Hnd Macroscopical And Microcosmic Economics Report

2067 words - 8 pages

(i) The mobile phone market is believed to be an oligopoly - what are two characteristics of this market structure?

(i) The mobile phone market is believed to be an oligopoly - what are two characteristics of this market structure?

1. Ability to set price: Oligopolies are price setters rather than price takers.

2. The distinctive feature of an oligopoly is interdependence. Oligopolies are typically composed of a few large firms. Each firm is so large that its actions affect market conditions. Therefore the competing firms will be aware of a firm's market actions and will respond appropriately. This means that in contemplating a market action, a firm must take into consideration the possible reactions of all competing firms and the firm's countermoves. It is very much like a game of chess or pool in which a player must anticipate a whole sequence of moves and countermoves in determining how to achieve his objectives. For example, an oligopoly considering a price reduction may wish to estimate the likelihood that competing firms would also lower their prices and possibly trigger a ruinous price war. Or if the firm is considering a price increase, it may want to know whether other firms will also increase prices or hold existing prices constant. This high degree of interdependence and need to be aware of what the other guy is doing or might do is to be contrasted with lack of interdependence in other market structures. In a Mobile Phone market there is zero interdependence because no firm is large enough to affect market price. All firms in a mobile phone market are price takers, information which they robotically follow in maximizing profits. In a monopoly there are no competitors to be concerned about. In a monopolistically competitive market each firm's effects on market conditions is so negligible as to be safely ignored by competitors.

(ii) Illustrate with an appropriate diagram and describe the price and output behaviour that may be seen in an oligopolistic market structure.

The "kinked-demand-curve" model was developed in the 1930s in part to help explain:
(a) barriers to entry into oligopoly markets.
(b) the allegedly excessive stickiness of prices in oligopolistic industries.
(c) how competitive industries become oligopolies.
(d) why oligopolies agree when setting their initial prices.
(e) how formal collusion is used to establish output quotas.

If this mobile phone company's marginal cost curve shifted upward from MC 2 MC3, it would:
(a) reduce output from Q3 to Q2 and increase price from P3 to P4.
(b) reduce output from Q2 to Q1 and increase price from P4 to P5.
(c) not change its price or output.
(d) shut down.

In this "kinked-demand curve" model, the mobile phone company views the demand curve it faces as the:
(a) linear "kinked" demand curve aD2 for all prices.
(b) linear "kinked" demand curve D1D1 for all prices.
(c)...

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