Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 15: Problem 3

In the 1990 s, Reliance spent \(\$ 6\) billion to build a world-class oil refinery at Jamnagar, India. Now Reliance's expansion will make it the world's biggest producer of gasoline- 1.2 million gallons per day, or about \(5 \%\) of global capacity. Reliance plans to sell the gasoline in the United States and Europe where it's too expensive and politically difficult to build new refineries. The bulked-up Jamnagar will be able to move the market and singapore traders expect a drop in fuel prices as soon as it's going at full steam. Source: Fortune, April 28, 2008 a. Explain why the news clip implies that the gasoline market is not perfectly competitive. b. What barriers to entry might limit competition and allow Reliance to influence the price?

Short Answer

Expert verified
The market is not perfectly competitive due to Reliance's significant market share and its ability to influence prices. Barriers like high capital costs, regulatory policies, and technical expertise limit competition.

Step by step solution

01

Determine characteristics of perfect competition

In a perfectly competitive market, there are many sellers, homogeneous products, perfect information, and no barriers to entry. Each firm's actions do not affect the market price.
02

Compare Reliance's scenario with perfect competition

Reliance becoming the world's biggest producer of gasoline at 1.2 million gallons per day implies significant market share (5%). This contradicts the many small sellers attribute of perfect competition, indicating that Reliance's actions can affect the market.
03

Identify the implication from the news clip

The drop in fuel prices anticipated by Singapore traders due to Reliance's increased production suggests that Reliance has market power, which is not a feature of perfect competition. This implies the market is not perfectly competitive.
04

Identify possible barriers to entry

Barriers to entry might include the substantial capital investment required ($6 billion), regulatory policies, technical expertise needed, and the established supply chain and distribution networks.
05

Explain effect of these barriers on competition

These barriers limit the number of new entrants into the market, reducing competition and allowing Reliance to influence gasoline prices.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Perfect Competition
The concept of perfect competition is a theoretical market structure that features numerous sellers, all offering identical products. Imagine a farmers' market where multiple vendors sell exactly the same kind of apples under the same conditions. There is no individual market power, and prices are determined by the overall supply and demand. Sellers have no influence over the market price, as any attempt to increase prices would mean losing customers to competitors instantly. Also, in perfect competition, there are no barriers to entry, meaning any firm can enter or exit the market freely without any restrictions. This ideal market condition fosters maximum efficiency and consumer welfare but is rarely found in real-world markets.
Market Share
Market share refers to the portion of a market controlled by a particular company or product. It is usually expressed as a percentage. For example, if a company's sales account for 20% of the total market sales, it has a 20% market share. In the Reuters case, Reliance's production of 1.2 million gallons of gasoline per day translates to about 5% of the global capacity. Having a significant market share allows a company to have more control over prices and market conditions. This is contrary to the situation in perfect competition where each seller has an insignificant market share, and their actions do not impact the market price.
Barriers to Entry
Barriers to entry are obstacles that make it difficult for new firms to enter a market. These can come in various forms:
  • Capital Requirements: High initial investment costs, like the $6 billion spent by Reliance on their refinery, deter new firms from entering.
  • Regulatory Policies: Government regulations and policies can create significant entry barriers.
  • Technical Expertise: Specialized knowledge and expertise required in complex industries can be a substantial barrier.
  • Supply Chain and Distribution Network: Established relationships and networks can make it tough for new players to compete with existing firms.
These barriers restrict competition, allowing established companies to wield greater market influence.
Market Power
Market power refers to a company's ability to influence the price of goods or services in a market. Firms with significant market power can set prices higher without losing all their customers, unlike in a perfectly competitive market where firms are 'price takers.' In the case of Reliance, their considerable production capacity gives them market power. By increasing their gasoline output, Reliance can drive down global fuel prices, showcasing their ability to influence market conditions. This ability to sway market outcomes is a hallmark of imperfect competition and stands in sharp contrast to the theoretical conditions of perfect competition.

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

Why do Coca-Cola and PepsiCo spend huge amounts on advertising? Do they benefit? Does the consumer benefit? Explain your answer by constructing a game to illustrate the choices Coca-Cola and PepsiCo make.

The Asian rice-exporting nations planned to discuss a proposal that they form a cartel. Ahead of the meeting, the countries said that the purpose of the rice cartel would be to contribute to ensuring food stability, not just in an individual country but also to address food shortages in the region and the world. The cartel will not hoard rice and raise prices when there are shortages. The Philippines says that it is a bad idea. It will create an oligopoly, and the cartel could price the grain out of reach for millions of people. Source: CNN, May 6,2008 a. Assuming the rice-exporting nations become a profit-maximizing colluding oligopoly, explain how they would influence the global market for rice and the world price of rice. b. Assuming the rice-exporting nations become a profit-maximizing colluding oligopoly, draw a graph to illustrate their influence on the global market for rice. c. Even in the absence of international antitrust laws, why might it be difficult for this cartel to successfully collude? Use the ideas of game theory to explain.

All four leading U.S. airlines - American Airlines, Delta, United, and Southwest- are down about 10 percent from their respective highs set two weeks ago. The fall came after Southwest Airline's decision to increase fleet capacity 7 percent and American Airline's response that they will "compete aggressively" on price to retain customers from low-cost carriers resulting from capacity increases. Source: www.seekingalpha.com, June 1,2015 As implied in the news clip, what type of market best describes the U.S. airline industry?

Use the following news clip to work. Bud and Wise are the only two producers of aniseed beer, a New Age product designed to displace root beer. Bud and Wise are trying to figure out how much of this new beer to produce. They know (i) If they both produce 10,000 gallons a day, they will make the maximum attainable joint economic profit of \(\$ 200,000\) a day, or \(\$ 100,000\) a day each. (ii) If either firm produces 20,000 gallons a day while the other produces 10,000 gallons a day, the one that produces 20,000 gallons will make an economic profit of \(\$ 150,000\) and the other will incur an economic loss of \(\$ 50,000\). (iii) If both produce 20,000 gallons a day, each firm will make zero economic profit. Find the Nash equilibrium of the game that Bud and Wise play.

Use the following news clip to work. Bud and Wise are the only two producers of aniseed beer, a New Age product designed to displace root beer. Bud and Wise are trying to figure out how much of this new beer to produce. They know (i) If they both produce 10,000 gallons a day, they will make the maximum attainable joint economic profit of \(\$ 200,000\) a day, or \(\$ 100,000\) a day each. (ii) If either firm produces 20,000 gallons a day while the other produces 10,000 gallons a day, the one that produces 20,000 gallons will make an economic profit of \(\$ 150,000\) and the other will incur an economic loss of \(\$ 50,000\). (iii) If both produce 20,000 gallons a day, each firm will make zero economic profit. Construct a payoff matrix for the game that Bud and Wise must play.
See all solutions

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free