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Chapter 12: Q1E (page 465)

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

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 compete by choosing price. Their demand functions are

Q1 = 20 - P1 + P2

and

Q2 = 20 + P1 - P2

where P1 and P2 are the prices charged by each firm, respectively, and Q1 and Q2 are the resulting demands. Note that the demand for each good depends only on the difference in prices; if the two firms colluded and set the same price, they could make that price as high as they wanted, and earn infinite profits. Marginal costs are zero.

  1. Suppose the two firms set their prices at the same time. Find the resulting Nash equilibrium. What price will each firm charge, how much will it sell, and what will its profit be? (Hint: Maximize the profit of each firm with respect to its price.)
  2. Suppose Firm 1 sets its price first and then Firm 2 sets its price. What price will each firm charge, how much will it sell, and what will its profit be?
  3. Suppose you are one of these firms and that there are three ways you could play the game: (i) Both firms set price at the same time; (ii) You set price first; or (iii) Your competitor sets price first. If you could choose among these options, which would you prefer? Explain why.

Demand for light bulbs can be characterized by Q = 100 - P, where Q is in millions of boxes of lights sold and P is the price per box. There are two producers of lights, Everglow and Dimlit. They have identical cost functions: Ci = 10Qi +1/2Qi2(i = E, D) Q = QE + QD

  1. Unable to recognize the potential for collusion, the two firms act as short-run perfect competitors. What are the equilibrium values of QE, QD, and P? What are each firm鈥檚 profits?
  2. Top management in both firms is replaced. Each new manager independently recognizes the oligopolistic nature of the light bulb industry and plays Cournot. What are the equilibrium values of QE, QD, and P? What are each firm鈥檚 profits?
  3. Suppose the Everglow manager guesses correctly that Dimlit is playing Cournot, so Everglow plays Stackelberg. What are the equilibrium values of QE, QD, and P? What are each firm鈥檚 profits?
  4. If the managers of the two companies collude, what are the equilibrium values of QE, QD, and P? What are 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 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?

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.
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