Assignment:
1) Agree or disagree and explain your answer. "The typical firm in a monopolistic competitive market earns above normal profits because it sells a differentiated product and only produces up to the point where marginal revenue equals marginal cost."
2a) Suppose that a restaurant offering Ethiopian cuisine opened in Cambridge Ma. and became a great success. What would you predict would happen in the greater Boston restaurant market?
2b) Draw a graph illustrating the likely changes in the shape and position of the demand curve facing the original "Ethiopian" restaurant in the above problem.
3) In the Wall Street Journal article included in this week's lesson, what change in the small drugstore chain's product differentiation strategy has helped lift profitability? What has been responsible for the success of this strategy (who comprises the customer base attracted by this product differentiation strategy)? Are there barriers to other firms' imitating this strategy?
4) Why do prices in monopolistic competitive markets remain above the prices that would exist in perfectly competitive markets even in the long run after entry has eliminated above normal profits?
5) Agree or disagree with the following statement and either explain your answer or draw a diagram to illustrate your answer. "The more highly differentiated the output of individual producers in a monopolistic competitive market, the higher the % markup of Price over marginal cost."
6) Give an actual example from your experience or observation of price discrimination.
7) Many professional and scholarly journals have an annual subscription rate for individual subscribers which is well below the annual rate charged to libraries. What must be true about the elasticity of demand for individuals and for libraries if this two tier price system is a profit maximizing pricing strategy?
1) Where formal cartels are illegal, what techniques can firms use to attempt to prevent "price wars" from breaking out and to maintain
a price level in the market, which approximates the level that a monopolist would charge?
2) Explain why if there is no formal or informal collusion in an oligopoly market firms are more likely to match a price cut by an individual firm than they are to match a price increase? If firms in an oligopoly do indeed behave in this way (matching price cuts, but not price hikes), what unusual shape does the demand curve facing the individual firm assume?
3) Which of the following market conditions in an oligopoly increase the probability that it will be able to maintain prices well above the competitive market level? Explain your answer briefly in each case.
a) A high degree of brand name identification by consumers
b) A dominant price leader
c) 10 or 12 firms in the market instead of 2 or 3
d) Cartels are legal
e) Technological and organizational change is creating opportunities to realize economies of scope and scale in the market
f) Barriers to new entrants are not very high
4) Explain carefully how oligopolies can use product differentiation strategies to increase barriers to entry. Consider both brand name creation and product line proliferation strategies.
5) Why haven't large nationwide chains been particularly successful dominating upscale consumer markets in areas like restaurants, jewelry and wine, while they have taken over mass production markets such as fast food and beer?
6) The following quote appeared in a recent Wall Street Journal article on the recent sharp increase in gasoline prices. "Mark Lazarus, owner of two Myrtle Beach, S.C., racetracks with more than 250 gasoline-powered go-carts and bumper boats, expects the spike to reduce profit by at least $21,000 during the busy season that begins today. 'I can't raise my ticket prices to cover it at this point,' he says. 'I think we would start losing customers if we started raising our price."
Is Mr. Lazarus making a mistake? Should he raise prices? Might your answer depend on whether you assume the market in which his go-cart business competes is an oligopoly market or a monopolistic competitive market? Draw a diagram (or possibly 2 diagrams) to illustrate your answer.
7) Assume that the above graph represents the market demand facing an oligopoly, which sells an undifferentiated product and the cost conditions of a typical firm in that oligopoly.
a) Explain why there will be no more than 4 firms in this market.
b) Assuming that there are 4 firms in this market what will be the price, which maximizes the overall level of profits in this industry?
c) If this oligopoly organizes itself into a cartel and agrees on the joint profit-maximizing price, what output quota will be assigned to each firm?
d) Explain why it may be difficult for the cartel to maintain the profit maximizing price.
8) Look back at the article in lesson 3 on the merger between P&G and Gillette. Do you think this merger will help these firms to heighten barriers to entry into the markets in which they were each already significant players prior to their merger? Explain briefly.