Comparing Market Structures (Exercise 9-2)

	Perfect Competition	Monopolistic Competition	Oligopoly	Monopoly
Number of firms	Very Many	Many / Several	Few	One
Freedom of Entry	Unrestricted	Unrestricted	Restricted	Restricted or completely blocked
Nature of Product	Undifferentiated	Differentiated	Undifferentiated or differentiated	Unique
Implications for demand curve	Horizontal: firm is a price taker	Downward sloping but relatively elastic	Downward sloping. Relatively inelastic	Downward sloping: more inelastic than Oligopoly.
Average size of firms	Small	Small to Medium	Medium to Large	Very Large Firms
Possible consumer demand	Perfect elastic	Relatively elastic	Kinked Demand curve	Inelastic demand
Profit making possibility	Normal profit in the long run	Normal Profit	Economicprofit	Economicprofit
Government intervention	None	None	Unregulated	Taxes and proce setting
A new example	Wheat and corn (commodities)	Toothpaste, Software	Automobiles, Airlines	Utilities (Gas, Water, Electricity)
Ability to Control Prices	None	Little	Little	High

Defining Oligopoly and Game Theory (Exercise 8-1)

Compare an oligopoly market to a perfect competition and monopolistic competition type of market.  The similarities and differences between each type of market

Oligopoly Market	Perfect Competition	Monopolistic Competition
Dominated by a few large firms	Large number of buyers and sellers	Many small firms
Entry by new firms is difficult	Easy entrance into and exit from the market	Easy entrance into and exit from the market
Each firm has significant control over its’ prices	Do not have control over its’ prices	Some control over price
Mutual interdependence exists between firms	there are many substitutes for products in this market	There are differentiated products

What is the market type you consider the best choice. Explain why.

Perfect competition is the best market because as a consumer you have more choices and places to buy the same products from.  The businesses need to be conscience of what they are charging or consumers will take their business elsewhere.  The consumers have more control over the market and the price of the products in this type of market.

With your new knowledge, how do you feel as a consumer?

Do you feel in control of your purchasing choices?

Yes for the most part because there are many differentiated products and substitute products so I do not have to pay more than I feel a certain product is worth.  Because we have competition there are sales and firms need to be conscience about the price they are charging giving the consumer more control over the market and prices.

What are the main ideas behind game theory?

Game theory uses mathematics to represent and capture behavior in specific strategic situations (or games) in which the success of an individual's choices is directly linked to the choices of others.

How did it develop?

Game theory was originally developed to analyze competitions where one individual achieves better results at another individual's expense. Today game theory is applied to several interactions across many fields.

Is there evidence of game theory in the current economy? Explain.

Yes.  There is evidence of game theory because of competition.  Why when two businesses that start up at the same time with very similar products priced about the same does one go on to be very successful and the other may not and close down.  This is game theory.  One competitor achieved better results at the other’s expense.  An example of this is Blue Ray technology by Sony and HD DVD technology.  They were two products that were released around the same time that were very similar products but Sony Blue Ray technology beat out HD DVD technology and you can no longer buy HD DVD players or disks only Blue Ray.

How does the payoff matrix work?

A payoff matrix is a decision analysis tool that summarizes pros and cons of a decision in a tabular form. It lists payoffs (negative or positive returns) associated with all possible combinations of alternative actions (under the decision maker's control) and external conditions (not under decision maker's control).

Describe the principles behind collusive and cartel actions.

A cartel is an agreement among competing firms or organizations. Cartel members may agree to price fixing, market shares, bid rigging, division of profits, allocation of territories, allocation of customers or any combination of these.  The point of collusive actions is to increase profits for each individual member by reducing competition. 

Sources

http://www.mba-online-program.com/an-introduction-to-game-theory

http://wiki.answers.com/Q/What_is_the_payoff_matrix

http://en.wikipedia.org/wiki/Cartel

Defining Monopolistic Competition (Excercise 7-1)

