INDUSTRIAL ORGANIZATION ESSAY
- Problem 1
- With the demand function being P (price)= A – q, where A = 2.35 and the cost function is C = F + 0.5q2,
F = C – 0.5q2
P = 2.35 – q
q = 2.35 – P
Substituting q (output) in the first part of the equation we get;
F = C – 0.5(2.35 – P)2
Since it is a market with a risk neutral monopolist, the F will be represented by two ranges denoted with 50% coverage. Therefore, the first range will be F= 10 – 0.5(2.35 – 0.5)2 = 8.2. The second range in an inverse demand will be F= 10 + 0.5(2.35 – 0.5)2 = 11.7. Therefore, F will have 8.2 and 11.7 ranges.
- With the same demand function and the cost function being C = 1/ 2Aq,
P = A – q, where A = 2.35, therefore 2.35 – P = q
C = 1/ 2 x 2.35 (2.35 – 05)
C = 2.17
Therefore, the maximum amount of R the monopolist will be 2.17.
- In the case of demand function being P = Aq, where A is 2.35 and a cost function has no fixed cost and the unit marginal cost, the equilibrium output will be 2.17/2 = 1.085
Therefore, the price will be P = 2.35 x 1.085 = 2.55
- Problem 2
- With linear demand curve being Q = 100A−p, where A is 1.5 and same average and constant marginal cost are at 40, the prices and profits in equilibrium will be as follows:
The inverse demand curve will be p = 100 x 1.5 – Q, which is p = 150 – Q. Then the marginal revenue curve is expected to have the same intercept and will also have twice the slope. Therefore, MR = 150 – 2Q.
At the same time, marginal cost is a constant $40. Given MR = MC, it is easy to determine the optimal quantity: 150 – 2Q = 40; which is Q = (150 – 40)/2 = 55.
Therefore, price (P) = 150 – 55
Equilibrium profit will be 95 x 55 = 5,225
- Given interaction time being N (which is significantly large) and the discount factor is δ = 0.9, together will be (40 + 55)/0.9 x 95 = 10027.8
Choosing the trigger strategy will be 40/0.9 x 95 = 4,222.2
As for setting pi to maximize profit, it will be 55/0.9 x 95 =5,805.6
- Choosing the trigger strategy will be (40/0.9 x 95)/2 = 2,111.1
When cooperating 0.7(40/0.9 x 95)/2 = 1,477.77
- Choosing the trigger strategy will be 0.5(40/0.9 x 95)/2 = 1,055.55
When cooperating (0.7- 0.5) (40/0.9 x 95)/2 = 1,477.77 = 422.22
- Part 2: Essay
- Questions addressed by the article
The article selected for the analysis is the one compiled by Claude Crampes, Carole Haritchabalet, and Bruno Jullien (2009), which expounds on the a significant model of media competition. It is characterized by free entry in the case whereby both customers and advertisers become the central financing sources for the media operators. The main question that is being addressed in this article is on the type of relationship that exists between sales receipts and advertising receipts as they are exercised in the coded broadcast television, newspapers, cable television, and magazine. This is a relevant question that sets a strong foundation of understanding the activities that amounts to revenue generation in media outlets.
The second question addressed by the authors is whether imposing positive subscription prices on different services to consumers benefits the media operators. It is a question that is aimed at defining different factors that play a central role in ascertaining the benefits for media operators. Finally, the article has also focused on whether it is socially acceptable and better for the media to be in the business of setting the advertising price or the advertizing space. In this question, the author aimed at determining the ethical formations in the selecting the advertising price or the advertizing space as it is enjoyed by the media.
- Author’s responses to the question
In addressing the first question, the authors have focused on the construction of a free entry model for the purpose of analyzing the type of relationship that exists between sales receipts and advertising receipts. It is an approach that looks on different activities that involves the commitment of the consumers in paying for what has been shared for the purpose of accessing them as part of the viewership. It has been argued that both ads and services are complementary and antagonist in the same way. This mean that they are services and ads that play a central role in increasing the total revenue that is expected to be collected by the media owner while, at the same time, are hardly increased in a simultaneous way. Therefore, it is a practice that follows a structured approach in ensuring that all issues are addressed in the most constructive way in accordance to the expectations and assumptions that have been established within the media industry.
