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East-West Transportation Market Structure Simulation
Businesses are categorized in one of several market structures. Economic factors such as supply and demand affect business structures such as perfect competition, monopolies, monopolistic competition, and oligopolies. This paper, authored by the CEO of East-West Transportation, Inc. will discuss the recommendations of the consulting firm Brighton, Young, and Roy (BYR), Inc. BYR was hired to investigate the various East-West divisions such as consumer goods, coal, chemicals, and forest products and identify market structures and possible courses of action to continue profitability or reduce losses for those divisions reporting losses.
Advantages and Disadvantages of Supply and Demand
In the East-West Transportation simulation, an example of an advantage of supply and demand is illustrated by the ability for the market to achieve market equilibrium in a perfect competitive market. Equilibrium is reached when the most efficient price and output are reached. East-West’s consumer division operated in a perfect competitive market because there are several buyers and sellers with each seller a price taker. In addition, there are no barriers for new firms to enter or leave the market. The servoffered are identical across sellers and all organizations have complete information and maximize profits.
On the other hand, disadvantages of supply and demand occur in instances where a monopoly or oligopoly develops. In a monopoly, a single seller, such as the coal division of East-West exists with no competition. Many times monopolies result in delivering undesirable outcomes such as setting higher prices to maximize profits. In an oligopoly, a few firms exist and significant barriers exist for new firms to enter the market. Pricing and output decisions are made strategically taking into account what the reaction of the other firms in the oligopoly market will be instead of consumer reaction. Once set, prices rarely change in an oligopoly.
Wynn Buick, Pontiac, and GMC is an automobile dealership that falls into the market structure of a monopoly that price discriminates. By price discriminating, a dealership may charge different prices to different individuals or groups of individuals instead of charging the same price to everyone. The effectiveness of the market structure for the dealership is beneficial when used correctly.
Dealerships rarely sell automobiles for suggested list or retail price. Salespeople can identify customers who have not prepared themselves and conducted research. Research reveals that dealerships sell at 10% off list price on a regular basis. Thus, individuals with inelastic demands pay higher prices than those individuals with elastic demand who researched for information and uncovered alternatives and were well informed.
Identifying consumers as elastic or inelastic provides the dealership the ability to generate profits as a discriminating monopoly versus a normal monopoly. Price discriminate monopolies “generate greater profits than a normal monopoly because the industry classification of a smaller two digit industry would have significantly more output” (Colander, 2008, p. 300, ¶7).
Analyzing Perfect Competition
Perfect competition is a hard to find market structure theory where a firm’s only goal is to make as much of a profit as possible where profit is the difference between revenue and cost. Organizations maximize profits when marginal revenue (MR) equals marginal cost (MC). Additional revenue is recognized from producing additional quantity, which equals the additional cost incurred in producing that quantity. Therefore, at an output where MR is greater than MC, increasing production increases profits. If MR is less than MC, decreasing production increases profits.
Therefore, the profit-maximization condition formula is MR=MC. The price (P) is a given for each firm in perfect competition. As a result, P=MR because the fixed price per unit is the additional revenue a firm can expect to earn by selling additional quantity. Therefore, an organization’s profit maximization condition becomes P=MR=MC.
In the East-West simulation, the consumer goods division was losing money yet was able to cover its variable costs at a given price. An organization, such as East-West, should shut down if the price falls so much that it cannot cover its variable costs. Long-term all costs are variable and there will be zero profit. If profits were being made, more organizations would enter the market with East-West. Market prices would then eventually decline forcing firms to leave the market.
A monopoly is a firm that is the only seller of a product with no close substitutes. Sellers in a monopoly are not price takers. Instead a monopolist sets the price for the product or service to maximize profits. The profit-maximization and output is at the point where MR=MC. The output, however, is less than what it is in the case of perfect competition. Monopolies can be found in industries with strong economies of scale or where government restrictions exist on the entry of new firms providing the potential for long-term profits for monopolies.
- Quote paper
- James Tallant (Author), 2009, East West Transportation Simulation, Munich, GRIN Verlag, https://www.grin.com/document/167264