Market Equilibrium: Tanker Services Industry Analysis, Slides of Managerial Economics

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MARKET

CASE: TANKER SERVICE MARKET, 2005

 Impact of  Increasing oil prices  Increasing China imports  More stringent tanker standards

DIFFERENTIATED OR HOMOGENEOUS?

 In market where products are differentiated, competition is not as keen as that in a market where products are homogeneous.  Compare  mineral water – differentiated  gold – pure commodity

NO MARKET POWER

 Many small buyers  Many small sellers  Both buyers and sellers have no market powers.  Both buyers and sellers are price takers.  Note: buyer/seller with market power can influence market conditions

FREE ENTRY?

Japanese Beer Market, pre-’94: Ministry of Finance  production licenses for minimum of 2 million liters a year  sales licenses limited to small family-owned stores

SYMMETRIC OR ASYMMETRIC

INFORMATION

 Market with differences in information not as competitive as one where all buyers and sellers have equal information  Compare  photocopying service  medical treatment  legal advice

0 20 22 8 10 11 supply demand a b c equilibrium excess supply Quantity (Million ton-miles a year) Price ($ per ton

• mile)

MARKET EQUILIBRIUM, II

MARKET EQUILIBRIUM, III

 excess supply = excess of quantity supplied over quantity demanded  triggers price decrease  excess demand = excess of qty demanded over qty supplied  triggers price increase

0

20 10 10. original supply new supply demand 60 cents 60 cents c e b d Quantity (Million ton-miles a year) Price ($ per ton

• mile) a

SUPPLY SHIFT, II

0 10

20 original supply new supply demand 60 cents 60 cents c b 0 10 10. 20 new supply original supply demand 60 cents 60 cents b c Extremely inelastic demand Extremely elastic demand Quantity (Million ton-miles a year) Quantity (Million ton-miles a year) Price ($ per ton

• mile) Price ($ per ton
  • mile) e e

PRICE ELASTICITIES OF DEMAND

0

1 retail supply a Quantity (Million units a year) Price ($ per unit) after wholesale price cut retail demand b

PROMOTING RETAIL SALES

Q

DEMAND SHIFT, I

 demand shifts down (left) - > lower price, lower quantity  demand shifts up (right) - > higher price, larger quantity  final equilibrium depends on elasticities of demand and supply

TANKER SERVICES, 2005

 Increasing oil prices  Higher costs for tanker services  supply curve up  Increasing China imports  Higher demand for tanker services  More stringent tanker standards  Non-complying tankers scrapped  supply curve shifted to left

VALENTINE’S DAY

Nearing Valentine’s Day, price of roses always rises much more than the price of greeting cards. Why?