Complete course materials for Business & Industrial Economics in the Management Engineering degree programme at Politecnico di Milano. The document covers: CONTESTABILITY, NATURAL MONOPOLY, NETWORK EFFECTS Monopoly e ciency-> needs to be regulated Relation between concentration and e ciency. Concentration creates market power, which reduces the sector e ciency. But there is something that we are neglecting… E ciency is a multisided
Complete course materials for Business & Industrial Economics in the Management Engineering degree programme at Politecnico di Milano. The document covers: CONTESTABILITY, NATURAL MONOPOLY, NETWORK EFFECTS Monopoly e ciency-> needs to be regulated Relation between concentration and e ciency. Concentration creates market power, which reduces the sector e ciency. But there is something that we are neglecting… E ciency is a multisided
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CONTESTABILITY, NATURAL MONOPOLY, NETWORK EFFECTS Monopoly e ciency-> needs to be regulated Relation between concentration and e ciency. Concentration creates market power, which reduces the sector e ciency. But there is something that we are neglecting… E ciency is a multisided concept, but one type in term of economic e ciency, (allocative e ciency, when we have perfect competition equilibrium) But also productive e ciency, when the production system is chosen in term of control of cost and quality of the productive process Dynamic e ciency: innovation and product innovation is made possible, frequently improved E cienza allocativa: Si ottiene quando il mercato è altamente competitivo e i prezzi si avvicinano al costo marginale. E cienza produttiva: Riguarda l'ottimizzazione e l'e cacia dei costi. E cienza dinamica: È legata all'innovazione, alla creazione di nuovi prodotti e al miglioramento della qualità nel tempo. Solitamente non esiste una singola struttura di mercato che garantisca tutte e tre le e cienze contemporaneamente; è necessario scendere a compromessi (trade-o ). Ci sono però tre casi principali in cui mercati concentrati possono comunque risultare e cienti sotto determinati aspetti: i mercati contendibili, i monopoli naturali e i beni di rete. The sides of e ciency create a trade o , not possibile to have the three e ciency achieved in a market. Need to make a complex choice. Relationship between concentration and e ciency. -Contenstable market: where company can contend customer constantly, here we can have allocate e ciency -Natural monopoly: monopoly can be avoided and should be, it guaranteed productive e ciency, since higher cost, but no allocative e ciency -Network goods: Dynamic e ciency with dominant platforms yet allocative ine ciency…
This is a better strategy rather than rely on investor! Since investor doesn’t know if they trust me, and so they will charge interest and there also will be other sunk cost such as contractual cost, coordination cost, 3 test to decide to diversify, if I pass all the test I can choose to do it Attractiveness test: the industry should be one with a good market, not saturated, there should be the possibility slitty to reach other customer (an industry in an actrativeness market) Cost of entry test: the cost of entry should not exceed (expected) future pro ts stemming from the target industry, understandably how much time I need to recover the investment (Il costo per entrare non deve superare i pro tti futuri attesi da quel settore.) Better-o test: I should verify there are strong synergies between the two business, they both adds value to me (I due business devono valere molto di più insieme, rispetto a come valerebbero separati) Bias: the managers! The cost-bene t analysis is often biased, and diversi cation happens much more often than it should, because managers can signi cantly bene t from diversi cation. They want to diversify because of bene t they will get: Social prominence, public prestige and political power (building an empire) and limit managerial risk: diversifying limits managers’ risk of achieving a poor pro tability overall. Corporate governance issues, but how to mitigate them? - Monitoring through the board of directors: monitor the management to ensure that actions are taken to increase shareholder value from external members. However, very strong information asymmetries within a rm that makes it quite di cult to monitor managers - Inventives to managers: cash ow used to managers, not distributed only among shareholder but also to managers, to link…