It is an issue that calls on the integration of the Salopi’s model of horizontal differentiation that focuses on two key phases of the analysis. In the first phase of the analysis, it is indicated that there is a need for the media operators to be open and clear on deciding whether they are confident in entering the market or have their reservation over the same notion. In this case, if they make the decision of entering such a market, they should expect to incur a fixed entry cost over the business. In a second phase of the analysis, the authors have affirmed that media operators should be prepared to take their competition through subscription prices that are considered as attracting consumers. This will be a constructive approach through which they will make decisions on how much is expected to be advertized. In relation to their advertising operations, it is suggested that media operators are at liberty of imposing an advertising price or advertising level, which are referred to as price or quantity game respectively.
With regard to the second question, it is noted that the authors have been instrumental in showing the benefits associated with allowing customers to be imposed with prices to consumers. This is as a result of the advertising returns that are used in the scaling of the audience. A practical way that this has been handled is by making relevant propositions that are associated with the volume of advertising, the like or dislike of advertising with consumers, and the difference between free-media profits and pay-media profits. With such an approach, a clear understanding of what is supposed to be undertaken in building a strong framework on the benefits that media operators receive.
As for the third question, the focus has been on determining the effects of disliking advertising by consumers. A significant outcome of this analysis has been established that in such a scenario the prices and profits are considered to be higher when the advertising price is identified and selected by the media. In the case where the fixed market structures are evident, it has been indicated that the two models will have the same level of advertising. Indeed, the authors have been realistic in explaining all the premises that are with reference to the key questions addressed in the article selected for the analysis.
- Credibility of the research
The research that has been conducted provides a clear roadmap on the issues that are experienced within the media, and the approach that has been adopted by the authors affirms on the significance of the findings achieved. The systematic approach that has been used by the authors is convincing and builds on key steps of ensuring that all relevant information is synthesized appropriately. For example, the authors focus on the aspect of addressing every issue that is related to the topic and other elements expected to have an impact on the economic principle being discussed. It is through such approach that a constructive journey of substantiating information shared is initiated. It provides a clear path of understanding the premises that the authors uses in building a discussion over the subject matter, which is considered to be articulative and relevant to issues that are taking place in a contemporary environment that is characterized by the values of reason.
- Other relevant articles
The following is a highlight on the three key articles that provide a light to the issues related questions. They include:
- Caillaud and Jullien (2003)
Presenting competition as the only aspect that most of the intermediation service providers are now turned to found to be appropriate given that it has also been the point of focus in understanding the mind of the media.
- Gabszewicz, Laussel and Sonnac (2001)
The relevance of this article on the concepts learned in class, especially on the nature of press media that the impact it has established with the media industry, especially on matters of competitions, is what was of interest. The authors have been specific on an area of interest that has effectively impacted on the current trends as experienced in the media industry.
- Gal‐Or and Dukes (2003)
The approach that has been taken by Gal‐Or and Dukes in addressing the characteristics of the commercial media markets is intensive and seeks to address the nature of business operation that is adopted in this sector. It is also interesting of how the authors have been analytical with the relevant measures that considered essential in affirming on the differentiation experienced within the sector.
- Analysis of the literature
The literatures studied in this course have been precise and articulative on the points and concepts covered by the topic. They have offered a deeper understanding of different economic options that are available in any given business projection. A practical example is in reference to the efforts made by Crampes, Haritchabalet, and Jullien in describing a model that is considered to be efficient in explaining the nature of media competition as it is experienced. One important lesson that has been learned this experience is that different business models are only efficient in their specific environments that they were designed to operate. This leads to understanding that various factors are considered in the development of such economic models while defining the business environment that a given type of business is considered to be effective or ineffective.
Caillaud, B. and Jullien, B., 2003. Chicken & egg: Competition among intermediation service providers. RAND journal of Economics, pp.309-328.
Crampes, C., Haritchabalet, C. and Jullien, B., 2009. Advertising, Competition And Entry In Media Industries. The Journal of Industrial Economics, 57(1), pp.7-31.
Gabszewicz, J.J., Laussel, D. and Sonnac, N., 2001. Press advertising and the ascent of the ‘Pensée Unique’. European Economic Review, 45(4), pp.641-651.
Gal‐Or, E. and Dukes, A., 2003. Minimum differentiation in commercial media markets. Journal of Economics & Management Strategy, 12(3), pp.291-325.