Question

please answer this three question

1.     What entry barriers exist in (a) the fast-food industry, (b) cable television, (c) the auto industry, (d) the illegal drug trade, (e) potato chips and (f) beauty parlors?

2.     Why might OPEC members have a difficult time setting and maintaining a monopoly price?

3.       If one gas station reduces its prices, must other gas stations match the price reduction? Why or why not?

Answer 1

Answer;

1.

Some markets are dominated by only few firms because there are barriers to entry in these markets. The barriers to entry prevent a new firm from entering the market. Price cutting is a way to put barriers to entry. There are many ways to put barriers to entry, they are discussed below.

Economics of scale: Many markets are subject to economics of scale. That is they can produce large amount of product at lower per unit cost than lower amount of product. In this type of market it is impossible for new firm to start from lower quantity and then grow up to be large firm. Thus, new firm keep them away from such markets. Here economies of scale act as a barrier to new entrants.
Exclusive franchises: For the natural monopolies often government grants monopoly to a single large firm and the firm is regulated by a agency provided by the government. The firm operates in a geographical area and the agency makes sure the consumer get some benefit of the large scale.
Control Essential Raw Materials: if the firm controls an essential raw malarial needed to produce a product, it enjoys sufficient monopoly power in the market for that product.
Patents: Patent is the government granting of exclusive rights to buy or sell a new technology or product for a period of time. The firm uses this to differentiate or make its product more user friendly from other competitors. This gives the firm to some extent of monopoly power and keeps potential competitors away from the market.
Product differentiation: Product differentiation is a way to put barriers to entry. Product differentiation is any characteristic that makes the product different from other products in the eyes of the buyer. The differentiation may be real or it can be entirely artificial. For a new entrant the advertising cost may be too high and they can keep themselves away.
Licensing: License is a permit to operate in a trade or profession. The license ensures some minimum level of competency. But license also restricts entry into fields.
Price-Cutting: Price cutting is a way to put barriers to entry. Firms to deter entry into the market occasionally lower the prices for their products. So the firms wanting to enter the market have to match these lower prices. As large firm operates at economies of scale, they can produce large quantity at lower costs. But this is not possible for the new firms. So, they keep themselves off from the industry.
In light of the above discussion the followings are bariiers to entry in the respective markets :

In fast food industry there is no barrier to entry and the market is perfectly competitive.
In cable industry there is large start up cost and the industry is subject to economics of scale.
In illegal drug trade the existing delaers have exclusive control over raw materials.
In Potato chips indutry the firms often deter entry by price cutting.
Beauty Parlors is said to perfectly competitive and there is no barriers to entry.
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2.

In an economy when a relatively few firms control all or most of the production and sales of a product, the market is characterized as Oligopoly. The oligopoly is characterized by the mutual interdependence among firms, that is, a firm must shape its policy with an eye on its competing firms.

It is very difficult to predict how firm will react in situation of mutual interdependence. This uncertainty of deciding the right policy of its opponent seriously jeopardizes the firm’s position. Hence the firms tempted to collude in order to maximize its profits. The firms who collude and agree on various sales, pricing and other decisions are called cartel and their agreement is cartel agreement.

However, the more the number of firm in the cartel the more difficult it should be to reach in the consensus. As more firm enter the market, competition in the market increases. This competition increases the chances of non-cooperation and increases the difficulty of cartel outcome.

Hence, as OPEC has many members maintaining the monopoly price is difficult.

3.

The kinked demand curve theory states that as the oligopolistic firms are dependent on each other on pricing decision, each firm will be respond to the price cut of its competitors but will mostly ignore any rise in price.

The gas stations always match the price cut but reluctant on the occasion of price rise by the competitors. The kinked demand curve theory states that as the oligopolistic firms are dependent on each other on pricing decision, each firm will be respond to the price cut of its competitors but will mostly ignore any rise in price.