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Oligopolistic Competition

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My presentation from the 2010 Opening Seminar of the European Master in System Dynamics study programme, Bergen.

My presentation from the 2010 Opening Seminar of the European Master in System Dynamics study programme, Bergen.

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  • 1. Andreas Größler Oligopolistic Competition between Strategic Alliances
  • 2. Oligopolistic Competition between Strategic Alliances Some thoughts about results and process of a consulting project using system dynamics • Focus is on process – Work in progress – Confidentiality • Model complexity • Indexed variables Andreas Größler, 2010
  • 3. Oligopolistic Competition between Strategic Alliances Six honest men... I Keep six honest serving-men: (They taught me all I knew) Their names are What and Where and When And How and Why and Who. Rudyard Kipling, 1902 Andreas Größler, 2010
  • 4. Oligopolistic Competition between Strategic Alliances Men 1 to 6 1. What: a case study in a major industry within the transportation sector 2. Where: actual client (alliance headquarter) is located in Germany but alliance is international 3. When: project started beginning 2010, still going on 4. How: a system dynamics analysis, of course 5. Why: it is a very interesting topic, methodological and Andreas Größler, 2010 content wise (OK, there is money here as well) 6. Who: me as a member of Radboud University consulting a group of consultants that consult the actual client (i.e. the alliance)
  • 5. Oligopolistic Competition between Strategic Alliances So, why is it so interesting content wise? Constellation of firms Industry Collective Cartel Competition Structure Traditional of players Perfect in the market Competition Traditional Traditional Andreas Größler, 2010 Single Monopoly Oligopoly firms One player Few players Many players Structure of the market Cf. Gomes-Casseres, 2006
  • 6. Oligopolistic Competition between Strategic Alliances So, why is it so interesting methodologically? • Dynamics involved in situation – Classical strategy tools are static – Classical economic analysis has an equilibrium perspective • Increasing complexity of model – Face validity – Parameterization – Interpretability • Using more than two (or three) actors in an competitive Andreas Größler, 2010 analysis – Game theory – Subscripts in Vensim and their visual representation – Structural rigidity in system dynamics?
  • 7. Oligopolistic Competition between Strategic Alliances Standing on the shoulders of giants (i) Andreas Größler, 2010 Cf. Warren, 2008
  • 8. Oligopolistic Competition between Strategic Alliances Standing on the shoulders of giants (ii) GROWTH COMPETITION COMPETITION GROWTH RATE A EFFECT ON A EFFECT ON B RATE B STARTING STARTING VALUE POP A VALUE POP B Population Population growth of A A B loss of A loss of B growth of B Andreas Größler, 2010 competition CARRYING CARRYING CAPACITY OF A CAPACITY OF B Cf. Bossel, 2004
  • 9. Oligopolistic Competition between Strategic Alliances Finally: the model... Market Andreas Größler, 2010 Demand Suppliers 88 variables and 1 subscript (defining 5 classes)
  • 10. Oligopolistic Competition between Strategic Alliances The demand view from Supplie r view effect of price on max/min effect <AvgPriceIndustry> <AvgIniPriceIndustry> demand price demand changes price effect demand changes due to seasonality industry due to travel affinity from <not-satisfied demand changes due Market to exogenous shocks demand effect view demand changes industry> due to population Andreas Größler, 2010 demand changes exogeneous endogeneous due to GDP changes to demand changes to demand IniDemand Total Actual to demand change Demand Airtraffic Market view
  • 11. Oligopolistic Competition between Strategic Alliances The market view preference preference product preference price network from attractiveness Supplie <Ticket Price> attribute product from attractiveness attractiveness <capacity Supplie r view attribute price offered> attribute network r view attractiveness competitor from Deman <Total Actual d view Demand Airtraffic> market share competitor IniRealisedDemand Realised Andreas Größler, 2010 Demand realising demand fraction unrealised from <capacity Supplie demand offered> r view to effect of unrealised Supplie demand r view not-satisfied to demand effect Deman industry d view
  • 12. Oligopolistic Competition between Strategic Alliances The suppliers view production AC lifetime delay growth percentage costs per AC IniACOnOrder IniACOperational costs per leg AC AC on order ordering AC operational retiring AC supplying AC costs per pax capacity fixed costs variable costs utilization seats per AC seat capacity from legs per month <realising Market demand> profit margin view profit capacity offered revenues legs per AC per generated to month target revenue Market per leg Andreas Größler, 2010 view price adjustment elasticity IniTicketPrice revenue per leg Ticket Price price change from <realising Market demand> view AvgIniPriceIndustry minimum ticket price AvgPriceIndustry <costs per pax> to to Market Deman view d view
  • 13. Oligopolistic Competition between Strategic Alliances ... and a validation run 120 AC 550 Dollar/Pax 3 M Pax/month 3 3 3 3 3 3 110 AC 3 1 3 525 Dollar/Pax 3 3 1 2 2 M Pax/month 3 3 1 2 3 1 2 1 2 2 1 2 Andreas Größler, 2010 100 AC 12 500 Dollar/Pax 12 12 1 M Pax/month 2 2 12 2 1 0 12 24 36 48 60 72 84 96 108 120 Time (month) AC operational: validationRun 1 1 1 1 1 1 AC Ticket Price: validationRun 2 2 2 2 2 2 Dollar/Pax realising demand: validationRun 3 3 3 3 3 Pax/month
  • 14. Oligopolistic Competition between Strategic Alliances A simulation experiment: different target revenues 140 2.5 M 1 1 2 2 1 1 2 1 2 125 Operational capacity 2.125 M 1 2 3 3 3 3 3 1 2 3 4 4 4 4 Pax/month 4 4 1 2 3 4 AC 4 110 4 1 2 3 1.75 M 4 1 2 3 2 3 4 5 5 5 5 1 2 3 5 5 1 5 1 2 3 4 5 3 4 5 3 4 5 1 2 5 4 5 1 2 1 2 3 4 5 1 2 3 4 5 1 2 3 5 95 1.375 M 5 Realising demand 80 1M 0 12 24 36 48 60 72 84 96 108 120 0 12 24 36 48 60 72 84 96 108 120 1,500 1.5 B 5 5 5 Andreas Größler, 2010 5 1,125 1.125 B Ticket price 5 5 5 4 4 4 4 4 3 3 5 3 Dollar/month 4 3 5 Dollar/Pax 3 2 5 4 3 12 12 1 1 2 2 5 5 3 12 1 2 750 750 M 4 12 1 5 123 5 4 4 5 4 4 4 4 5 4 3 3 3 1 2 3 4 1 2 3 1 2 3 3 3 3 1 2 1 2 1 2 1 2 1 2 1 2 375 375 M Profit 0 0 0 12 24 36 48 60 72 84 96 108 120 0 12 24 36 48 60 72 84 96 108 120
  • 15. Oligopolistic Competition between Strategic Alliances An illustrative (but real) simulation result 20 B 1 12 2 1 15 B 2 USD/month 1 2 2 1 1 3 10 B 2 3 1 3 4 2 3 4 1 3 5 3 4 3 4 5 5B 4 5 4 4 5 5 5 Andreas Größler, 2010 5 0 2010 2012 2014 2016 2018 2020 Time (month) overall profit[1] : test 1 1 1 1 1 1 overall profit[2] : test 2 2 2 2 2 2 2 overall profit[3] : test 3 3 3 3 3 3 3 overall profit[4] : test 4 4 4 4 4 4 overall profit[5] : test 5 5 5 5 5 5