Exercise 9-2: Comparing Market Structures for four different markets

Compare Markets

Types of smarkets	Perfect competition	Monopoly	Monopolistic competition	Oligopoly
Number of firms	Many firms	One company	Several firms	Few ones
Freedom of entry	Easy entry in the market	No entry	Easy entry	No entry
Nature of product	Same products	Very unique	Differentiated	Same/differentiated
Implications for demand curve	Horizontal	Downward-sloping Inelastic	Downward-sloping Elastic	Downward-sloping inelastic
Average size of firms	Small	Relatively large	Medium size firms	Large firms
Possible consumer demand	Low consumer demand	Low/medium	Medium/High	Very high
Profit making possibility	Very low	High	Medium	Medium/high
Government intervention	No intervention	Yes	No	moderate
A new example	Rice production	Software company	Retails	Car manufacturers

Diagram comparigan of different kind of markets

Exercise 8-1: Defining Oligopoly and Game Theory

Oligopoly
Oligopoly in Industry means that there are few large firms providing similar or differentiated services to the consumers. In Monopoly competition there is only one firm providing all the services and it has much more control over the prices it charges from the consumers. In contract to Oligopoly and Monopoly competition perfect market exists when there are numbers of small firms providing similar services to number of consumers, such that no firm or consumer have any influence over the market and no one controls the price in the market. Though perfect markets don’t really exist in today’s global economy but i consider them the best market as no firms can influence the market and the price for goods is determined by the market itself based on supply and demand. This kind of market might not be best for all kind of goods like agricultural and arms etc. but for other non-essential goods this is the best market.

After all getting a knowledge about all this I can  make a much better buying decisions in the future. I am now able to understand why one brand of cereal is cheaper that other why one firm offers buy one get one free and why government is interfering in almost all kinds of market.

Game Theory

The main idea behind the game theory is that in competitive environment all firms are always analyzing other firm’s behavior that highlights mutual interdependence among firms. Game theory was first developed to understand strategic behavior.
I feel Game Theory is consistently in use in today’s market place. With most of the market working as Oligopoly competition, all the firms are consistently trying to analyze other firm’s moves and decisions to get competitive advantage and product differentiation over each other. Collusion and Cartels are very common form of agreement in-game theory among oligopoly market. Collusion’s exist when there is an agreement among suppliers to set the prices of a product or quantities each supplier will produce. If all firms honor their collusion agreement they will all make greatest amount of profit possible. As either all of them are selling at the same price or producing limited amount of product not leaving too much choice for consumers but to buy the product at the given price.

Moreover,as firms get greedy to increase its profits over the other payoff matrix comes into play where when one firm starts charging less to increase its sales and profit. As a result other firm is only left with 2 options; watch its market share stolen by the first firm or to lower its prices to compete with the firm as well. In the end resulting in lower prices for the consumers.

Exercise 7.1 – Defining Monopolistic Competition

Size:	Small Company	Medium Company	Large Company
Features:	Landscaping Company	Provincial Car oil change franchise	National Home Depot Franchise
Differentiated products	Different services offered	Expertise on different make of cars	Range of products available for customers under one roof
Control over price	Little control, can vary with diff. services provided	Some control, can vary with different car types	Only for exclusive products that are not readily available
Mass advertising	Community flyers and signs	Newspaper and radio adds	TV campaigns
Brand name goods	NO	Are possible	Yes and generic goods as well
Customer Loyalty	Not really, as many substitutes are available	Can be with the kind of service provided	Medium to High depending upon what customer is looking to buy.
Entry in Market	Easy entry into the market	Relatively easy but not very easy	Little hard but sill doable at a smaller scale
Competition	Large amount of competition	Competition from local and national chains	Competition from other national chains

Exercise 6.2 – Competing as Starbucks

So I will start with  answering  to our question, is Starbucks considered part of perfect competition is yes/no and the answer is NO.There is no perfect competition in the coffee industry. Every now and then every major coffee seller has to adjust its strategy and growth based on the market and competition. Starbucks recently closed 600 of its stores to realign its growth strategy and compete effectively with its competition. Whereas in a perfect market there should be no need to close stores when new stores are already in plan.Starbuck stores were closed to restructure finances and its profit line

