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ECO550 Week 6 Scenario Script: Price and Output Determination; Monopoly and Dominant Firms, and OligopolySlide #Scene #NarrationsSlide 1Scene 1An older cottage style family run business (Katrina’s Candies)Slide 2Scene 2 In Renee’s office, Herb and Renee continue evaluating markets structures; and together decide that Katrina's Candies is operating in an oligopolistic manner. Renee:Good Afternoon, Herb! Herb:Hello, Renee.Renee:According to our timetable, we are on schedule to discuss Katrina’s Candies selling environment.Herb: Selling environment? I’m not familiar with this term. Renee:Oh, sorry, you may have heard it being called “market structures.” Herb: Yes, I have definitely heard of that term. Why do you refer to this term as “selling environment”?Renee:We use the term “selling environment” to remind us about there is competition in Katrina’s Candies market.Herb:That makes sense. So what type of competition does Katrina’s this company confront?Renee:Just regular competition from companies that sell similar products. I want you to keep in mind though that there is more than one type of “selling environment.” Herb: More than one type! I thought competition is competition!Renee:No, it isn’t. No matter the type of competition or selling environment, firms determine the maximum profit by equating marginal revenue and marginal cost. The similarity does stop there though. I can explain the different types of competition, if you like. Herb:That would be fantastic! I can’t believe I didn’t know there is more than one selling environment. Renee: Let’s meet in the conference room and we’ll begin. Slide 3Scene 3Herb and Renee in the conference room to discuss different types of competition Renee: To tell the difference between types of market structures, “selling environments,” you should use three characteristics to identify the market and they include: The number of firms in the market;The type of product sold in the market; andThe ease of entering and exiting the market. Herb: Number of firms? Isn’t there competition no matter how many firms are in a market?Renee:Yes, that is correct. To clarify your question, let me show you this informative video that may answer several of your questions. We can then talk afterwards and see if we need to revisit any concepts.Herb:Thanks, Renee!Slide 4Scene 4Interaction SlideIpad will be showcasing the video:Microeconomics- Market Structures http://www.youtube.com/watch?v=CH04Xxtm1ow Slide 5Scene 5Herb and Renee in the conference room to discuss different types of competition and the video Herb just watchedRenee: There you have it, Herb. Based upon the three characteristics, there are four market structures which include: pure competition, monopolistic competition, oligopoly and monopolies. Herb:Thanks, Renee! But I still have one other question.Renee:What is it, Herb?Herb:Is it proper to use the term competition to describe four markets that are different?Renee: Actually, there is an additional way to distinguish markets. Broadly, there are purely competitive market structures and imperfectly competitive market structures. Herb:I understand now! Imperfectly competitive market structures are markets where firms have the power to influence or determine price. Renee:That’s correct! Firms that have the ability to influence price have market power; unlike firms operating in purely competitive markets. The question for us is, which of the market structures best describes Katrina’s Candies market?Herb:I was reflecting on that very question while listening to the explanation about market structures.Renee:So, what do you think?Herb:Well, Katrina’s Candies is not the only seller of chocolates, ; there are other firms.Renee:How many other firms?Herb:Looking at some census data Katrina’s conducted two years ago, there were about forty firms.Renee: Really, forty firms? That’s a lot! Does that sound like pure competition to you?Herb: No, I don’t think so because each of the firms sells different types of chocolates.Renee: Differentiated products do exclude the purely competitive market structure. Any other reason the market is not purely competitive?Herb:I would say that, although there are forty firms, based upon the explanation of the number of firms criteria, I don’t think forty firms is considered “many” firms.Renee: That is quite true, Herb. Many firms means the market has so many firms it isn’t possible to accurately count the number. Since the former census resulted in forty known firms, the market is not purely competitive.Slide 6Scene 6Herb and Renee in the conference room to discuss monopolistic competitionHerb:So, we’ve just excluded pure competition that now leaves monopolistic competition. This brings me to another question, how large is Katrina’s Candies relative to the other forty firms in the chocolate market?Renee: Based on rank according to sells, Katrina’s it was listed as number four out of the forty. Herb: How