Price and Output Determination Under Oligopoly The interdependence of the demand curves of firms in oligopoly makes it difficult to establish a theory of determination of prices and outputs. According to American economist William J. Baumol, the firm may adopt any of the following approaches: a. Ignoring interdependence The firm may just disregard interdependence and make its own decisions as to pricing and quantity, but it must also be expected that other oligopolists will protect their own interest. Profit maximization is the common objective of the firms. b. Estimating the competitor’s countermoves Based on past experiences, the firm may try to estimate the anticipated actions and reactions of their
This point ‘e’ gives maximum profit to firm A because this point lies on the lowest possible iso-profit curve of firm A when reaction curve of firm B is given. Firm A decides monopolist output i.e, Qa (shown in figure), and firm B, according to its reaction curve, produces Qb output. Clearly, leader firm produces higher output and follower firm produces lower output as compare to Cournot’s equilibrium. In nut shell, stable equilibrium is reached when one firm is leader and another is
• Control over price: firms under this type of market structure do not determine the price and they do not accept the price. As the firms produce their own unique products they have their own control over the price in the market • Extent of the market information: In a monopolistic competitive market, both buyers and sellers do not possess full information of the prevailing market conditions. • Freedom of entry: Under this type of market structure, firms have freedom to enter or exit the market at any time they want. b) Short run and long run equilibrium of the firm Short
As per the situation described above, this paper attempts to answer the following questions: Does a free market economy preserve consumer sovereignty? If not, how do the inefficiencies of a free market impede the process of realisation of consumer sovereignty in the economy? The author hypothesises that free markets have imperfections which can result in the loss of sovereignty enjoyed by consumers. Market imperfections cause market failure. In this paper, a market fails when the allocation of resources in not efficient.
Industry Rivalry: The rivalry among existing firms is non-existent because no direct competitor exists. This eludes back to the lack of threats of substitutes and low barriers to entry. The barrier to entry is high at the moment due to PicoBrew patents, and while indirect competitors exist, there are no other firms that automate the brewing
This will affect the growth of market when it comes to stiff competition. The second C which takes the competition form is regarding how to perform better in terms of sales, profit and market share. In this form, a company will study competitor reaction when setting its strategy to destroy the market structure which can affect the overall profitability. For example, the price wars can be avoided if competitors believe that their long term effect will be to reduce industry profitability. The third C which takes the coexistence form may arise due to several reasons.
A firm is given the advantage and is allowed to sell possibly inferior goods and services at the expense of both customers and competitors. Bureaucratic delays are another possible outcome. Once the company gets business through illegal means it gets harder to break this habit. Speed money given to officials is likely to create a situation in which they are going to expect bribes from other companies as well and delay actions until they receive it. Bribery can lead to decrease in the productivity at national level which incurs a cost to society as a whole.
Unlike complex buying behavior, buyers with habitual buying behavior have low involvement in purchasing products and little significant in differences between brands. This is because the consumer do not see much difference between available brands in the market. The customers keep on buying the products that suitable and best fit for them and they do not looking for other brands. For example, salt and sugar are the products that consumers have little involvement in the buying process. They just enter the store and purchase the products without compare the brands.
But in a long-run, when trade barriers continue, trade barriers will hurt national economy. One problem that emerges from trade barriers is rent seeking. When local industries tried to lobby the government to give them subsidies or increasing tariff rates to gain more profit, there are no additional value added to the total output thus, there will be wasted resources used for lobbying. This is one example of the inefficiency of trade