Exercise 8-1) Defining Oligopoly and Game Theory

Defining Oligopoly and Game Theory

Defining oligopoly

·         Compare an oligopoly market to a perfect competition and monopolistic competition type of market

Oligopoly market and perfect competition: In oligopoly market, oligopolies are price setters. There are a few big sellers in this market so large big sellers significantly influence on setting price. On the other hand, perfect competition market sellers are price takers because there are many small sellers so each seller has little influence on the price of a good or services and output etc.

Oligopoly and monopolistic competition market: Both are in imperfect competition and they are on market structure continuum become perfect competition and monopoly. Oligopoly consists of a small amount of large firms and monopolistic competition contains many small firms.

·         The similarities and differences between each type of market

	Number of firms	Market power	Elasticity of demand	Product differentiation	Pricing power
Perfect Competition	Infinite	None	Perfectly elastic	None	Price taker
Monopolistic competition	Many	Low	Highly elastic	High	Price taker
Monopoly	One	High	Relatively inelastic	Absolute (across industries)	Price setter
Oligopoly	Few	High	Relatively inelastic	Yes	Price setter

·         The market type you consider the best choice. Explain why

In my opinion, monopolistic competition is the best choice. It is because that monopoly and oligopoly are influenced by a few big powers and consumer’s demand may not affect the market control. Perfect competition looks like just theory and not fit for present market.

·         With your new knowledge, how do you feel as a consumer?

o   Do you feel in control of your purchasing choices?

According to the market type, price and providing quantities, it is possible that consumer’s purchasing choices are controlled by firms and government. Cartels are adjusting their benefit for maximizing the reward on controlling customers like robots.

Game theory

·         What are the main ideas behind game theory?

Game theory is used in oligopoly firms in order to illustrate interdependent decision-making. It means that when one firm makes a decision, it is influenced by the other firm.

·         How did it develop?

Game theory refers to a branch of applied mathematics using in social sciences, economics, biology, engineering and political science etc. Game theory uses mathematics to explain that how the success of individual’s choices is connected to the choices of others. Game theory was originally developed in order to analyze competitions that a person reaches better results at another person’s expense. Game theory was first developed by economists John Neumann and Oskar Morgenstern in the 1940s. .

·         Is there evidence of game theory in the current economy? Explain.

I think that telecommunication market shows the example of game theory. A few firms set the price and their prices are almost similar price range. At the early period telecommunication service just started, the prices are almost same and they moved in almost similar price range. However, a few of them tried to deduct the consumer price for increasing sales so they could obtain better profits than the others. However, except a few, others keep their prices appropriate ranges. It is true that collusive action is illegal but they seem to do collusion when prices are changed.

·         How does the payoff matrix work?

Where both parties do no cheating, both can equal profits. If one of them does cheating, the party that does cheating can get more profits that the other party comparing with no cheating benefits. However, in the case that both parties do cheating, both can obtain less equal profits than the amount of no cheating. This amount is less than the amount that cheating party can achieve.

·         Describe the principles behind collusive and cartel actions.

Especially in oligopoly market, a few big firms tend to be collusive for maximizing their profits. A cartel is formal agreement among competing firms so they move based on this for obtain the best reward by reducing competition.

Exercise 7-1) Defining Monopolistic Competition

Defining Monopolistic Competition

* Definition for monopolistic competition

Monopolistic competition is hybrid between perfect competition and monopoly. There are large numbers of small firms that are relatively competitive with little market control on price. Similar but slightly different products exist and they can be substitutes for one another. Monopoly competitive firs are relatively free to enter and exit and buyer can get information of necessary alternatives but not all.

Monopolistic competitive companies

Where do you think the company Nike would fit in the table? Would it be considered a brand name company? What about the Dollar Store?

In my opinion, Nike is in the large company group. Even though Nike products are similar with other competitive products, the branding and advertising are making the brand name & company name Nike more famous. Sports marketing star marketing using TV commercials and sponsoring sports events are enough to appeal and improve brand value.

In the case of Dollar Store, it is similar with convenience store example in small company group. There are many dollar store but not combine together with franchise agreement so I think that it is like small business type. No brand power and no guarantee quality of product but just concentrating on cheapest price products.

Size:	Small Company	Medium Company	Large Company
Features:	Convenient store	Franchise restaurant	Walmart
Differentiated products	Almost similar products but slightly different price affects the differentiated products	Almost similar products but creates differences with branding, packaging etc	Almost similar products with branding, packaging and high qualified services.
Control over price	Price competition with other stores	Market competition and marketing cost make differ product cost	Government regulation, buying power
Mass advertising	Word of mouth marketing	Newspaper, outdoor advertising	TV commercial, Newspaper
Brand name goods	Few	A few	Many

Exercise 6-2) Competing as Starbucks

Competing as Starbucks

* Review articles about the operation of Starbucks Corporation coffee stores from the following sources:

·         Starbucks Gossip(http://starbucksgossip.typepad.com/_/2007/02/starbucks_chair_2.html)

·         CBC News(http://www.cbc.ca/money/story/2008/07/01/starbucks-closures.html)

·         The Seattle Times(http://seattletimes.nwsource.com/html/businesstechnology/2008028854_starbucks02.html)

* Think about the following questions and jot down some answers in your study notes:

1.    Why would Starbucks be considered part of a perfect competition market?

It is because there are many small buyers and sellers of whom are price takers spread widely. All various franchise companies and private small sellers exist in this market not to affect the demand and supply tremendously. Besides, quality of coffee is almost similar not to divide their tastes perfectly. Moreover, even now many coffee sellers appear and disappear depending on the situations like benefits.

