Business Decision on Market Structure

Question 1. Effectiveness of the market structure

McGuigan, Moyer and  Harris (2014), Sivagnanam and Srinivasan (2010), and Snowdon (2007) observed that decisions on the market structure are informed by the general principles of economics, specific laws that relate market with prices, quantity and supply, and the business principal cause in the industry. It is critical to study the market behavior in ensuring the business attains competitive advantage at every point of operation. Assessing the company’s ability to meet the demand of the market and ensure that the quality of the product is up to standard is one of the strategies of creating a favorable change in the market. The company must ensure that the costs are low while the revenue remains high (McGuigan, Moyer &  Harris, 2014; Sivagnanam & Srinivasan, 2010; Snowdon, 2007).

In the previous market, the competition was perfect where the laws that determine the market situation determined the business practices. The equilibrium price was determined by setting the Quantity demanded equal to the Quantity supplied. In the current situation, the imperfect market allows the company to control prices (Madhavan, 2000; McGuigan, Moyer &  Harris, 2014).

Question 2: causes of market structure change

It is important to observe that the initial situation suggests that the company operated in an environment that similar companies existed. The products in the market were homogeneous, economic efficiency was high, but the companies in the industry had weak innovation strategies. In the current situation, the businesses control the optimal pricing but there are companies in the market with similar characteristics in terms of products. Therefore, at this point, the company is not a monopoly but the market in oligopoly. This is a situation of few dominant firms, the products are differentiated, barriers to entry are high, innovation is strong, and economic efficiency depend on scale economies and innovation. The company must have invested more on innovation that focused on products differentiation. Although the nature and form of the product remains within the parameters of the initial homogeny, innovation added a feature that gave the company a competitive advantage. There could be other factors that created an environment that lead to the shift in the market structure. A decrease in price of inputs, decrease in the benefits of producing other goods within the same industry, and a more directed market approach positioned the company above the peers in the industry (Snowdon, 2007; McGuigan,  Moyer & Harris, 2014; Smythe, & Zhao, 2001; Tucker, 2011).

Question 3: Short run and long run business functions

The short run of the business will involve the fixed and variable costs while only the variable costs determine the long run of the business. The short run costs are determined by looking at the costs during the production process. Such costs are incurred on wages of the workers and buying the raw materials. When the cost of the raw materials increases, the cost of production is high and the effect is felt immediately in terms of the outputs. The company will be forced to reduce on the quantity of the raw material which in effect affects the quantity of supply. If the company has to sustain the supply quantity, the company must incur more costs on the factors of production. Long term costs are determined by fixed factors of production. Such factors include land, labor, capital goods and in some operations the industrial rights. The firm must project the market requirements on the products against the cost of the fixed factors. The benefit that matches the cost on fixed factors are dependent on the quantity, market demand, and sustainable of production. If the firm produces the desired quantity at the right quality at the lowest cost sustainability is achievable and the totality of these factors defines an efficient costs.

Given that

TC = 160,000,000 + 100Q + 0.0063212Q2   . . . . .  . ..  .. . .  . .. .  .. . . . . . . . . . . . .  . ..  . ..  . (i)

VC = 100Q + 0.0063212Q2  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (ii)

MC = 100 + 0.0126424Q  . . . . . . . .  . . .. . . . . . . . . . . . . .  ..  .. . . . . . . . . . . . . . . . . . .  .. . (iii)

Equation (i) is the total cost function TC, equ (ii), VC is the variable cost, and equ (iii), MC is the marginal cost and Q is the quantity of goods sold.

