Week Six Assignment

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Macomb Community College *

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1090

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Economics

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Feb 20, 2024

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docx

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1. (1) Low Barriers to Entry: Although there is a cost to entering this type of market, there are relatively few barriers, such as cooperative or union dues. (2) Imperfect Information: In a monopolistic competition, asymmetric information from buyer to buyer, seller to seller, and vice versa is common. (3) Many buyers and sellers: The market has many buyers and vendors, much like the ideal competitive market. In other words, in this type of market, neither a single supplier monopoly nor a single buyer monopoly exist. 2. Herfindahl-Hirschman Index: The HHI is a measure of market concentration that considers the relative size distribution of firms in a market. It is calculated by squaring the market share of each firm competing in the market and then summing those numbers. The HHI, for instance, is 2,600 for a market with four firms and shares of 30, 20, and 20% (30 2 + 30 2 + 20 2 + 20 2 = 2,600). It takes into account the market's relative firm size distribution. It decreases to zero when a market is dominated by many enterprises all with the same maximum size and increases to a maximum of 10,000 points when one firm dominates the market. Groupon: an online coupon company. It provides time-limited deals that require a minimum number of buyers. It had 30 American operating cities, 120 staff members, 2 million subscribers, and $33 million in revenue in 2009. By the end of 2010, it had 4,000 employees, 51 million members, and $760 million revenue while operating in 565 cities throughout the world. With a market share of more than 60% in the US in 2011, the company's first quarter 2011 revenue of $645 million was almost as high as the total revenue for 2010. McDonald’s: A company that invests heavily in maintaining its brand name to differentiate itself from other companies. McDonald's invests money in protecting its brand identity, which sets it apart from competing businesses. The sum of money used to establish and keep a brand name does not indicate anything unique about the items offered by McDonald's. Less than 1% of the company's shares increased in morning trading. The stock, which has a $135 billion market value, has lost 11% of its value so far in 2020. According to the corporation, first-quarter sales at its global name stores decreased by 3.4%. Burger King: Another fast-food chain restaurant that is weakly differentiated from McDonald's but offers similar satisfaction to customers. Burger King has moved its focus from current franchises, to seeking new franchisees. The company is focusing on strengthening their marketing, product pipeline, cooking platform, and emphasis on service and friendliness. The company’s percentage is at 2.5%, but declining because they are losing revenue. 3. In the short run, monopolistically competitive firms aim to maximize profit or minimize loss by producing the level of output where marginal revenue equals marginal cost. This is similar to the strategy used by both pure competitors and monopolists. To illustrate this, we can refer to Figure 13.1a in the textbook. In this figure, a competitive firm produces an output where MR (marginal revenue) is equal to MC (marginal cost). The demand curve D1 shows that the firm charges a price of P1 for this level of output. However, in order to produce this output as determined by demand curve D2, the firm must charge a price of p

squared. If p squared is less than average total cost, then the firm incurs a per unit loss represented by A squared - p squared and a total loss represented by the red area on the graph. In contrast, in the long run for monopolistically competitive firms, only normal profits are earned. If there is a short-run profit due to favorable market conditions or other factors attracting new rivals into the industry because entry is easy. As new firms enter and compete with existing ones, each firm's share of total demand decreases and they face more close-substitute products. This causes a shift in their demand curve to the left (represented as d cubed in Figure 13.1c). The long-run equilibrium output for a typical firm becomes q cubed on this shifted demand curve. Any greater or lesser output will result in an average total cost that exceeds product price p cubed, leading to losses for the firm. Therefore, when an industry experiences short-run losses like those shown earlier with A squared - p squared as costs exceed revenues), some firms may exit or leave that industry in search of better opportunities or profitability in other markets during long run equilibrium conditions. 4. In monopolistic competition, a firm is neither productive nor allocatively efficient in the long- run equilibrium.Productive efficiency refers to producing goods at the lowest possible cost. However, in monopolistic competition, firms produce where their average total cost (ATC) exceeds the minimum average total cost (ATCmin). This means that they are not producing at the most efficient level and could potentially reduce costs by adjusting their production methods. Allocative efficiency refers to producing goods at a quantity where marginal cost (MC) equals price (P). In monopolistic competition, firms set their prices higher than their marginal costs. This results in an under allocation of resources because consumers are willing to pay more for the product than it actually costs to produce. As a result, there is an inefficiency in resource allocation.These inefficiencies lead to excess production capacity at every firm in the industry and create an efficiency loss. The monopolistically competitive firm produces only q cubed units, which is less than what would be produced if it were operating efficiently. The size of this efficiency loss can be represented graphically as area acd. Due to these inefficiencies, monopolistically competitive firms are not able to achieve productive or allocative efficiency in the long-run equilibrium. 5. The firm is making a profit because they are willing to negotiate with customers and increase the amount of meals they serve during certain hours at the restaurant. This strategy is attracting more customers and increasing their revenue.By doing this, the firm is creating barriers for other firms to enter the market. These barriers come from the need to develop and advertise a product that is different from what their rivals offer. This makes it difficult for other firms to imitate them, as it would be costly for them to do so. As a result of these actions, the demand curve for the firm's product will shift to the left. This means that there will be a decrease in demand for their product compared to before.When new firms enter the market and reduce demand to such an extent that the demand curve becomes tangent (touches) with the average total cost (ATC) curve at its profit-maximizing output level,

