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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

Suppose the market for tennis shoes has one dominant firm and five fringe firms. The market demand is Q = 400 - 2 P. The dominant firm has a constant marginal cost of 20. The fringe firms each have a marginal cost of MC = 20 + 5q.

a. Verify that the total supply curve for the five fringe firms is Qf = P - 20.

b. Find the dominant firm’s demand curve.

c. Find the profit-maximizing quantity produced and the price charged by the dominant firm, and the quantity produced and the price charged by each of the fringe firms.

d. Suppose there are 10 fringe firms instead of five. How does this change your results?

e. Suppose there continue to be five fringe firms but that each manages to reduce its marginal cost to MC = 20 + 2q. How does this change your results?

Consider two firms facing the demand curve P = 50 - 5Q, where Q = Q1 + Q2. The firms’ 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’s equilibrium output and profit if they behave noncooperatively? Use the Cournot model. Draw the firms’ 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?

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’s 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’s 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’s profits?
  4. If the managers of the two companies collude, what are the equilibrium values of QE, QD, and P? What are each firm’s profits?

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.

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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