2.    What are some main reasons for Starbucks to:

a.   realign their business practices.

b.  close a number of stores.

           

The size of Starbucks business was huge but the profit structure was not good because too many store focused in some area and they are cannibalized each store. It results to decrease the gross profit range of company. Therefore, headquarter of Starbucks need to do realign the profit structure for closing the non-profit stores.

3.    What impact do costs and profit making have on these decisions?

a.    Consider in terms of short-run and long-run costs. 

             In short run, severance costs and lease-termination cost occur and if some stores  

             which do business for a short time close, they lose money such as interior cost and

             annual franchise fee.  In long run, wage of store staff, monthly rental fee can be saved

             due to shut down not profit stores.

4.    Do you think coffee is too expensive at Starbucks?

a.    How have they managed to charge such prices?

b.    What would happen if they lowered their prices? Support your explanation with a graph.

Starbucks are managing the coffee cost as the level that they can achieve maximum

profits. In the case that total cost is lower than the revenue, they can reach the maximum profits.

  

     If the lower the price, then the revenue will decrease and the benefits also reduce.

  

Exercise 5-5) Long Run Costs and Economies of Scale

Long Run Costs and Economies of Scale

·         Describe a potential business you might create and its product or service

Developing high technical products, Robot Company will assume to form. It will be based on the continuous research of developing brand new robots. Besides, facilities for manufacturing robots will be invested continuously. It is because that future targeting business should keep the level of high tech the highest.

·         What size would it be?

It will start from very small firm. At the very first business, 3-4 friends who have the same major of robotics get together and work hand in glove. It is because this is technology-intensive industry so small quantity of production but highest cost for the specific customers will be appropriate at the beginning of it. However, on increasing the sales, its average cost may be decrease due to be able to buy bunch of raw materials at once and efficiency of labour. In that case, the size may be access to almost similar with large firm.

·         What type and size of market would it target?

It will be targeted small and medium market because robot business can be applied to the process of manufacturing in the factories. At the beginning of the business, it starts small business with high average cost but if the size of firm increase to the medium or large level, its average cost will be deducted.

·         What are some of its major costs, such as?

o   Long-run costs

o   Short-run costs

o   Fixed costs

Short-run costs are what we can add according to the increase the demand of robot equipment such as labours and raw materials.

Long-run costs are about factors that can be variable during the long period. For meeting the increase demand, firms can build other factories or assembly lines and they are long run costs. Firms can enter and exit the market place.

Fixed costs are such as land, firm building and factory etc. On increasing the demand, they cannot be changed and just spread the cost to each unit manufactured. For example, the firm has to be equipped them regardless of the units demanded.

·         Last, find a business similar to your idea by exploring the Internet. Post an additional paragraph on the business and its strengths and weaknesses in regards to the questions given above. Provide a link(s) to online information about the business.

http://www.abb.com/robotics

This company is very specialized in that robot equipment and software industry. It hasn’t widely known to the public but most of the enterprises which have the manufacturing process automated use the ABB products.  

Strength & Weakness

It is unique business so there are not many competitors. When they broaden the sales, they can approach even the small business firms. However, total average costs for manufacturing are too high. For example of fixed costs, when they started the business, initial fixed costs might be too high.

Exercies 5-3) Law of Diminishing Returns

Law of Diminishing Returns

Read the debate “The Diminishing Returns to Tobacco Legislation” on the PierreLemieux.org  website. (http://www.pierrelemieux.org/artdiminish.html)

Consider the following:

    ·  Decide which points in the debate have merit.

According to the policy for reducing the rate of smokers, the rate of increase smokers decreased. However, decreasing rate is not more and more but even less and less thought the strength of reducing policies got bigger such “The Diminishing Returns” in economics.

     ·  Decide which points lessen the debate.

Studies by American economist Kip Viscusi lessen the debate. He commented that smokers overestimated the risks of smoking. However, smokers might not consider its risks too much because even thought the bigger risks referred on the cigarette package, the rate of decreasing smokers did not increase as much as the degree of referred risks.

·         In words, estimate the point of diminishing returns for the government.

In this website, government was showed various policies for reducing the rate of smoker increase. The more information of risk the government give to smokers, they are negligence it. It is like the diminishing returns for the government. The degree of appealing gets bigger but smokers didn’t decrease as much rate that we estimated.

Also, government would be to increase variable costs such as labour, advertising, and packaging for diminishing output. However, total supply would increase less and less. Demand may decrease due to the higher price.  

·         What are some other solutions that would increase the government’s production  (success) compared to their costs, thus lessening their diminishing returns?

In my opinion, creating new tools for letting know the smoking risks is one of the alternatives. The new ways that smoker can be shocked and motivate to quit smoking. Channel variation can enhance the success possibilities of the government policies. Moreover, changing target may be possible that not only smokers but young children before starting to smoke will be good way to prevent increase of potential smokers.

·         What implications are there in this article for the supply and demand of tobacco (Chapter 2 and 3)?

Because smoking is a habit really hard to quit, the demand of tobacco is inelastic.

Even thought the price changed largely, only small amount of changes in the quantity demanded happen. It means that only large price increase or decrease will diminish or increase demand because the demand is inelastic to price changes.

·         Explain the debate in terms of sin taxes (Chapter 4)

In the situation of increase in sin taxes, smokers feel big burden for purchasing inelastic product tobacco because there is no substitute product that becomes more attractive. In this reason, producers also cannot change manufacturing product because of no substitute products to transfer.