Topic: Economics pricing strategies
Description:
Learning Objectives Learning:
1. Explain what a monopoly market is and what conditions mi ght cause a market to be a monopoly
2. Derive the marginal revenue (MR) curve for a monopolist 2. Derive the marginal revenue (MR) curve for a monopolist
3. Show how a monopolist maximises its profit (MR = MC) – and use p p( )
graphs to show a firm’s profit (or loss)
4 Explain why a monopolist causes a loss in surplus (a deadweight loss) 4. Explain why a monopolist causes a loss in surplus (a deadweight loss)
5. Explain possible option to regulate a monopolist, and outline their strengths and weaknesses
This assignment requires you to explore a ‘r eal-world’ application of a firm’s pricing strategy.
The question:
Ray works for a major Australian bank. Ray is in charge of IT purchases for the bank and has to make a large order to replace all the deskto p computers in the head office. This question explores the options for Ray as to how he should structure this purchase in order to get the computers required by the bank at the lowest possible price. More generally, it is about a business designing the best procurement proces s it can to buy inputs into its production process.
a. Assume that Ray, through his vast industr y experience, has perfec t knowledge about the costs (and quality) of a computer supplier. Moreover, assume that the computer supplier acts like a price taker in the negotiations. What offer should Ray make to the supplier in order to get the best possible price? Make sure you highlight the intuition for your suggestion. Practically, if Ray does not have perfect knowledge, but instead has fairly accurate information about the supplier’s costs, what are some of the potential problems that Ray might face? Can these problems be mitigated (and how)? Ensure you explain your answer.
b. Now assume that there are two computer manufacturers. Both manufacturers make identical computers (in terms of the specificat ions of the computers) and both have the same constant marginal cost per unit manufactu red (and no fixed costs). Ray is not exactly sure of the costs for each potential seller. Wh at are the potential issues that Ray now faces in designing the procurement process? Given th e aim of minimising cost, suggest a purchase procedure for Ray. What is the expected price per computer if Ray adopts your suggestion?
Again, use economic intuition to explain your answer. Is Ray better off splitting the order in two, or having it as one larger order?
c. Once again, assume that there are just tw o computer manufacturers. Both have constant marginal costs (and no fixed costs), but Ray knows that one of the suppliers has a lower cost than the other (but he isn’t sure which one). Again, he isn’t really sure of the costs of production for each firm, as in part (b). Each computer manufacturer knows their costs, and the costs of their rival. What procurement process would you recommend, and what is the expected price Ray will end up paying for each computer? Explain your answer.
Please note:
1. This essay is 500 words long, not including references, appendices and diagrams. Any essays longer than 500 words will only be read and graded up for the first 500 words.
2. Please submit an identical copy in the BUSS1040 drop box in the Merewether Building and online on Blackboard.
3. Apply the relevant theories from the unit of study when analysing the problem. The content of lectures (and related tutorials and readings) are relevant when answering this question.
4. You may need to undertake some research to complete this assignment. Make sure you reference your essay complete ly, consistently and accurately.
5. In this assignment, you will also be reward ed for the depth of your analysis using the tools that you will have been taught in the unit.
6. You must back up with evidence or logi cal reasoning all statements that you make. Your claims should be, where appropriate, supported by references to the existing work (detailed in your references).