Price/Output Determination and Competition

Price/Output Determination. Tallahasse Cars Unlimited, Inc., a rapidly expanding new entrant to this area, is considering two proposals for the provision of its cosmetic detailing of cars (washing, waxing, polishing, engine cleaning, etc.). First, a large janitorial agency with some experience in the detailing of cars has offered to purchase the business detailing equipment in return for an exclusive francise. A second proposal would allow several small contractors to enter the business without any exclusive franchise agreement or competitive restrictions. Under this plan, individuals would bid for the right to provide service on groups of cars as they were delivered to the lot, presumably based on how busy they were at the time. The car lot would then allocate business to the lowest bidder.

TCU has conducted a study of its past sales records and the amount of detailing spent on each car, and the premium over book value recouped in the sale to estimate the amount they would be willing to pay for various amounts of detailing. The car lot has also estimated the total cost of service per car. Service costs are expected to be the same whether or not an exclusive franchise is granted. To instigate bidding, TCU guarantees the winner of any bid a minimum per car, whether or not the service is used.

A. Use the indicated price and cost data to complete the following table.

Hours of Price
detailing Per total marginal total marginal
per car hour revenue revenue cost cost
___________________________________________________________________
0 $24.00 $0.00
1 $23.40 18.00
2 $22.80 36.00
3 $22.20 54.00
4 $21.60 72.00
5 $21.00 90.00
6 $20.40 108.00
7 $19.80 126.00
8 $19.20 144.00
9 $18.60 162.00
10 $18.00 180.00

B. Determine price and the level of service if competitive bidding results in a perfectly competitive price/output combination.
C. Determine price and the level of service if the car lot grants a monopoly franchise.