Purchase Solution

Pricing and Output Decisions in an Oligopoly

Not what you're looking for?

Ask Custom Question

Assume you are the manager of Yabba Cable Company, which provides commercial communication services to the town of Canyon Lake, Texas. Because of licensing restrictions in the market, only your company and two others (Dabba and Zabba) are allowed to operate in this market. The three companies decide to form a cartel and divide the market shares such that each company will provide services that will maximize its profits. The licensing restrictions allow each company to sell as much as it wants at a price ceiling of $2,400. You have the following output and MC data for each company:

Output MC ($)
Q Yabba Dabba Zabba
1,200 2,700 2,800 2,900
2,200 2,600 2,500 2,700
3,200 2,400 2,300 2,500
4,200 2,200 2,200 2,300
5,200 2,300 2,400 2,400
6,200 2,400 2,700 2,500

1. Calculate the industry output and market share at the current price of $2,400, assuming the prices are stable and unlikely to change.

2. Assume the current prices in the market are challenged by the regulatory agency, resulting in a new maximum price of $2,200. How will this change the industry output and market share for each company?

3. Is there any incentive for any company to cheat under either of the conditions in tasks a and b? Why or why not?

Attachments
Purchase this Solution
Solution Summary

This solution provides methodology calculations and explanation to find out the market share of the given firms at different price levels.

Solution Preview

Solution is attached as MS Word file also.

a. Calculate the industry output and market share at the current price of $2,400, assuming the prices are stable and unlikely to change.

Each company will select a output level such that marginal cost is less than Marginal revenue (equals to price in this case) for profit maximization/loss minimization.

In case of Yabba, it will choose a output level of 6200 units because marginal cost is equal to marginal revenue at this level.
In case of Dabba, it will choose a output level of 5200 units because marginal cost is equal to marginal revenue at this level.
In case of ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
Recent Feedback
  • "Thank you"
  • "Really great step by step solution"
  • "I had tried another service before Brain Mass and they pale in comparison. This was perfect."
  • "Thanks Again! This is totally a great service!"
  • "Thank you so much for your help!"
Purchase this Solution
Free BrainMass Quizzes
Basics of Economics

Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.

Economic Issues and Concepts

This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.

Elementary Microeconomics

This quiz reviews the basic concept of supply and demand analysis.

Pricing Strategies

Discussion about various pricing techniques of profit-seeking firms.

Economics, Basic Concepts, Demand-Supply-Equilibrium

The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.

View More Free Quizzes
Related BrainMass Solutions

  • Market Structures

    2) Firms that operate in an oligopoly must take into consideration how competitors will react to their price and output decisions.

  • Oligopoly: Supply and Demand Problem

    This means that each firm must take into account the likely reactions of other firms in the market when making pricing and investment decisions. This creates uncertainty in such markets.

  • behavior of firms in oligopoly markets

    And it isn't just simply a failure in the analysis of oligopoly prices -- not really. In a comic strip a few years ago, a schoolboy was discussing his grades with his guardian. The schoolboy said that he had gotten an "A" on an algebra test.

  • oligopoly market conditions

    Thus, an oligopolist firm always considers the reactions of its rivals in formulating its pricing or output decisions. An oligopolistic industry is also typically characterized by economies of scale.

  • Oligopoly theories

    (3) Oligopoly price and profits will be between the monopoly and competitive ends of the scale (4) Oligopoly prices and profits are "indeterminate" because of the difficulties in modelling interdependent price and output decisions Because of the

  • Monopoly and oligopoly

    each firm must take into account the likely reactions of other firms in the market when making pricing and investment decisions.

  • Pricing strategies

    So for an individual firm the pricing strategy is to accept the prevailing price in the market. What the seller can change is its output.

  • Conditions for a perfectly competitive market

    Ø The output obtained in an oligopolistic market must be homogeneous or differentiated (Monopolistic Competition and Oligopoly, 2009). // From the above discussions, basic requirements of each market structure, is clear.

  • Basic Characteristics of Market Structures

    Distinguish between productive efficiency and allocative efficiency in your answer. 3. Discuss the major barriers to entry into an industry. Explain how each barrier can foster monopoly or oligopoly.

  • Difference between a monopoly and an oligopoly

    Difference between a monopoly and an oligopoly

View More Related Solutions