Thursday, August 18, 2011
Tuesday, August 16, 2011
The Other Game: Noncollusive Oligopoly
Game theory is mainly concerned with prediciting the outcome of ones actions in which there are two pariticipants involved. People seek to work out the best possible action, taking into consideration the reaction of rivals. Game Theory was first developed by Economist John Newmann and Oskar Morgenstern in 1940 to analyze strategic behavior.
Game Theory exisits within Canada; our home electricity and gas providers are an example.
In the Pay Off Matrix there are four possible pay offs, labelled cells A through D. Cell A shows the result if neither of them cheat and stick to the original agreement. Cell B shows what will happen if one cheats and the other doesn't. Cell C shows what happens if the other cheats and one doesn't. Cell D shows what will happen if they both cheat.
Sayre, John E, Alan Morris J. Principles of Microeconomics, 6th edition. Textbook.
Game Theory exisits within Canada; our home electricity and gas providers are an example.
In the Pay Off Matrix there are four possible pay offs, labelled cells A through D. Cell A shows the result if neither of them cheat and stick to the original agreement. Cell B shows what will happen if one cheats and the other doesn't. Cell C shows what happens if the other cheats and one doesn't. Cell D shows what will happen if they both cheat.
Pay Off Matrix | Sticks to Agreement | Doesn't Stick to Agreement |
Sticks to Agreement | Equal results in the market for Company #1 & Company #2 | Lower than expected share for Company #1 |
Doesn't Stick to Agreement | Lower than expected share for company #2 | Lower than expected outcome for both company #1 & Company #2 |
Sayre, John E, Alan Morris J. Principles of Microeconomics, 6th edition. Textbook.
Monopolistic Competition
Monopolistic Competition is a type of market structure that includes retail, service and some manufacturing markets. A monopolistic industry has four characteristics:
1. Many buyers and sellers
2. No significant barriers to entry
3. Profit maximizers
4. Similar but not absolutely identical
As more producers or firms enter the market the demand curve decreases. Once the demand curve reaches the point of tangency with the average total cost curve it can only break even. If the demand curve shifts below the average total cost curve the firm will then generate at a loss. This when the market is no longer profitable.
This table demonstrates the different types of products and services that exist within a monopoly categorized by the four characteristics.
1. Many buyers and sellers
2. No significant barriers to entry
3. Profit maximizers
4. Similar but not absolutely identical
As more producers or firms enter the market the demand curve decreases. Once the demand curve reaches the point of tangency with the average total cost curve it can only break even. If the demand curve shifts below the average total cost curve the firm will then generate at a loss. This when the market is no longer profitable.
This table demonstrates the different types of products and services that exist within a monopoly categorized by the four characteristics.
Size: | Small Company | Medium Company | Large Company |
Differentiated Product: | SEARS | Microsoft | Nike |
Control Over Price: | Calaway Park | Ciniplex Odion | Dollarama |
Mass Advertising: | CJAY 92 | Superstore | Dodge |
Brand Name goods: | SAIT Polytechnic | PetroCanada | McDonalds |
Thursday, August 4, 2011
Perfect Competition
Perfect competition is a theoretical market structure. It is primarily used as a benchmark against which other market structures are compared. To be classifed as a perfect market the following five criteria would need to be me:
1. All firms sell an identical product
2. All firms are price takers
3. All firms have relatively small market share
4. Buyers know the nature of the product being sold and the prices charged by each firm.
5. The industry is characterized by freedom of entry and exit.
Starbuck as an example ended up closing 600 stores because their overhead costs were far more than their economic profit. Maybe cutting back a little on extra costs such as training (30 hours), benefits (even if you work only 20 hours per week) Top quality machines and free wi-fi Starbuck would be able to keep those stores open. They are closing additional stores because stores are no longer within their break-even point or profit maximizing output levels. As they close those 600 stores they are decreasing the quantity of coffee available within the industry so existing stores that remain open will now increase in output (sales).
In order to be able to accomodate long run costs the company needs to be very profitable in the short run. The tough economy as of July 2, 2008 would have had an effect on the brand causing it to struggle. Therefore, long run costs associated with operating several stores means closing 600 stores in order to stay in business.
The price of coffee is too expensive at Starbuck in comparison to other venues but their reputation for top quality coffee as a "brand name" brings its customers back again and again. If they lowered their prices they would cause a diseconomies of scale because their extra costs (training, benefits, wi-fi, and equipment) would outweigh their revenue.
1. All firms sell an identical product
2. All firms are price takers
3. All firms have relatively small market share
4. Buyers know the nature of the product being sold and the prices charged by each firm.
5. The industry is characterized by freedom of entry and exit.
Starbuck as an example ended up closing 600 stores because their overhead costs were far more than their economic profit. Maybe cutting back a little on extra costs such as training (30 hours), benefits (even if you work only 20 hours per week) Top quality machines and free wi-fi Starbuck would be able to keep those stores open. They are closing additional stores because stores are no longer within their break-even point or profit maximizing output levels. As they close those 600 stores they are decreasing the quantity of coffee available within the industry so existing stores that remain open will now increase in output (sales).
In order to be able to accomodate long run costs the company needs to be very profitable in the short run. The tough economy as of July 2, 2008 would have had an effect on the brand causing it to struggle. Therefore, long run costs associated with operating several stores means closing 600 stores in order to stay in business.
The price of coffee is too expensive at Starbuck in comparison to other venues but their reputation for top quality coffee as a "brand name" brings its customers back again and again. If they lowered their prices they would cause a diseconomies of scale because their extra costs (training, benefits, wi-fi, and equipment) would outweigh their revenue.
Subscribe to:
Posts (Atom)