Starbucks forecasted up to $348 million in charges relation to closing 600 stores. Still the company felt it will be better in the long run to close these stores and company will still be saving money after paying all these charges. Starbucks profits in the short run were affected by this decision but their share prices rose on the same hand. As all the investors were looking for the long run gain after closing the under performing stores by saving on long-term costs. According to me, yes coffee is expensive at Starbucks but then again Starbucks is not just selling coffee, its selling on customer preferences, its selling on its brand and uniqueness. There are many coffee sellers, if coffee was a perfectly competitive market there was no way Starbucks could charge twice, in some situations 3 times the price of other coffee sellers. Price would have been determined by buyers and anybody selling over that price would have gone out of business.
As Starbucks brand is built on its reputation of being exclusive, unique and different from all other coffee sellers, reducing their coffee prices might even hurt Starbucks to some extent. They might get new buyers who could never afford Starbucks coffee before but at the same time they will risk loosing all their loyal customers who go to Starbucks for its uniqueness. As Starbucks brand is built on its uniqueness this will directly go against their mission statement and hurt the brand on the long run.

Exercise 5.5- Long Costs and Economics of Scale

Spring Meadows landscaping is a company that provides all the services . They have full-time employes, Spring Meadow company deals with not only landscaping but building decks and patios. Outdoor light and water feature installation. Since they are working year round their personnel cost is very high and need continuous work to be profitable. Some of the jobs also require experienced workers hence they don’t have many students working for them and have to pay high wages.As Spring Meadows is paying higher wages, more rent for bigger office and multiple equipment. There are some costs to running the business as follow:

Short Run Cost:
Cost of repair on various equipment
Cost of oil and fuel
Cost of regular maintenance
Cost of advertising

Fixed Cost:
Cost of rent for the office
Cost of utilities
Cost of personnel

Exercise 5-3: Law of Diminishing Returns

According to Pierre Lemieux,

  Pierre Lemieux definitely made some very good points in this article and some points could need little bit more explanation. When from 1985 – 1995 in United States the prices of tobacco increased by 52% and most of the increase was based on taxes collected by the government on cigarettes the consumption of cigarettes dropped by 18% and again when taxes on cigarettes were increased from 1995 – 1999 by 48% the cigarettes consumption dropped by another 11%. Clearly from this we could state that if government keeps on increasing the tax on the cigarettes the consumption would keep on dropping but this is not the case. As government had already hit law of diminishing return on tobacco by increasing he price few times. When the prices are increased the very first time, its easiest to see the result as people who are not very addicted to the product are the first to quit when they feel price is getting out of their budget bracket. Any further increases in price after that targets the group of people who are addicted to the product and in some cases will do anything to buy it. So collecting more taxes will simply mean that if these addicted people can’t afford the product they will do crimes to make money. Hence increase the crime rate.

Therefore, Just increasing the price is not the solution so European Union forced tobacco manufacturers to print on the cigarettes pack colored pictures illustrating presumed effects of tobacco.  To keep the anti-smoking momentum I feel this is needed as it creates awareness in the minds of the seasoned consumers and provide knowledge and warning to new consumers who can afford the product but are still not addicted to it. Increasing the size of warning to the pack to me is not the sign of diminishing return for the government. I feel to keep the momentum alive and more people to consider quitting smoking more education and awareness is needed among the users and one way to do that is more explicit pictures and warnings on the pack, further I feel it stops more youngsters from trying the cigarettes and eventually becoming addict.
Some other solutions that government can consider to keep up the anti-smoking momentum are; to ban smoking from all public places, ban smoking from pubs,  restaurants and other party places. Enforce fines for people who are caught smoking in public. Increase more awareness among smokers for side effects of smoking. Use the sin tax money to promote campaigns and research to help people quit who are willing to quit but are forced to smoke because of their addiction. In the end, raising taxes on cigarettes work but only to some extent and government effect will reach diminishing return unless they keep looking different alternatives and ways and keep bringing new policies to the momentum. Making smoking illegal will also not work as it will create another window for drug smuggling, forcing government to spend even more money to fight that.

Exercise 4.2 – Elasticity and Revenue

Elasticity and Revenue

Based on this website http://www.forbes.com/sites/energysource/2011/05/10/raising-gas-taxes-wouldnt-cut-consumption-but-it-still-makes-sense/


Looking at the Forbes article on Oil based on Elasticity and Demand, it very clear that no matter what people argue oil is still an inelastic product for which the demand is not much affected with price at-least for the short-term.
As per the article 50% increase in price in the short-term leads to only 1.2% decrease in consumption. On the long run 50% increase in price leads to 4.7% decrease in consumption.
Hence, we can clearly understand the regular short-term price busts we experience in the gas prices.Looking at the oil closely and its uses there are not really any substitutes available in the market. Over the long run there is more decrease in consumption that short-term because to people not depending much on substitutes but may be looking at other alternatives like carpooling, working from home etc. All these alternatives can’t work for long and not for all type of customers.