then the firm is making a normal profit. In other words, they are covering all their costs and earning just enough profit to stay in business. 6. (1) Control over price but mutual interdependence: In an oligopolistic market, each firm has the ability to set its own price and output levels, similar to a monopolist. However, unlike a monopolist, an oligopolist must consider the reactions of its rivals when making pricing decisions. This is because the actions of one firm can have significant effects on the other firms in the industry. Therefore, there is mutual interdependence among these firms as they strategically plan their pricing, product characteristics, advertising, and other strategies to maximize their profits. (2) Entry barriers: Oligopolies often have high barriers to entry that prevent new competitors from entering the market easily. These barriers can be similar to those found in pure monopoly situations. One common barrier is economies of scale - where larger firms enjoy cost advantages due to their size and production capabilities. For example, in industries like aircraft manufacturing or copper mining, existing firms may already have achieved economies of scale that new entrants would find difficult to match with their smaller market share. (3) Mergers: Some oligopolies emerge through mergers or acquisitions between competing firms in an industry. When two or more companies merge or combine forces, they increase their market share significantly and gain greater control over supply within the industry. This increased control allows them to influence prices more effectively and potentially achieve greater economies of scale due to increased production capacity and purchasing power for inputs. 7. Dominant Firms: The degree to which one or two firms dominate an industry is not shown by the four-firm concentration ratio. Both of these industries have a 100% concentration ratio. While industry Y is an oligopoly that might be undergoing intense economic competition, industry X is a full monopoly. Economists concur that monopolistic power in industry X is far larger than in industry Y, despite the fact that both industries have similar 100% concentration ratios. In a second business, Y firms compete for a market share of 25% each. World Trade: Because import competition from overseas suppliers is not taken into account, the data in Table 14.1 may overestimate concentration because they solely consider output produced in the United States. Despite the fact that table 14.1 indicates that four American companies create 73% of the domestic tire output, it ignores the reality that a sizable majority of the truck and auto tires purchased in the United States are imports. Many of the largest foreign firms in the world conduct business in the United States. Interindustry Competition: Concentration ratios are based on various industry definitions. In this instance, they cover up strong interindustry competition between two items linked to various industries. Because aluminum competes with copper in many applications, the high concentration ratio for the main aluminum industry understates competitiveness in that sector. Localized Markets: While concentration ratios apply to the entire country, some product markets are quite localized due to high transit costs. Despite low national concentration ratios, they can nonetheless persist. The percentage of household refrigerators and freezers is 93%.