Condition for the Folk Theorem: - repeated interaction, in nitely or with an uncertain end - Players are rational and want to maximize their long-term payo - Punishment strategies exist: if someone cheats, they get punished in future rounds - Discount factors (delta) is high: meaning player value future payo s almost as much as much as the present. The two strategies that lead to the Pareto e cient solutions are (=regole di comportment): 1. Trigger strategy: anyone who fails to cooperate even once is permanently excluded from cooperation, as they destroy their reputation as a reliable player; “One mistake can destroy future cooperation - no second chances” 2. Tit-for-Tat strategies (=occhio per occhio): each player cooperates as long as the other cooperates, stops cooperating when the other does not, and resumes cooperation when the other party does the same; “This strategy introduces the idea of tolerance - a temporary defection is allowed...And also hostage theory” Hostage theory: to make every alliances more e ciency, its aim is that one of reducing opportunism in transaction where one or both the parties must make relationship-speci c investments. Events that works as hostage in the alliances, it is a sort of guarantee, Williamson (1983) suggests that contractual relationships can be strengthened by mutual e orts from both parties to create and o er "hostages" in order to promote exchange and safeguard the alliance over time. This leads to: - Signal of commitment: hostages help build trust in relationships with high risk of defection - Reduction of opportunism: something that’s costly to lose will reduce opportunistic behaviors - Greater transaction stability: symmetrical risk that gives both parties equal deterrent power Hostage Theory: Examples Netflix and…
Innovazione Drastica (2b): L'innovazione rende le soluzioni esistenti totalmente obsolete. Il nuovo entrante potrebbe creare un nuovo monopolio eliminando l'incumbent; in questo scenario l'impresa dominante (l’incumbent esistente) ha meno da guadagnare dall'innovazione rispetto all’entrante.) CHOOSING BETWEEN ALTERNATIVE RDI PATTERNS The way a market innovates depends on the type of knowledge it uses. We call this the 'technological regime'—which simply means how knowledge is created and shared. This helps explain if an industry follows the Schumpeter Mark I or Mark II model. - Schumpeter Mark I technologies - Schumpeter Mark II technologies Schumpeter Mark I: Dinamiche di "distruzione creativa" guidate da innovazioni drastiche. Gli attori principali sono le startup e gli imprenditori che soppiantano i modelli di business consolidati. Bassa cumulabilità delle conoscenze (modello di allargamento), alte opportunità di innovazione e bassa appropriabilità (le idee sono facilmente imitabili). Esempio: la nascita e le dinamiche attuali della Silicon Valley, caratterizzata da tantissime nuove imprese entranti e molteplici uscite dal mercato, oltre a cluster come Cambridge (farmaceutica) e Dresda (semiconduttori) Schumpeter Mark II: dinamiche di "accumulazione creativa" (nel senso che chi fa ricerca da anni è avvantaggiato) compatibili col modello di innovazione graduale del monopolista minacciato. I principali attori dell'innovazione sono le grandi imprese consolidate (incumbent), le quali godono del vantaggio derivante da lunghi percorsi di R&D e ampie risorse nanziarie. Alta cumulabilità delle conoscenze (modello di approfondimento), minori opportunità di creazione per i nuovi entranti e alta appropriabilità (i risultati sono di cili da imitare). Esempio: l'archetipo sono i…
B. First-best with Subsidy: the usage rate is kept at Marginal Cost (T = MC) to maximize welfare, but the State provides a subsidy from the public budget to cover the infrastructure's xed costs (S = F). The downside is that it recreates SOE-like problems: political negotiation over funds and weak incentives for e ciency due to "soft" budget constraints. This is typical in urban or regional public transit. The break even constrains is ful lled: revenues (R = T∙Q + S) equal to total costs (TC = MC∙Q + F). Svantaggi: Porta criticità molto simili a quelle del patronage nelle SOE. Il manager non ha veri incentivi ad abbattere i costi di produzione perché sa che a ne anno lo Stato lo ripagherà comunque (vincoli di bilancio troppo essibili). Si usa in genere nei servizi base non remunerativi (es. trasporto pubblico urbano). C. First-best with Two-Part Tari s: The usage rate is set at Marginal Cost (T = MC), but xed costs are covered through a yearly xed access fee charged to users. This ensures the rm breaks even while maintaining transparency and avoiding political subsidies, but it is only feasible when users are permanently connected to a grid (e.g., water, gas, electricity, telecom). But need to set an yearly access fee based on the income oof the customer A= F/N (where N is the number of customer) , but the remaining customer with lower income A=0. Business Perspective: Price regulation can make for-pro t monopolies highly e cient and socially bene cial. For business management, the regulator must be treated as a "key stakeholder" because their decisions are the primary driver of fair returns on investment in these low-risk infrastructure sectors. fi fi fi fi fi ff fi fl ffi fi fi ffi
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