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Market structures
Running head: Market Structures
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Question 1:
Prisoner's dilemma is:
Given the two companies Exxon and Texaco who collaborate in the maintenance of a good each, the following table summarizes the results: (Mankiw, 2008)
In the above table, the two companies can cooperate and drill only one well each, in this case will earn 5 million dollars in profits each, however, the dominant strategy will be to drill an extra oil and thus gain an additional 1 million in profits, if Exxon drill two wells that gets 6 million in benefits to both firms will choose the dominant strategy for drilling two wells and the resulting outcome will be worse than if they had cooperated, although the two companies drilling of two wells each of the benefits is 4 million, compared 5 million if both cooperated. (Mankiw, 2008)
At 4 million dollars in profits of these companies may decide to maintain the two wells each, that have been drilled, however the company may decide to drill another well to increase its profits 4000000-5000000 perhaps, the two firms choose dominant strategy for drilling an extra well, so further reduce profits below $ 4 million in the long term. The best strategy would be to cooperate and each firm gets 5 million in revenue. (Mankiw, 2008)
Question 2:
Monopoly
The government may create a monopoly in a number of ways, when a company discovers a new product on the market reaches a patent for the new product by the government, this patent allows the company to be the only company producing this product in the market resulting in a monopoly. For example, when a pharmaceutical company discovers a new drug and acquires a patent, patent creates a monopoly for which there is only one company that makes that particular product. (Hardwick, 2002)
The government will also create a monopoly if the product produced is a public good, this includes the services and products that can not be produced by individual company, due to high costs of maintenance, initial high investment and low incomes. For this reason, therefore, arise a monopoly to produce public goods whose yields are unattractive to private companies. (Hardwick, 2002)
The government will also create a monopoly (natural monopoly) where the production and distribution of a product is more efficient and effective if one company in the market, this kind of monopoly is called a natural monopoly is created taking into account that the production and distribution of a product for more than a company will result in inefficiency therefore a natural monopoly is created. (Hardwick, 2002)
Question 3:
Monopoly cost and revenue curves:
A monopoly has the power to fix the prices of their products on the market as opposed to a competitive market, a company in a competitive market structure will produce at the point where the marginal cost curve cuts the average revenue curve, monopolistic company however does not occur in this price, the diagram below shows the revenue and cost curves of a monopoly:
(Hardwick, 2002)
A company in a competitive market occur in Q2 and the price is P2, however, the monopoly will produce less at the point of Q1 and charges a higher price P1. This is because the monopoly has the power to set prices. The shaded area B shows the economic benefits derived by the company a monopoly, monopoly occurs at the point where MR = MC, but rates at a higher price, this results in a deadweight loss (area D), due to the fact that it produces less than the efficient quantity, hence the monopoly should not produce the level that maximizes profits, but place at the point where it's normal profits and thereby increase the quantity produced. (Hardwick, 2002)
Question 4:
Oligopoly
The output effect occurs when a firm in an oligopolistic market structure is capable to increase their profits by increasing production, the condition for increasing production is that the price must be greater than the marginal cost and thus increasing output level will increase profits. (Parkin, 2009)
The effect on prices from the opposite occurs due to increased production of oligopolies, as output increases, then the prices of its products declines, as prices decline due to increased production then this also results to a decline in profit margins of oligopolies. (Parkin, 2009)
Oligopoly equilibrium occurs when these two effects are equal, if the effect the price is greater than the effect on production then the company must lower its production level if the output effect exceeds the price effect, the firm increases output. (Parkin, 2009)
Question 5:
In monopolistic competitors from entering a new market structure of firms leads to two external effects, this includes the externality variety of products and business stealing externality, the business stealing effect occurs when the entry of a new company of the results in a reduction demand for goods from other companies by consumers and also a reduction in earnings of other companies in the market. This is known as a negative externality companies in the structure of monopolistic competition. (Parkin, 2009)
The entry of a new company in the market also results in a positive externality the new company introduces new products in the market resulting in increased consumer surplus, this is known as the effect of the variety of products in more products are available on the market and what consumers experience a positive externality of entry of the new company. (Parkin, 2009)
Question 6:
Monopoly
Tat Since there is only an advertising company in this structure would not be necessary, the brand name in this structure market is only for identification purposes. (Parkin, 2009)
Monopolistic competition:
In the products monopolistic competition differ, this means that companies have an incentive to advertise to increase demand for its products, the companies also have brand names that are intended to differentiate products. (Parkin, 2009)
Oligopoly
Since there are only a few companies in this market structure, advertising will also help increase the number of buyers for a company, advertising is aimed at informing consumers about the quality of the product. (Parkin, 2009)
Perfect Competition:
In advertising of perfect competition is important because it helps a company to increase the buyers of their products, many companies in the industry and therefore companies should advertise. The brands that are also related to advertising brands which are designed to indicate the quality of products. (Parkin, 2009)
References:
Hardwick, P. (2002). Introduction to Modern Economics, New Jersey, Prentice Hall Press
Mankiw, Gregory. (2008). Principles of Micro Economics. New York: Dryden Press.
Michael Parkin (2009) Essential fundamentals of the economy, New York: McGraw Hill Press
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