a) In the case of this remodeling company, we expect that the cost will have an upward trend. This is because it exists in a kind of industry in which the costs increase with time. This shows clearly that this remodeling company is not a monopoly. In Economics, the short-run period can be understood as that short time in the operation of a business that does not allow for any changes in the fixed factors that affect the business. In this period, only the variable factors will change. The reason for this is that in the short-run period, there may not be many competitors in the same industry. As such, the company may not incur a lot in terms of product promotion and also it is able to sell its services at a high price. Since the company is making profits in the short-run, other firms will be attracted to join the industry. This means that in the long-run, competition will increase in the industry. The existence of competition will prompt the firm to increase its product promotion so as to survive in the changed market. This and other costs associated with competition will make the costs in the firm have an increasing trend.
b) In this scenario where competition exists, the firm does not determine its own prices. The price level will be set by the market forces, demand and supply. This brings in the issue of how competition affects the normal equilibrium in the market. We realize when competition increases; it is likely to cause a shift of the equilibrium downwards. This means that the new equilibrium price will be lower than the old equilibrium price(in the short-run). This means that in the price at which the remodeling company can sell its services will be lower. In conclusion, the trend of the price that can be charged will be downward.
c) Profit is the difference between revenue and cost. Revenue is the product of price and the quantity that is sold. This shows that Profit is a function of price. We have seen in part (b) above that the price at which the services can be sold will go down. The number of units that the firm can sell per unit time may also go down because of comprtition. This will means that the revenue, which will be a function if decreasing price and decreasing quantity will also decrease. In part(a) above, we also noted that the cost that the firm will be incurring will have an upward trend (it will increasing. From the foregoing, we notice that profit will be the difference of decreasing revenue and increasing cost. This automatically means that the profit will be decreasing.
A merger is a business combination aimed mostly at betterment of business. When two firms merge, they form one bigger firm that has higher chances of surviving in the market. This is because the capital base of this new firm will be bigger. The new company also enjoys economies of scale (The advantages that accrue to a firm due to large scale production). These economies of scale will include the following:
- Financial economies: Due to the fact that the firm now has a large capital base, it is able to access better financing methods. Lenders will more easily trust a big firm than a small firm. This is because the firm with a large capital base will be deemed to be more stable than the smaller firms, which makes it safer to lend money to it.
- Risk bearing economies: In economic terms, it is clear that if a big risk crystallizes in the market, a small firm may not stand it. A big firm, due to its stability will be able to bear the risk more easily with bringing its business to a halt
- Information (Research) economies. A big firm with a big capital base will afford to carry out very extensive market research. This means that it is able to access very detailed information about the market than the smaller firms ever can.
- Other advantages that will accrue to the firm because of producing in large quantities and having a more stable base.
Going by the above information, the Federal Trade Commission (FTC) will have reasons to suspect that the merger will make the new firm, resulting from the merger will in a sense dominate the market. The reasoning is that since the firms have come together and merged; they will have an advantage over the other firms because of enjoying the economies of scale and the other reasons as discussed above.
From the face of it, it may look automatic that the merger will increase the market power of the combined firms, leading to their dominance in the market. However, this may not be always the case. The arguments against the assumption by FTC (increased market power) are discussed as follows:
- The two firms are in a competitive market. This means that even if they merge, they still will not have the power to control the price. The price will be determined by the market forces, demand and supply as usual
- The two firms existed before the merger. This means that each firm had its own customers. The merger will simply combine the existing customers of the pre-existing two firms. In this case, the effect of the merger will be internal and not external
- We can argue that the idea of combination was brought about by the fact (that could be) that the two firms have not been stable enough to stand alone any more. They have simply merged to see that their survival in the market does not face a threat of collapsing
- Any two firms have a right to merge as long as the merger is conducted in accordance with the companies act. This shows that no firms should fall victim of this merger as they have equal rights to merge
Game theory, being a science of conflicts, is dependent not only on individual actions but also on the actions of others. McDonald’s Corp took the action of its big Mac if customers could also purchase French fries and a soft drink in hope that the sales would rise, but instead they fell. The customers, the other players in the game, took the action which saw the reduction in sales for the McDonald’s. In this situation this would be considered a game of pure strategy because McDonald’s takes only one action plan: reduce the price of the all Macs.
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Example: In the contemporary game world, each player has a goal of outdoing the other. This means that when one player takes a certain action towards outdoing the other, the other player comes up with a counter strategy. The gain of one player is a loss to the other player and vice versa.
The reason why the McDonald’s Corp did not succeed in its strategy in the market is because the other players in the market were also coming up with counter strategies