close was Katrina’s to the number one firm?Renee:That’s the interesting thing. Although Katrina’s it was number four out of forty firms, the top three firms had a forty percent share of the market overall. When we looked closer, we discovered that within the category of specialty chocolates, firms like “Godiva’s” had nearly eighty percent of the total sells.Herb:The share you calculated is called concentration ratio and represents the numeric representation of a firm’s power in the market. The more powerful a group or a single firm, the larger is the value of the concentration ratio. In other words, this value shows the extent of market control that the firm has in the industry.Renee:Why is the concentration ratio important, given the three market characteristics we discussed? Herb:In some cases the number of firms in a market misrepresents the actual behavior in the market. In this case, more than forty percent of the firms share the four largest firms control meaning the market is not monopolistically competitive despite the fact that there are enough firms in numbers to use that classification. I feel this is a good example of how concentration ratios allow for a more precise classification of markets.Renee: There’s only one type of market structure left, which is oligopoly. Does oligopoly describe Katrina’s Candies market?Herb:Based upon the information you told me about the four-firm concentration ratio; yes, Katrina’s it Chocolates is operating in an oligopolistic market structure. Renee: Now, I would like you to tell me how this information about the market is useful to Katrina’s Candies. Herb: Essentially, understanding market structure empowers Katrina’s Candies because the information enlightens us about possible market reactions when Katrina’s it implements either an output or price decision. Renee: Thanks for going over that with me. That is all I want to go over today. I want to make sure you understand the different concepts we discussed today. Therefore, I would like for you to participate in a review activity I put together based on the key items we discussed. Slide 7Scene 7Interaction SlideIncorporate iPad to show supplemental information about today’s topicsKinked Demand Oligopoly: The lack of price competition.http://www.youtube.com/watch?v=HT9t-zjYi_APrice Leadership http://www.youtube.com/watch?v=GeD2fwjJ8_USlide 8Scene 8Check Your UnderstandingMultiple Choice QuestionIn both monopolistic competition and oligopoly market structures:a. There are many sellers.Incorrect Feedback: As a matter of fact neither monopolistic, competition, nor oligopoly has many sellers. Oligopoly has only a few firms; while MC has more firms than in Oligopoly yet not as many as in pure competition.b. There is easy entry and exit.Incorrect Feedback: In monopolistic competition (MC), entry in and exit from the market is relatively easy; however, it’s difficult to penetrate the market for “leading brands.” For oligopolistic markets, there are significant barriers that make entry into a market difficult.c. Consumers perceive differences among the products of various competitors.Correct Feedback: Both monopolistically competitive and oligopolistic firms sell differentiated products. For example, packaging may differ along with other characteristics of the product like color. d. Economic profits may be earned in the long run.Incorrect Feedback: It is possible that neither monopolistically, competitive, or oligopolistic firms will earn profit in the long-run. There is no guarantee.Slide 9Scene 9SummaryConcluding scene taking place in conference roomRenee: Herb, I hope the review activities were helpful!Herb: They were great, Renee! Thank you for sharing those the youtubes and activities with me; they were a great review tools. Can we do a review of what we accomplished today so I can be prepared for my next meeting with Ken?Renee: Good thinking! We first learned about the three characteristics that are used to define market structures. Then, we saw that when we apply these characteristics, four market structures can be identified. Herb: We also noted that Katrina’s exists in an “Oligopoly” marketWe noted that the "Oligopoly" market is characteristic of Katrina's Candies!.Renee: That’s Thanks for emphasizing that point, Herb!for bringing that up Herb. As we saw oligopolistic firms face intense competition from other firms, yet there is a high level of interdependence among each group of firms. You should also keep in mind that the decisions of one firm impact the profits of other firms. Herb: I would say today was a success! I feel really good about meeting up with Ken and answering any questions he may have about the concepts we discussed today.Renee: That is fantastic and I believe that is all for our meeting today. Until we meet again, don’t forget to complete your weekly threaded discussions based on the key concepts we covered this week.Herb: Thanks, Renee and have a great day!
Solution: Eco550 week 6 discussions