Total Cost = Fixed cost + (Average variable cost) x Output.  . . . . .  . . . . . . .. . . .  . ..  .. .  . (iv)

If Q = 10 (an arbitrary figure; Q will be determined from the profit function later on in the paper)

Substitute 10 in equation (i)

TC = 160,000,000 + 100(10) + 0.0063212(10)2   . . . . .  . .. .. .  .. . . . . . . . . . . . .  . ..  . ..  . (v)

TC = 160,000,000 + 100 x 10 + 0.0063212 x 100   . .. . .  . .. .  .. . . . . . . . . . . . .  . ..  . ..  . (vi)

VC = 100Q + 0.0063212Q2  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  . . . . . . . . . . . . . (vii)

VC = 100 x10 + 0.0063212 (10)2  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (viii)

 

MC = 100 + 0.0126424Q  . . . . . . . .  . . .. . . . . . . . . . . . . . .  ..  .. . . . .. . . . . . . . . . . .  .. . (ix)

MC = 100 + 0.0126424 x10  . . . . . . . .  . . .. . . . . . . . . . . . . . .  ..  .. . . . . . . . . . . . . . .  .. . (x)

(Madhavan, 2000; McGuigan,  Moyer & Harris, 2014; Smythe, & Zhao, 2001; Tucker, 2011).

 

Question 4: Circumstances under which the company may discontinue operations

From the relation that

TC = TFC +TVC . . . . . . . . . .  .. . .  . .. . . . . . . . . . . . . . .. . . . . .. . . . . . . . . . . . . . . . .. . . .(xi)

Where TC is the total cost, TFC is the total fixed cost, and TVC is the total variable cost

TVC is associated with production, therefore, when production is zero, TVC is also zero. When the TVC = 0, the company operations will discontinue, although the fixed variables and the already existing products remain to be the worth of the company.

The production may stop but the existing quantities either in the stores or within the supply chain can be used to determine the average fixed cost of the company. The relation of the quantities and the average fixed cost is given by

AFC = TFC/Q  . .. . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  .. . .. . . . . . . . . .. .  . . (xii)

To obtain the average total cost the following relation is used

ATC = TC/Q….. .  . . .. . .  . . . .. . . . . . . .  . .. . . . .. . .  . . . . . . .. . . . .  . . ..  ..  . . . . . . . .  . (xiii)

Relating the fixed costs and the variable costs with the average total cost, from the equ (xii)

ATC = TC/Q = TFC/Q + TVC/Q = AFC + AVC . . .  . ..  ..  . . . .. . . . . .  . .. .  . ..  .. .  ..  (xiv)

To deal with such circumstances, the company must look at the factors of production, the competitors, and reaction of the market. in the factors of production, the company will go back to the strategy that gave a competitive advantage from the previous situation. This may include use of innovation and uniqueness of the product. This will overcome the homogeneous effect in the oligopoly market. the company may ensure that competitors are find it hard to overcome its market influence by the first-mover strategy. In oligopolies, companies that make the first move on a new product or a rebranded product have the tendencies of sustaining the market share (McGuigan,  Moyer & Harris, 2014; Smythe, & Zhao, 2001; Tucker, 2011).

Question 5: Determining the pricing policy

The demand equation is (from the previous assignment)

Q = 38650 – 42P  . . . .  . . . . . ..  ..  . . . . ..  .. . . . .  . . . . . . . .  . . . . . . . . .. . . . . . . . . . . . . (xv)

The inverse demand function is given by the relation,

P = (38650 – Q)/ 42  . . .  . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . .. . . . (xvi)

Total revenue function is given by the relation

TR = P.Q  . . . . . . . . .  ..  .. . . . . . . . . . . . . .. . . . . . . .  . . ..  .. . . . . . . . . . . . . . . . . . . . . . (xvii)

Substituting the equations (xv) and (xvi) in (xvii), the following relation is obtained

TR = {(38650 – Q)/ 42}. Q . . . .  . . . . . . . . .  . . . . . . .. . . .  .. . . . . . . . . . . . . . . .  . .. . . (xviii)

Therefore the TR function becomes

TR = (38650 Q – Q2)/42  . . . . . . . . .  . .. . . . . . . . .. . . . . . . .. . . . . . . . . . .. . . . . . . . .. . . .(ixx)

TR = 920.2380952380952Q – Q2/42

When the profit function has a maximum, relation of marginal revenue and marginal cost is given by the relation,

