Marginal Revenue and Market Power in Business Strategy

price takers

individual firms that have no impact on market price, are too small relative to the market, and face a horizontal, perfectly elastic demand curve.

What are price searchers?

Price searchers are firms that have at least some influence on market price, face a downward sloping demand curve, and include market structures like monopoly and oligopoly.

How does the demand curve differ between price takers and price searchers?

A price taker faces a horizontal demand curve, while a price searcher faces a downward sloping demand curve.

What is marginal revenue for price takers?

For price takers, marginal revenue equals the market price because they can sell all they want at that price.

How does marginal revenue behave for price searchers?

For price searchers, marginal revenue is less than price because they must lower the price to sell additional units.

What are the two effects on revenue when a price searcher increases production?

The two effects are the quantity effect, which increases total revenue, and the price effect, which decreases total revenue due to lowering prices for all units sold.

What is the relationship between marginal revenue and price for a price searcher?

Marginal revenue is less than price at any given level of output for a price searcher.

What is market power?

Market power is the ability of a firm to raise its price above the perfectly competitive level.

What factors impact a firm's market power?

Factors include the level of competition, product differentiation, features, location, and brand loyalty.

How does successful advertising affect market power?

Successful advertising increases market power by increasing demand for the product and making the demand curve more inelastic.

What are the five forces in business strategy?

The five forces are existing competitors, potential entrants, potential substitutes, suppliers, and customers.

What is the significance of existing competitors in business strategy?

The type and intensity of competition among existing competitors can lead to price competition or non-price competition through product differentiation.

How do potential entrants affect market competition?

Potential entrants can reduce market share and intensify competition, but strategic management can deter their entry.

What is the threat of substitute goods or services?

The threat of substitutes refers to the potential for products from other industries to replace existing products, impacting market competition.

What is seller bargaining power in the context of suppliers?

Seller bargaining power refers to the ability of suppliers to charge high prices based on their negotiating strength.

What is buyer bargaining power?

Buyer bargaining power is the ability of customers to demand lower prices, influenced by their ability to switch to different firms or products.

What does the marginal revenue curve for a price searcher look like?

The marginal revenue curve for a price searcher is below the demand curve and intersects the horizontal axis halfway between the origin and where the demand curve intersects the horizontal axis.

What happens to total revenue when demand is elastic?

When demand is elastic, a decrease in price will increase total revenue.

What happens to total revenue when demand is inelastic?

When demand is inelastic, a decrease in price will decrease total revenue.

What occurs when demand is unit elastic?

When demand is unit elastic, the price and quantity effects offset each other, resulting in marginal revenue being zero.

What is the quantity effect?

The quantity effect is the additional revenue received from selling one more unit, equal to the price at which that unit is sold.

What is the price effect?

The price effect is the lost revenue from lowering the price on existing customers to sell additional units.

How does the marginal revenue curve relate to total revenue for a linear demand curve?

For a linear demand curve, the marginal revenue curve will also be linear and intersect the horizontal axis at a point that is halfway between the origin and where the demand curve intersects the horizontal axis.

What is the implication of a downward sloping demand curve for a price searcher?

It implies that to sell more output, the price searcher must lower the price, which affects marginal revenue.

What is the relationship between total revenue and marginal revenue when total revenue is increasing?

If total revenue is increasing, marginal revenue must be positive.

What is the relationship between total revenue and marginal revenue when total revenue is decreasing?

If total revenue is decreasing, marginal revenue must be negative.

What does it mean for demand to be elastic?

Demand is elastic when a decrease in price leads to an increase in total revenue.

What does it mean for demand to be inelastic?

Demand is inelastic when a decrease in price leads to a decrease in total revenue.