Size:	Small Company	Medium Company	Large Company
Features:	River Cafe’ in Calgary	Cuisinart	Pepsi Co.
Differentiated products	They differentiate themselves by their location.  They are located in a neat place on Prince’s Island park where you have to walk to get there.  It is a neat dining experience compared to other high end restaurants.	Yes – Cuisinart has very similar products to Kitchenaid but creates a difference for the consumer to see by offering a better and longer warranty/guaranty  on their products	Yes – They create this difference in consumers’ minds through their advertising.  Coke puts out their product that is very similar but consumers prefer Pepsi over coke and do not consider Coke a suitable substitute because of Pepsi’s branding.
Control over price	They set their own prices and do not worry about the competitions.  They charge what they feel their food and experience is worth without worrying about loosing business to competition.	They don’t have control over price but they choose their price without worrying about the competitors price. They emphasize their quality and guaranteeing their products rather than being competitive with their price.	Pepsi looks at the competitions price but could charge what they want, to an extent, without worrying about loosing consumers to the competition.
Mass advertising	No they do not set themselves apart but mass advertising.  They do some print ads but nothing on a large scale.  They use word of mouth from consumers that have dined in their restaurant.	They do advertise on TV and in print but they do not put their emphasis on advertising.	Yes – They pay for TV ads, print ads they sponsor pro teams and use pro athletes and celebrity’s to advertise their products.  They sponsor schools so that their product is the sole product being sold in the vending machines at those schools.  They are huge into advertising everywhere.
Brand name goods	They are not a brand name service.  They have one location and that is it.	It is a brand name that people associate with quality and their more expensive price tag.	Yes – They spend millions of dollars a year advertising and sponsorships of events and teams to get their brand known to as many consumers as possible.

Monopolistic competition is a type of imperfect competition such that many producers sell products that are differentiated from one another as goods but not perfect substitutes (such as from branding, quality, or location).  In monopolistic competition, a firm takes the prices charged by its rivals as given and ignores the impact of its own prices on the prices of other firms.


^Source
http://en.wikipedia.org/wiki/Monopolistic_competition

Competing as Starbucks (Excercise 6-2)

Starbucks is a large Seattle based company that provides barista service with fresh brewed coffee and espresso beverages among other drinks and snacks.  The reason this company is considered to be a part of a perfect competition market is because…

-          There are a large number of buyers and sellers in the market.  There is a lot of competition from Tim Horton’s, McDonald's, A&W among the many “Mom and Pop shops” that have entered into the market. 

-          It is easy to enter into and exit from this market.  As a result of the easy access to enter the market it creates a perfect competition because there are many products that are similar in nature and, as a result, many substitutes.

-          In a perfect competition prices are determined by supply and demand. Thus, producers in a perfectly competitive market are subject to the prices determined by the market and do not have any leverage.   If a company raises their prices and consumers are not willing to pay the higher prices then in a perfect competition market they have many substitutes and they can change where they buy that product from. 

Starbucks has set themselves apart by producing an experience to coffee and drinking it.  The eventual owner and chairman of Starbucks travelled to Italy and fell in love with Italian coffee bars and the romance of the coffee experience. He had a vision to bring the Italian coffeehouse tradition back to the United States.  He wanted to create a place for conversation and a sense of community.  From the beginning, Starbucks wanted to be a different kind of company.  By setting themselves apart from most other coffee shops the company Starbucks was able to grow into the large company it is today with over 15,000 stores world wide.

Despite the company’s success in 2008 Starbucks announced that they would be closing 600 stores in the USA.  Their expansion was happening very quickly and many locations of the company were too close together.  They closed 600 stores that had been recently opened, since 2005, and that were a short walk away from another Starbucks location.  By closing these stores they could cut a lot of their long term and short term costs.  By having too many stores you create many expenses that may not be recoverable.  With more stores you have more costs such as rent, utilities, salaries, machine costs and maintenance, and more supplies to provide to each of these locations. By closing these stores Starbucks states that they believe that people will still come to Starbucks other locations that are close by thus creating a larger profit because the costs to run fewer stores is less.  Despite the costs associated with closing these 600 locations, in the long run the company will be more profitable.

Even though you always hear the statement “Starbucks coffee is way to expensive, I will never pay $5.00 for a cup of coffee” people still flock to Starbucks for their coffee fix.  So from the success of the company and the long line that I stand in to get my Starbucks fix, I would assume that consumers do not actually think that what Starbucks charges  for their coffee experience is too much.  I believe that Starbucks does so well because they brew the best coffee and espresso and that they have created the ultimate coffee experience in their stores. 

If Starbucks lowered their prices I believe that they may at first show an increase in profits but I believe that the experience and the mood of Starbucks would fail and that you would eventually loose customers.  With the increase in traffic the stores would most likely see they would look to simplify things and their vast menu choices that they are know for could be cut back.  The quality of the product could be lost with cost and time saving processes and it would become just another Tim Horton’s with rushed service and not a quality product.  In the end I believe that it would do more harm than good the Starbucks brand and experience.  

Image from: http://consumerist.com/2008/05/christian-group-calls-for-boycott-over-titillating-new-starbucks-logo.html

Sources

http://www.starbucks.ca/about-us/our-heritage

http://seattletimes.nwsource.com/html/businesstechnology/2008028854_starbucks02.html