 John Chuang 26