Topic: Competing in Tight Oligopolies: Pricing StrategiesRequired:Please explain the photo attached 4. Durable goods. When firms in monopolies and oligopolies sell long-lived durablegoods like cars and televisions, they have the option to sell to customers atdifferent times and can attempt to do something similar to first-degree price87discrimination by setting the price very high at first. When the subset ofcustomers who are willing to pay the most have made their purchase, the firmscan drop the price somewhat and attract another tier of customers who arewilling to pay slightly less than the first group. Progressively, the price will bedropped over time to attract most customers at a price close to the maximumthey would be willing to pay. However, economists have pointed out thatcustomers may sense this strategy, and if patient, the customer can wait and paya much lower price than the perceived value of the item. Even if the firm has littlecompetition from other firms, a firm may find itself in the interesting situation ofcompeting with itself in other production periods. In theoretical analyses ofmonopolies that sold durable goods, it has been demonstrated that whendurable goods last a long time and customers are patient, even a monopolist canbe driven to price items at marginal cost. One response to the durable goodsdilemma is to sell goods with shorter product lives so that customers will need toreturn sooner to make a purchase. U.S. car manufacturers endeavored to5. do this in the middle of the 20th century but discovered that this opened the doorfor new entrants who sold cars that were designed to last longer. Anotherresponse is to rent the use of the durable good rather than sell the good outright.This turns the good into a service that is sold for a specified period of time ratherthan a long-lived asset that is sold once to the customer (for at least a long time)and allows more standard oligopoly pricing that is applied for consumable goodsand services. This arrangement is common with office equipment like copiers. 1. Deep discounting. One exercise of seller power is to try to drive out existingcompetition. Deep discounting attempts to achieve this by setting the firm's pricebelow cost, or at least below the average cost of a competitor. The intent is toattract customers from the competitor so that the competitor faces a dilemma oflosses from either lost sales or being forced to follow suit and also set its pricebelow cost. The firm initiating the deep discounting hopes that the competitor willdecide that the best reaction is to exit the market. In a market with economies ofscale, a large firm can better handle the lower price, and the technique may beespecially effective in driving away a small competitor with a higher average cost.If and when the competitor is driven out of the market, the initiating firm willhave a greater market share and increased market power that it can exploit in theform of higher prices and greater profits than before.2. Limit pricing. A related technique for keeping out new firms is the technique oflimit pricing. Again, the basic idea is to use a low price, but this time to ward off anew entrant rather than scare away an existing competitor. Existing firms typicallyhave lower costs than a new entrant will initially, particularly if there areeconomies of scale and high volume needed for minimum efficient scale. A limitprice is enough for the existing firm to make a small profit, but a new entrant thatneeds to match the price to compete in the market will lose money. Again, whenthe new entrant is no longer a threat, the existing firm can reassert its sellerpower and raise prices for a sustained period well above average cost. As a gameof strategy, the new entrant may reason that if it is willing to enter anyway andincur an initial loss, once its presence is in the market is established, the existingfirm will realize their use of limit pricing did not work and decide it would bebetter to let prices go higher so that profits will increase, even if that allows thenew entrant to be able to remain in the market.

The term "tight oligopoly" refers to a market that is dominated by a small number of very big…

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Topic: Competing in Tight Oligopolies: Pricing Strategies Required: Please explain the photo attached

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

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