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Chapter 12: Q1. (page 497)

Suppose all firms in a monopolistically competitive industry were merged into one large firm. Would that new firm produce as many different brands? Would it produce only a single brand? Explain.

Short Answer

Expert verified

Yes, after the merger, many different brands will earn more profits from different customers.

Step by step solution

01

Step 1. Explanation

The competitive monopolist firms produce differentiated products. Each firm in this market spends on selling costs, i.e., advertisement to make their product known to everyone. After the merger, there will be one firm managing the different brands of the different firms, or there will be coordination issues.

The decision to produce different brands is to take advantage of the loyal customers. A single brand will not be able to cater to the different tastes and preferences of the customers. Continuing with various brands will increase the market size for the single firm. The single firm acting as a monopolist will have the power to control the prices. This price discrimination would result in higher profits for the firm. Thus, the monopolist can earn more profit by selling different brands and also by discriminating the price.

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Most popular questions from this chapter

Two firms produce luxury sheepskin auto seat covers: Western Where (WW) and B.B.B. Sheep (BBBS). Each firm has a cost function given by

C(q) = 30q + 1.5q2

The market demand for these seat covers is represented by the inverse demand equation

P = 300 - 3Q

where Q = q1 + q2, total output.

  1. If each firm acts to maximize its profits, taking its rival鈥檚 output as given (i.e., the firms behave as Cournot oligopolists), what will be the equilibrium quantities selected by each firm? What is total output, and what is the market price? What are the profits for each firm?
  2. It occurs to the managers of WW and BBBS that they could do a lot better by colluding. If the two firms collude, what will be the profit-maximizing choice of output? The industry price? The output and the profit for each firm in this case?
  3. The managers of these firms realize that explicit agreements to collude are illegal. Each firm must decide on its own whether to produce the Cournot quantity or the cartel quantity. To aid in making the decision, the manager of WW constructs a payoff matrix like the one below. Fill in each box with the profit of WW and the profit of BBBS. Given this payoff matrix, what output strategy is each firm likely to pursue

    PROFIT PAYOFF MAXTRIX

    (WW PROFIT, BBBS PROFIT)

    BBBS

    PRODUCECOURNOT q

    PRODUCE CARTEL q

    WW

    PRODUCE COURNOT q

    PRODUCE CARTEL q

d. Suppose WW can set its output level before BBBS does. How much will WW choose to produce in this case? How much will BBBS produce? What is the market price, and what is the profit for each firm? Is WW better off by choosing its output first? Explain why or why not.

Consider two firms facing the demand curve P = 50 - 5Q, where Q = Q1 + Q2. The firms鈥� cost functions are C1(Q1) = 20 + 10 Q1 and C2(Q2) = 10 + 12 Q2.

  1. Suppose both firms have entered the industry. What is the joint profit-maximizing level of output? How much will each firm produce? How would your answer change if the firms have not yet entered the industry?
  2. What is each firm鈥檚 equilibrium output and profit if they behave noncooperatively? Use the Cournot model. Draw the firms鈥� reaction curves and show the equilibrium.
  3. How much should Firm 1 be willing to pay to purchase Firm 2 if collusion is illegal but a takeover is not?

Suppose that two identical firms produce widgets and that they are the only firms in the market. Their costs are given by C1 = 60Q1 and C2 = 60Q2, where Q1 is the output of Firm 1 and Q2 the output of Firm 2. Price is determined by the following demand curve P = 300 鈥� Q where Q = Q1 + Q2.

  1. Find the Cournot-Nash equilibrium. Calculate the profit of each firm at this equilibrium.
  2. Suppose the two firms form a cartel to maximize joint profits. How many widgets will be produced? Calculate each firm鈥檚 profit.
  3. Suppose Firm 1 were the only firm in the industry. How would market output and Firm 1鈥檚 profit differ from that found in part (b) above?
  4. Returning to the duopoly of part (b), suppose Firm 1 abides by the agreement, but Firm 2 cheats by increasing production. How many widgets will Firm 2 produce? What will be each firm鈥檚 profits?

A lemon-growing cartel consists of four orchards. Their total cost functions are

TC1 = 20 + 5Q12

TC2 = 25 + 3Q22

TC3 = 15 + 4Q32

TC4 = 20 + 6Q42

TC is in hundreds of dollars, and Q is in cartons per month picked and shipped.

  1. Tabulate total, average, and marginal costs for each firm for output levels between 1 and 5 cartons per month (i.e., for 1, 2, 3, 4, and 5 cartons).
  2. If the cartel decided to ship 10 cartons per month and set a price of $25 per carton, how should output be allocated among the firms?
  3. At this shipping level, which firm has the most incentive to cheat? Does any firm not have an incentive to cheat?

Suppose that two competing firms, A and B, produce a homogeneous good. Both firms have a marginal cost of MC = \(50. Describe what would happen to output and price in each of the following situations if the firms are at (i) Cournot equilibrium, (ii) collusive equilibrium, and (iii) Bertrand equilibrium.

  1. Because Firm A must increase wages, its MC increases to \)80.

  2. The marginal cost of both firms increases.

  3. The demand curve shifts to the right.
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