Answer 1
The market for mobile network roaming is a collusive oligopoly market. An oligopoly market is characterized by few sellers, many buyers and very slightly differentiated products (Varian 2014). In the mobile network market in the European Economic Area (EEA), there are few network providers and huge number of consumers. The product and the service are undifferentiated. The sellers have formed collusion. If one provider raises its rates, others would follow the suit. Under collusive oligopoly, the firms form a group, called Cartel, to affect the entire market (Feng, Li and Li 2013). The price is set higher than the market equilibrium price for profit maximization. Few large companies capture the market; hence, market concentration creates barriers to entry for a new firm. The higher rates of roaming services also possess a barrier. Along with that, as the service providers are large, they can exploit the economies of scale. The brand recognition also creates barriers to entry. Hence, the operators take the advantage of cartel and determine the market price at such a rate, which is not profitable for a new operator (Ciliberto and Williams 2014).
In this particular case, the operators find it quite easy to exploit the consumers. Firstly, only few large operators have the whole market share, and among them, only a single operator has got the 50% share of the market. There is lack of competition, as new operators cannot enter the market for higher levels of barriers to entry (Gomez-Martinez, Onderstal and Sonnemans 2016). These operators have formed collusive oligopoly market structure and the consumers are left with no other cheaper choice. Secondly, lack of information among the consumers regarding the roaming charges has helped in exploitation by the operators. Very few consumers know the actual charge they pay for roaming. Even fewer people choose different network for roaming. The consumers do not choose their network based on the roaming charges. Thus, the lack of cheaper networks and lack of knowledge and awareness of the consumers about the roaming charges have made exploitation easy.
The commission wants to make the choice easier for the customers. Hence, it wants the operators to reduce their roaming charges. However, as the mobile network market is collusive oligopoly, the operators have set the roaming rates quite higher to exploit the customers (Alonzi and Condon 2015). They have no incentive to compete over the roaming charges, as there is no competition. As the customers are mostly not aware about the exact amount they are paying for roaming, the operators would not have any desire to cut down the rates. The commission realized that if given a choice, the consumers would prefer the call-back service due to lower receiving rates and higher calling rates. If this service is implemented as a mandatory service, then the operators would be under pressure to reduce their roaming rates. This is due to the reason that, if receiving increases than calling during roaming, then less revenue would be generated. However, only if the commission takes such an action, the operators would be forced to reduce their roaming rates.
Case 1Answer (a)
Business cycle refers to the upward and downward movement of the production level around the long term growth in an economy. A business cycle consists of four distinguished phases, namely, expansion, peak or boom, contraction or recession and trough or depression (Schumpeter 2017).
Expansion: When the economy is growing and GDP is increasing. The growth rate is usually 2-3%, unemployment is at the natural range of 4.5-5%, inflation is at 2% and stocks are in the bull market.
Peak: It comes when the growth rate becomes more than 3%, inflation crosses 2% and due to irrational exuberance of the investors, asset bubble is created.
Contraction: It is the third phase, when the economy slows down and the growth rate remains positive but low. GDP grows less than 2%. When the growth rate becomes negative, unemployment rises significantly, investment falls, and stocks are in the bear market. The phase with negative growth is called recession.
Trough: It’s the fourth phase. In this phase, the economy hits the bottom (Iacoviello 2015).
According to the case study of the ABC country, it is seen that the economy started with downturn, which is the contraction phase. In this phase, the macroeconomic factors, such as, production, investment, employment etc. started decreasing. The economy was going through the phase of negative growth, i.e. recession. From that, it entered into the phase of trough, when there was no growth. After that, the economy tried to become optimistic and increased the level of investment, thus employment and GDP increased. Thus, the economy started to grow and expand again.
The main causes of recession were the excessive investment in production and excess supply of goods in the market. As the fluctuations in the economy were left to be handled by the market forces, the businesses continued their investments. It led to overproduction of goods and the supply exceeded the market demand. Hence, the businesses started to make losses and stopped investing further. This led to cost cutting and increase in unemployment. The debt burden increased, leading to a negative growth of the economy.
Answer a)
Substitute goods are those goods, which are similar and can be used instead of the other. Thus, having more of one product will lessen the demand for the other. These goods offer alternative choices to the consumers. Hence, if the price of one good rises, the demand for the substitute goods will increase (Balestrieri, Izmalkov and Leao 2015). The cross price elasticity of demand determines the responsiveness of demand for the substitute goods. Cross price elasticity is the percentage change in the demand for a good, due to one percent change in the price of the other good (Berry, Gandhi and Haile 2013). For close substitutes, the cross price elasticity is very high. According to the case study, the Britannica on paper and the Britannica on CD are close substitutes. Since the content is same, hence, people would prefer the CD at a lower price than the book at a higher price.
The Britannica on CD and Encarta on CD are also close substitutes. The price fall of the CD of Britannica will lead to a fall in the demand for the CD of Encarta. The consumers see the content of both the CDs are similar and they do not differentiate much in regards to the quality between the two (Baumol and Blinder 2015).
If I were at the helm of Britannica, I would have released the Britannica CD much sooner and been more attuned to how technology was developing. If the CD was introduced earlier and not four years later, Britannia could have had a better chance of capturing back their market.
