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Chapter 12: Problem 1

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
Post-merger, the new monopolistic entity would make strategic decisions about the number of brands to produce based on factors such as costs of production, consumer preferences, and economies of scale. It might not necessarily produce as many brands as when in monopolistic competition, nor would it necessarily produce only a single brand.

Step by step solution

01

Understanding Monopolistic Competition

In a monopolistically competitive market, there are several firms, each producing slightly differentiated products. Each firm has a certain degree of market power to set prices for its branded products
02

Merger into a Single Firm

When all these firms merge into one large firm, it now has control of the entire industry as a monopolist. However, this does not necessarily mean it will continue to produce as many different brands.
03

Implications of Merger

Following the merger, the new firm could potentially limit the number of brands produced, if it finds that a fewer number of brands can still satisfy the diverse consumer preferences whilst also reducing costs.
04

Considering Economies of Scale

On the other hand, if economies of scale can be achieved in production, it could be beneficial for the new entity to continue producing multiple brands as to not lose market segments that value variety
05

Conclusion on Brand Production

The decision to produce many brands or just a single brand will depend not on the firm's monopolistic position per se, but rather on the relationship between costs, consumer preferences and economies of scale.

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Most popular questions from this chapter

A monopolist can produce at a constant average (and marginal) cost of \(\mathrm{AC}=\mathrm{MC}=\$ 5 .\) It faces a market demand curve given by \(Q=53-P\) a. Calculate the profit-maximizing price and quantity for this monopolist. Also calculate its profits. b. Suppose a second firm enters the market. Let \(Q_{1}\) be the output of the first firm and \(Q_{2}\) be the output of the second. Market demand is now given by \\[ Q_{1}+Q_{2}=53-P \\] Assuming that this second firm has the same costs as the first, write the profits of each firm as functions of \(Q_{1}\) and \(Q_{2}\) c. Suppose (as in the Cournot model) that each firm chooses its profit- maximizing level of output on the assumption that its competitor's output is fixed. Find each firm's "reaction curve" (i.e., the rule that gives its desired output in terms of its competitor's output). d. Calculate the Cournot equilibrium (i.e., the values of \(Q_{1}\) and \(Q_{2}\) for which each firm is doing as well as it can given its competitor's output). What are the resulting market price and profits of each firm? *e. Suppose there are \(N\) firms in the industry, all with the same constant marginal cost, \(\mathrm{MC}=\$ 5 .\) Find the Cournot equilibrium. How much will each firm produce, what will be the market price, and how much profit will each firm earn? Also, show that as N becomes large, the market price approaches the price that would prevail under perfect competition.

Suppose the airline industry consisted of only two firms: American and Texas Air Corp. Let the two firms have identical cost functions, \(C(q)=40 q\). Assume that the demand curve for the industry is given by \(P=100-Q\) and that each firm expects the other to behave as a Cournot competitor. a. Calculate the Cournot-Nash equilibrium for each firm, assuming that each chooses the output level that maximizes its profits when taking its rival's output as given. What are the profits of each firm? b. What would be the equilibrium quantity if Texas Air had constant marginal and average costs of \(\$ 25\) and American had constant marginal and average costs of \(\$ 40 ?\) c. Assuming that both firms have the original cost function, \(C(q)=40 q,\) how much should Texas Air be willing to invest to lower its marginal cost from 40 to \(25,\) assuming that American will not follow suit? How much should American be willing to spend to reduce its marginal cost to \(25,\) assuming that Texas Air will have marginal costs of 25 regardless of American's actions?

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: \\[ \begin{array}{c} C_{i}=10 Q_{i}+\frac{1}{2} Q_{i}^{2}(i=E, D) \\ Q=Q_{E}+Q_{D} \end{array} \\] a. Unable to recognize the potential for collusion, the two firms act as short-run perfect competitors. What are the equilibrium values of \(Q_{E}, Q_{D},\) and \(P ?\) What are each firm's profits? b. 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 \(Q_{E}\) \(Q_{D},\) and \(P ?\) What are each firm's profits? c. Suppose the Everglow manager guesses correctly that Dimlit is playing Cournot, so Everglow plays Stackelberg. What are the equilibrium values of \(Q_{E}\) \(Q_{D},\) and \(P ?\) What are each firm's profits? d. If the managers of the two companies collude, what are the equilibrium values of \(Q_{E}, Q_{D},\) and \(P ?\) What are each firm's profits?

Consider two firms facing the demand curve \(P=50-5 Q\), where \(Q=Q_{1}+Q_{2}\). The firms' cost functions are \(C_{1}\left(Q_{1}\right)=20+10 Q_{1}\) and \(C_{2}\left(Q_{2}\right)=10+12 Q_{2}\) a. 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? b. 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. c. How much should Firm 1 be willing to pay to purchase Firm 2 if collusion is illegal but a takeover is not?

Suppose that two competing firms, \(A\) and \(B\), produce a homogeneous good. Both firms have a marginal cost of \(\mathrm{MC}=\$ 50 .\) 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. a. Because Firm \(A\) must increase wages, its \(\mathrm{MC}\) increases to \(\$ 80\). b. The marginal cost of both firms increases. c. The demand curve shifts to the right.
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