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Chapter 12: Q1. (page 497)

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

Step 1. 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 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.

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.

This exercise is a continuation of Exercise 3. We return to two firms with the same constant average and marginal cost, AC = MC = 5, facing the market demand curve Q1 + Q2 = 53 - P. Now we will use the Stackelberg model to analyze what will happen if one of the firms makes its output decision before the other.

  1. Suppose Firm 1 is the Stackelberg leader (i.e., makes its output decisions before Firm 2). Find the reaction curves that tell each firm how much to produce in terms of the output of its competitor.
  2. How much will each firm produce, and what will its profit be?

Suppose that two identical firms produce widgets and that they are the only firms in the market. Their costs are given by C1 = 60Q1 and C2 = 60Q2, where Q1 is the output of Firm 1 and Q2 the output of Firm 2. Price is determined by the following demand curve P = 300 – Q where Q = Q1 + Q2.

  1. Find the Cournot-Nash equilibrium. Calculate the profit of each firm at this equilibrium.
  2. Suppose the two firms form a cartel to maximize joint profits. How many widgets will be produced? Calculate each firm’s profit.
  3. Suppose Firm 1 were the only firm in the industry. How would market output and Firm 1’s profit differ from that found in part (b) above?
  4. Returning to the duopoly of part (b), suppose Firm 1 abides by the agreement, but Firm 2 cheats by increasing production. How many widgets will Firm 2 produce? What will be each firm’s profits?

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?
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