Economic for managers - Essay Example

Moreover the increase in price sometimes has negative impact on the growth of sales and revenue because customers are always attracted to the firms which have lower prices so, most oligopolistic firms prefer to keep their prices relatively constant. c) The goal of most oligopolistic firms is to attract the buyers and increase the market share, while keeping the control over price. These firms use nonpricing strategies such as advertising, barriers to entry product differentiation Through advertisement the company declares that something is for sale and tries to boost the turnover.

Advertising is primarily designed to augment the demand for a product by pulling the attention of customers towards a particular product. To achieve this goal the consumers are endowed with adequate knowledge concerning price and product quality using advertisement. Product differentiation is the observation of customers about distinction among the similar goods that prompt them to prefer one good over other. This strategy is used by firms to gain market control. Barriers to entry are intended to create hindrance for potential competitor to enter the market.

Some examples of creating barriers to entry include, need for government consent, high initial cost, resource ownership, sunk cost and research and development expenditures. d) Where, MC = Marginal cost AR = Average Revenue MR = Marginal Revenue Let’s suppose that firms want to get the most out of profits. If firm A increases the price of its product from P1, other firms will not follow the price change. Hence, the demand for Firm A’s product will fall as consumers will buy the product from other competitive firms at the price P1.

This will lead to fall in revenue of Firm A. If firm A lowers the price of its product from P1, they will gain a huge increase in market share. However, other firms in the competition will also follow the price decrease to maintain their market share. Consequently, the revenue of firm A will not increase but rather will decrease. Hence the prices will be inflexible in oligopoly and this kinked demand curve shows that a variation in marginal cost still gives the same price. The change in price leads to the loss of revenue for the firm and hence firms in oligopoly keep their prices stable. e) In this situation Cournot duopoly model can be used by the firms, which was formed by a French mathematician Augustin Cournot (Lipsey and Chrystal 2001).

The fundamental thought of this model is that there is one firm currently present in the market and manufacturing at a constant unit of production and there is another competitor firm bearing in mind to enter in the market and has a tendency to get a profit. Augustin Cournot proposed that the competitor firm would take into consideration the production of present firm before selecting a level of production. He also proposed that the present firm would take into account the probable production of the competitor in choosing output.

As both types of sugar i.e. British Sugar and Tate & Lyle are available in market at same price, which shows that both firms must have estimated each other’s prices before choosing their own which is well described by Cournot Duopoly model. f) Firms reduce costs, lower prices and enhance the quality of their products due to