Answer 1
Average cost is obtained by dividing the addition of fixed and variable costs by quantity of output in the short run. Every production process incurs fixed and variable costs in the short run. Hence, initially, the addition of average fixed and variable cost is more than the production. With increasing output, the costs start declining. Using of indivisible factors and economies of scale for the factors of production result in the fall of the costs. It reaches the minimum point at the optimum level of production and beyond that point, the economies of scale starts to disappear. Thus, the average costs start rising beyond this optimum level of production due to diminishing marginal returns. This makes the average cost curve U-shaped (Waldman and Jensen 2016).
Long run average cost curve (LRAC) is U-shaped and much flatter than the short run average cost curves (SAC). The LRAC curve is a combination of all the short run cost curves, as shown in the above figure. The shape of the curve is U due to the above mentioned reasons. In the long run, there is no fixed cost and all are variable costs. In both the cases, as the output increases, the average cost falls. It reaches the minimum at the optimum level of production, i.e., Q*, and beyond this point, as production increases, average cost increases due to diseconomies of scale. This explains the U-shape of the curves (Varian 2014).
Elasticity of demand refers to the percentage change in demand of a good due to one percent change in any economic variable, namely, its price, other good’s price and income. The sensitiveness of demand is measured by elasticity of demand. There are three different types of elasticity of demand, namely, Price elasticity of demand, cross price elasticity of demand and income elasticity of demand. The degree of elasticity varies depending on the slope of the demand curve (López-Menéndez, Pérez and Moreno 2014). The figures 4 and 5 below depict the cases of perfectly elastic and inelastic demand curves and relatively elastic and inelastic demand curves. Figure 6 illustrates the unit elastic demand curve.
Cross price elasticity of demand refers to the percentage change in the demand for a commodity due to one percentage change in the price of another commodity. This concept of elasticity determines if the goods are substitutes, complementary or unrelated. Substitute goods have a high cross price elasticity as the change in the price of one will change the quantity demanded of the other. For example, tea and coffee are substitute goods. If price of tea rises suddenly or significantly, then the demand for tea falls and that for coffee rises. These goods have a high cross price elasticity. Again, tea and sugar are complementary goods. When the price for tea rises, demand for tea falls along with the demand for sugar. For unrelated products, such as, tea and eggs, the cross price elasticity is zero (Rios, McConnell and Brue 2013).
Income elasticity of demand refers to the percentage change in the demand for a commodity due to one percentage change in the income of the consumers. Thus, income has an effect on the elasticity of demand (DeCicca and Kenkel 2015). For example, when the level of income rises, the demand for automobiles increases in the economy. The goods are classified into inferior, normal and luxury goods based on their income elasticity of demand. An inferior good has negative income elasticity, that is, increase in income will lead to a fall in the demand for these goods. Inexpensive and poorer quality goods fall under the category of inferior goods (Hursh and Roma 2016). Normal goods have positive income elasticity, as the demand rises with the rise in income. Majority of goods are normal goods. Among the normal goods, if the commodity has income elasticity of less than 1, then it is a necessity good. For example, in case of staple food items, the rise in income will not lead to overpurchase of those. On the other hand, if the elasticity is more than 1, then it is a luxury good. For example, luxury cars have a higher income elasticity as, demand for the cars increases with a rise in the income of the consumers (Rios, McConnell and Brue 2013).
References
Alonzi, P. and Condon, D., 2015. Are Business Majors Different? Strategies for Teaching Principles of Microeconomics. The Journal of Applied Business and Economics, 17(3), p.82.
Balestrieri, F., Izmalkov, S. and Leao, J., 2015. The market for surprises: selling substitute goods through lotteries.
Baumol, W.J. and Blinder, A.S., 2015. Microeconomics: Principles and policy. Cengage Learning.
Berry, S., Gandhi, A. and Haile, P., 2013. Connected substitutes and invertibility of demand. Econometrica, 81(5), pp.2087-2111.
Ciliberto, F. and Williams, J.W., 2014. Does multimarket contact facilitate tacit collusion? Inference on conduct parameters in the airline industry. The RAND Journal of Economics, 45(4), pp.764-791.
DeCicca, P. and Kenkel, D., 2015. Synthesizing Econometric Evidence: The Case of Demand Elasticity Estimates. Risk Analysis, 35(6), pp.1073-1085.
Feng, Y., Li, B. and Li, B., 2014. Price competition in an oligopoly market with multiple iaas cloud providers. IEEE Transactions on Computers, 63(1), pp.59-73.
Gomez-Martinez, F., Onderstal, S. and Sonnemans, J., 2016. Firm-specific information and explicit collusion in experimental oligopolies. European Economic Review, 82, pp.132-141.
Hansen, A.H., 2013. Fiscal policy & business cycles. Routledge.
Iacoviello, M., 2015. Financial business cycles. Review of Economic Dynamics, 18(1), pp.140-163.
López-Menéndez, A.J., Pérez, R. and Moreno, B., 2014. Environmental costs and renewable energy: Re-visiting the Environmental Kuznets Curve. Journal of environmental management, 145, pp.368-373.
Rios, M.C., McConnell, C.R. and Brue, S.L., 2013. Economics: Principles, problems, and policies. McGraw-Hill.
Schumpeter, J.A., 2017. Essays: on entrepreneurs, innovations, business cycles and the evolution of capitalism. Routledge.
Varian, H.R., 2014. Intermediate Microeconomics: A Modern Approach: Ninth International Student Edition. WW Norton & Company.
Waldman, D. and Jensen, E., 2016. Industrial organization: theory and practice. Routledge.
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