1. You own a local sub shop in a college town. You primarily serve two groups of people: local residents (both students and other local residents) and visitors to your town. Devise a price discrimination strategy that will increase your revenues compared to a single-pricing strategy.
Price discrimination is a strategy employed by economists to enhance the market shares as well as the revenue created from the sale of goods and services. This method is mostly employed by monopolies in order to increase the market share from the existing consumer base by charging differently for similar product and services to dissimilar customers. In the context of a local pub in a college town, there are several factors that a shopkeeper ought to utilize in order to effectively carry out the price discrimination strategy, for instance, on the basis of place, the buyers bargaining power, gender and age basis, loyalty discount among others. From the factors mentioned, it is worth to expound on the effect that each has in the scenario of the local sub shop in a college town.
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Firstly, when a shopkeeper decides to carry out a price distinctive exercise on the basis of place, one can note that products like books for college students will cost less than other recreational books bought by the visitors since the college is shop is strategically placed near the college and so in order to encourage more sales, the shopkeeper has to employ these price differences on basis of cost of production. Secondly, basing on the buyers bargaining power, it is worth noting that, vegetable marketers often price differently for rich and poor. For instance, in a local sub shop setting, the local residents will buy such products at cheaper prices than passersby. This may be executed by the shopkeepers with an aim of maintain customer loyalty. In addition, the shopkeepers may charge inversely by observing the economic status as well as the customers' paying ability. Nevertheless, the basis of loyalty discount applies in cases where regular customers are accorded special incentives in terms of discounts which are calculated on basis of buying frequency or amounts of goods purchased within particular periods of time.
2. Suppose the cable TV industry is currently unregulated. However, due to complaints from consumers that the price of cable TV is too high, the legislature is considering placing a price ceiling on cable TV below the current equilibrium price. If the government does make this price ceiling law, diagram and explain the effects with supply and demand analysis. If the cable TV company is worried about disgruntling customers, suppose that the company may introduce a different type of programming that is cheaper for the company to provide yet is equally appealing to customers. Explain what would be the effects of this action.
Consequently, price ceilings can be described as a type of price control mechanisms imposed by the governments to prevent consumer exploitation by manufacturers. When a price ceiling is positioned below the market clearing price, as Pc is in the supply and demand graph, then the market clearing price of Pe turns out to be unregulated. Thus, at the ceiling price, one can derive that the buy more than what the seller is able to supply. In the context of the cable TV, the buyers are willing like to purchase amount Q4 at price Pc, nonetheless sellers will sell only Q1. As a result of higher demand than supply at the legal price then the buyers will be out of equilibrium. The normal adjustment that this disequilibrium would set into motion in a free market, an increase in price, is illegal; and buyers or sellers or both will be castigated if trades take place above Pc. Buyers are faced with the difficulty that they are willing to purchase more than is accessible.
3. Consider a perfectly competitive market. Analyse and explain in detail using graphical tools to show what you expect to happen to the number of firms and firm profitability in the short run and long run a) if demand for the product falls and b) if demand for the product rises.
Market surveys carried out to determine the factors that affect the profitability of production firms reveal that when the demand of a product falls, the organizations profitability level usually goes down and as a result most firms are usually thrashed into unfavorable commercial environments which lead to closure of trading activities. It is worth noting that a decrease in demand is due to factors such as decrease in price of substitute goods. For instance, when a firm producing tea margarine decides to decrease the price of the products taken to the market, then substitute goods such as cheese usually have a hard time in maintaining the customer base and as a result, there is a decrease in demand of cheese. Increase in the price of complementary goods also contributes to a decrease in demand.
The profitability levels of a firm may be determined by increase or decrease in demand of a product produced by such a particular organization. Thus there are several changes that yield an increase in demand of a product which in return directly increases the cost-effectiveness ranks. Firstly, increase in price of a substitute product highly contributes to a rise in demand. For example, if a firm producing tea increases the price of the product while those of a firm producing coffee remain constant, then most consumers will opt for coffee especially if the margin is high. In addition, economists argue that a decrease in the price of a complement product leads to an increase in demand of another product. Complementary goods can be described as those that go hand in hand in order to satisfy customer desires. Citing an example, suppose the price of ink goes down, then the sales of pens is likely to increase. Other factors that result into a firms' rise in profitability levels are decrease in income especially in the cases of inferior products as well as increase in income in cases of normal goods.
4. Discuss why some long-run average cost curves are steeper on the downward side than others. Discuss fully.
The explanation behind some long-run average cost curves taking a steeper trend on the downward side than others is due to the fact that in a market equilibrium, the long-run average cost curve is the derivation of an immeasurable amount of short-run average total cost curves. This is however done with each short-run average total cost curve tangent to the long-run average cost curve at a single point corresponding to a single output quantity. Nevertheless, the significant factor to consider during the derivation of the long-run average cost curve is that each short-run average total cost curve is constructed based on a given amount of the fixed input which is normally capital. Therefore it is worth noting that when the quantity of the fixed input oscillates, then the short-run average total cost curve shifts to a new location leading to a less steep trend as compared to the long-run curves.
5. If you purchased a new model of a digital camera right after it is released, you will likely pay more than if you purchase it six months after release. Explain why this is an example of price discrimination on the part of the firm.
Price discriminations ought to be coordinated according to the distribution, product design as well as the promotion decisions that account for an effective and consistent marketing program. In addition, it is worth noting that verdicts technological gadgets in regard to advancements may affect the pricing decisions. For instance, the decision to position a digital camera six months after release means that the seller will consider the increasing cost of distribution and charge it on the price. Marketers argue that some technological products may be packaged distinctively and thus priced differently depending on the season that the purchases are expected to increase. For instance, a new digital camera's image will appreciate in value after it has been launched since it is most likely to possess improved new features different from those of older models.
6. Explain the rationale and the implications of the new guidelines used by the Department of Justice and the Federal Trade Commission for evaluating proposed mergers.
The department has imposed new guidelines in order to ensure that monopolistic companies do not exploit consumers in the name of mergers and also to ensure that only legal businesses are licenced for mergers. Such guidelines have both positive and negative implications. For instance, one of the rules states that a business has to make clear that the expected merger analysis does not use a single methodology, but utilise a variety of tools to analyse the indication to define whether a merger may considerably reduce competition. The positive implication of this is that unhealthy competition will be reduced which means that there will be production of less substandard goods. On the other hand, the negative consequence is that monopolistic companies will develop price discrimination strategies in order to ensure that the sales output is always high.
The department has in addition introduced a new section in relation to competitive effects which is meant to educate company directors on numerous categories and sources of evidence that the agencies need to implement in order to predict the likely competitive effects of mergers. Nevertheless, one cannot that this has implication in the sense that it explains the conditions for a market when it is going concern. Based on this information, directors of mergers are in a perfect position to define and analyse when the market situation is safe for a merger as well as providing an updated clarification of the theoretical monopolist test used to describe relevant antitrust markets and how the agencies implement that test in exercise.
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