Comparing Market Structures

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.

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.

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

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.

Long run costs and Economies of scale

I am interested in starting a business in Promotional items ranging from T-Shirts, cups, pens, paper, bags, etc.  All items being customized to suit the customers needs and requests.  My business would start off small from home and depending on the sales volume I would eventually move into a small location suitable to staff a small group with the necessary printing equipment.  There would be no store inventory and I would start off purchasing from a wholesaler and subcontracting the printing until I have enough revenue to lease equipment, office space and hire additional staff. 

Long run costs of this type of business would include inventory, Internet support for website development and maintenance, Office location and advertising; they are all variable costs that depend on the success of the existing performance.  Short run costs would be a computer in which the current success of the business relies for orders and items available; which would be the one fixed costs while all other related costs are variable.  Fixed costs would include insurance and telephone.

A similar business in which I would like to see my company eventually compete with would be The Bargains Group.  They are an online promotional supply company that started it's business 17 years ago from home.  The owner (Mom and wife) started the business from home and it eventually expanded to operating in it's own office space and 20 employees.  The Bargains Group is now a multimillion dollar company that started off with a $1000.00 investment by the owner.

Long run costs associated with her success were inventory, office space and wages.  Short run costs related to the start up of the company would have been the requirement of computer.  Fixed costs included telephone and advertising.

http://www.bargainsgroup.com/Products1.aspx

Law of Diminishing Returns

The law of diminishing returns occurs when the amount of a single factor of production is increased, while holding the amount of all other (fixed) factors of production constant, at some point will yeild lower per untit returns rather than increasing production as the factor is increased.

 

In the Article "The Diminishing Returns to Tobacco Legislation" written by Pierre Lemieux, the law of diminishing returns is indicated in the following points:

• Additional reduction in tobacco consumption require more and more potent interventions.
• The phenomenon is also illustrated by cigarette taxation, where there are indications that decreasing returns have kicked in.
• One reason why government interventions agains smoking becomes less effective is that smokers who were the most easily persuaded have already quit.
• Too much information mayalso kill information
• A chapter of "Tobacco control in developing countries sites researh claiming that, indeed, the impact of information shocks a decay in time.

 

Lessening the debate on the diminishing returns on toabacco legislation can be observed throught hte following statement:

• Studies by American Economists Kip Viscuse have shown that smokers overestimate the risk of smoking, as evaluated by the public health literature and too much information may also kill information.  As advice, warnings and threats from authority become more numerous and visible, theytend to be discounted or ignored.

 

The only solution observed as a result of reviewing the article would be to impose more regulations and increase taxes.  Smokers are hard to sway, should the government be successful at their awareness program the affect would cuase a decrease in the demand and supply (shifting both curves to the left).

 

Sin taxes on cigarettes would need to continuously be increased to effectively impact consumers.  Because larger taxes would be required to achieve the same results as previously; addictive products tend to be inelastic.  Therefore, increasing taxes would have very little impact on the consumers decision making in purchasing cigarettes.

http://www.pierrelemieux.org/artdiminish.html

Elasticity

"Why $100 per barrel of oil prices are bad for Alberta - and everywhere else"

Is a blog on the current oil prices per barrel in comparison to the price 10 years ago.  As the price of oil and gas rises the demand decreases and travellers and tourists find alternative methods of enjoying the great outdoors and travel methods.  Gone are the days families will plan more than one trip per summer to enjoy an outing with family and friends.  People are finding cheaper alternatives of travelling such as car pooling, public transportation, biking and simply walking.  More and more city dwellers are also choosing more cost efficient ways of entertaining themselves by remaining within the city limits and enjoying what the city has to offer.  This is good for the shops and venues within the city limits but bad for rural business where tourism is low.

Prices have increased dramatically within the last ten years rising from $20.00 per barren in 1990 to $100.00 per barren in 2010.  Therefore causing the demand for gas/fuel to become more and more inelastic.  There is no close substitute for gas/fuel and although the price rises people have no alternative but to purchase at the price given therefore forcing the consumer to choose alternative methods of saving money by changing their choice of transportation.  The time it takes to produce gas is lengthy and takes time this also adds to the factor of inelasticity because the longer the period of time it takes to produce the product the greater the elasticity.  Finally there is a large percentage of one's income spend on fuel to travel to and from work, school, shopping and for educational purposes resulting in a person spending a large percentage of their income of fuel.

Our oil and gas resources are non-renewable and as our oil and gas deplete we can expect the prices per barrel to continue to increase rather than to fall and ever be where it was 10 years ago.  We really need to consider new and improve methods of fueling our vehicles.

http://looking-for-balance.blogspot.com/2011/03/why-100-per-barrel-oil-prices-are-bad.html