MR = MC.  . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . .. . . . . . . . .. . . . . . . . . .. . . . . . . . .. . .(xx)

Given that (from equ (iii)

MC = 100 + 0.0126424Q   . . . . . . . .  . . .. . . . . . . . . . . . . . .  ..  .. . . . . . . . . . . . . .  ..  .. . (xxi)

MR = 100 + 0.0126424Q  . . . . . . . .  . . .. . . . . . . . . . . . . . .  ..  .. . . . . . . . . . . . . . . .  .. . (xxii)

The cost function is given by

TC = 160,000,000 + 100Q + 0.0063212Q2   . . . . .  . ..  .. . .  . .. .  .. . . . . . . . . . . . . . ..  .  (xxiii)

Revenue function is

TR = 920.2380952380952Q – Q2/42  . . .. . . . . . . . . . . . .. . . . . . . . . . . . . . . . .. . . . . . . (xxiv)

Profit function becomes, revenue – cost

{920.2380952380952Q – Q2/42 } – {160,000,000 + 100Q + 0.0063212Q2}

P (Q) = -160,000,000 + 820. 2380952380952Q – 0.0174883238095238 Q2

Solved using quadratic formula

Q = 10519736.7

MC = 100 + 0.0126424x 10519736.7 = 133094.71925608

(Madhavan, 2000; McGuigan,  Moyer & Harris, 2014; Smythe, & Zhao, 2001; Tucker, 2011)

 

Question 6: profit

The short run of the business will involve the fixed and variable costs while only the variable costs determine the long run of the business.

The profit level of the company will be determined by the profit function,

P (Q) = -160,000,000 + 820. 2380952380952Q – 0.0174883238095238 Q2 . . . . .  . . . (xxv)

Substituting Q

P (Q) = -160,000,000 + 820. 2380952380952 x 10519736.7 – 0.0174883238095238 (10519736.7)2.  . . ..  .. . . . . . . .  . . . . . .. . . . .  . .. . . . . . . . .  .  . (xxv)

P(Q) = 1926554221372.853  . . . . . . . . . . . . . . . . . . . . . .  . . ..  . (xxvi)

The given functions had a complex value. Therefore, it was not to determine the short run profit. This is an indicator that although the company is positioned to determine the optimal price, there are market collusions among the major competitors in the oligopolies (Smythe, & Zhao, 2001; Sivagnanam, & Srinivasan, 2010).

Question 6. How to improve on profitability

To improve on profitability, the company must increase on quantity that is currently produced. This is indicated from the solution in the quadratic equation. The function contains a complex variable. The company could be facing undetermined hindrances in the market and its operations. The company needs to sustain its current market position. It must invest in innovations while reducing on the cost of production (McGuigan, Moyer &  Harris, 2014; Sivagnanam & Srinivasan, 2010; Snowdon, 2007).

 

References

Madhavan, A. (2000). Market Microstructure: A Survey. Journal of Financial Markets, 3 (3): 205–58.

McGuigan, J. R., Moyer, C. R., & Harris, F. H. (2014). Managerial Economics: Applications, Strategies and Tactics (13th Edition). Stamford, CT: Cengage Learning.

Phillips, R. (2005). Pricing and revenue optimization. Stanford, CA: Stanford University press

Sivagnanam, J.K., & Srinivasan, R. (2010). Business management. New Delhi: Tata McGraw-Hill.

Selvaraj, R. (2008). Quantitative methods in management. New Delhi: Anugrag Jain

Snowdon, B. (2007). Competitive advantage revisited. Michael Porter on strategy and competitiveness. Journal of management inquiry, 16(3), 256 – 273. DOI: 10.1177/1056492607306333.

Smythe, J.D., & Zhao, J. (2001). The optimal market structure in an asymmetric oligopoly. Iowa: Iowa state university.

Tucker, I. (2011). Microeconomics for today. Mason, OH:  Cengage Learning.

 

 

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