ART - JOPP- How Many Vendors Does it Take to Screw Down a Price? A Primer on Competition 2005

The document discusses a competition model used in government procurement to determine prices and market share for vendors. The model uses an equation to compute a vendor's share based on its bid price and the bid prices of other vendors. The logit function is used to describe market behavior and estimate the probability of a consumer choosing a product with multiple attributes. The parameter "g" represents the sensitivity of a vendor's share to its price, with higher values indicating that price is more important in determining share. The document also discusses factors that determine the actual sensitivity of share to price, such as uncertainty, switching costs, and political pressures. In the context provided, the document highlights a scenario where the first vendor increases its price. Despite the increased price, the first vendor's profit would drop to $13,250,000. This suggests that the market is highly sensitive to price changes, and consumers are likely to switch to other vendors offering lower prices. Conversely, if the first vendor were to decrease its price, it could potentially increase its market share and profit. The document emphasizes the importance of understanding market equilibrium in analyzing the benefits of competition. It explains that equilibrium analysis is crucial for estimating and influencing prices in a private business-driven system. The model presented in the document simulates a cycle where vendors adjust their prices to maximize profit until an equilibrium is reached. The market equilibrium price represents the level of competition in the market. Overall, the document provides insights into the competition model used in government procurement, the factors influencing market behavior, and the significance of equilibrium analysis in understanding pricing dynamics and vendor profitability.