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8. Collusive Oligopoly: A market in which businesses work together to set prices. Additionally, they do not compete with one another and adhere to a similar pricing policy. In other words, it's a type of market where a small number of businesses agree to forgo competition through a legal contract. So they band together to create a cartel. In this, the member enterprises' prices and output are decided upon collectively or cooperatively. The cartel will occasionally recognize a market leader as a price leader. The cartel's members consent to the price policy as laid out by the price leader. Non-Collusive Oligopoly: A market that has independent enterprises. They engage in rivalry and independently set the price of their goods. In other terms, it is a market with a small number of companies. Each company operates independently of its competitors and follows its own price and output policies. Therefore, via competition, every company seeks to increase its market share. Competition in this context refers to collaboration as a strategy for maximizing profit. Since there are so few large companies in the market, there is fierce competition. Because of brand loyalty, aggressive advertising grows in this industry. 9. Overt Collusion: A formal and secret agreement among firms in an industry to control the market. This collusion is done with the intention of raising the market price and acting like a monopoly. An example of overt collusion is OPEC (Organization of Petroleum Exporting Countries), which consists of 14 oil-producing nations. OPEC produces a significant portion of the world's oil and has the ability to influence oil prices by adjusting supply. In 1973, OPEC restricted output, causing the price of oil to almost quadruple. Covert Collusion: Occurs when firms try to hide their collusive behavior in order to avoid detection by regulators. They do not openly communicate or make formal agreements but still engage in anti-competitive practices. An example of covert collusion is when several Japanese auto parts makers pleaded guilty in 2012 for rigging bids that they submitted to a major carmaker. These firms were trying to manipulate prices and restrict competition without being detected by regulators. 10. (1) Demand and cost differences: Oligopolists often face different costs and demand curves, making it difficult for them to agree on a price. Each firm may have a different market share and operate with varying degrees of productive efficiency. As a result, their profit- maximizing prices will differ, and there won't be a single price that all firms can readily accept. Collusion requires compromises and concessions that are not always easy to obtain, which acts as an obstacle to collusion. (2) Cheating: The prisoner's dilemma illustrates that collusive oligopolists are tempted to engage in secret price cutting in order to increase sales and profits. However, the problem with cheating is that buyers who are paying a high price for a product may become aware of lower- priced sales and demand similar treatment. Additionally, buyers who receive price concessions from one producer may use those concessions as leverage to get even larger concessions from

rival producers. This can lead to price wars among producers as buyers try to play them against each other. Secret price concessions pose a threat to collusive oligopolies over time. (3) Recession. A long-lasting recession serves as an enemy of collusion because it increases average total cost in slumping markets. As the demand and marginal-revenue curves of oligopolists shift leftward in response to a recession, each firm moves upward on its average- total-cost curve towards higher operating costs. Firms find themselves with excess production capacity, decreased sales, increased unit costs, and squeezed profits during recessions. Under these conditions, businesses may feel that they can avoid significant profit reductions by cutting prices and gaining sales at the expense of their rivals. 11. The price leadership model is a way for oligopolistic firms to coordinate their prices without explicitly colluding or making formal agreements. Instead, it involves a situation where one firm, known as the "dominant firm," takes the lead in changing prices, and other firms in the industry tend to follow suit. The dominant firm is typically the largest or most efficient company in the industry. It initiates price changes, and other firms automatically adjust their prices accordingly. This practice of following the leader helps maintain stability and avoid intense competition among oligopolistic firms. There are two main tactics used in price leadership: infrequent price changes and communications. Infrequent price changes mean that firms do not constantly change their prices but rather make adjustments only when necessary or when prompted by the dominant firm's actions. Communications refer to informal exchanges of information between firms regarding pricing strategies. In a price war scenario, some companies may benefit while others may lose out. The consumers generally benefit from lower prices during a price war as they have access to cheaper products or services. However, participating firms often experience reduced profits due to lower margins resulting from aggressive pricing strategies. 12. (1) Verizon: Verizon spent roughly 3.39 billion dollars on advertising in 2021. The company spends billions of dollars on advertising annually. (2) AT&T: AT&T spent 1.62 billion dollars on advertising in the year 2021. The company spends billions of dollars on advertising each year. (3) Coca-Cola: Coca-Cola spent 4.1 billion dollars on advertising in 2021. The company spends billions of dollars on advertising annually. 13. Positive: Consumers need information about product characteristics and prices and about various competing goods. ● Firstly, it provides consumers with information about product characteristics, prices, and various competing goods. This helps consumers make informed decisions and compare different options before making a purchase. For example, if there were no advertising for

high-quality cameras, consumers would have to spend a lot of time visiting stores to gather information about availability, prices, and features of different brands. Advertising reduces this search cost by providing all the necessary information in one place. ● Secondly, advertising can reduce monopoly power by introducing new products that compete with existing brands. When new products are advertised and made available to consumers, it creates more competition in the market. This competition can lead to lower prices and better quality products as companies strive to attract customers. Negative: designed to manipulate or persuade consumers and alter their preferences in favor of the advertiser's product. ● On the other hand, advertising also has negative effects. One negative effect is that it is designed to manipulate or persuade consumers and alter their preferences in favor of the advertiser's product. Advertisements often use persuasive techniques such as emotional appeals or celebrity endorsements to influence consumer behavior. ● Another negative effect is that advertising can sometimes be based on misleading or extravagant claims that confuse consumers rather than enlighten them. This can lead consumers to pay high prices for inferior products that are heavily advertised but not necessarily better than unadvertised alternatives selling at lower prices.

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Week Six Assignment

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