Economics for Managerial Decision Making: Market Structures

Quasar having launched the world first optical notebook computer will have to take strategic decisions in order to secure and optimize revenues and profits from an initial monopoly market to an oligopoly market and afterward to monopolistic and perfect competition situations. In each context, the company will have make the correct choices with its pricing and non pricing strategy, on the level of investment for upgrading production processes, on the advertising budget, on the need to introducing new products or on the amount of investment for cost reduction.

In 2003, the company finds itself with the launch of its innovative all optical notebook computer in a situation of pure monopoly. Quasar being the sole seller of that new and unique computer, it does not have to “make any effort to differentiate its product” (Mc Connell & Brue, 2004). Knowing the demand for its product, controlling its Marginal Cost (MC) and Marginal Revenue (MR), Quasar must produce up to the output at which marginal revenue equals marginal cost for optimized profits (reference made to table 1.). Being in a situation of absence of close substitute, Quasar can control the quantity supplied and hence the price. For the next three year, Quasar will benefit from a total block of entry of competitors due to its technological advance and optical computer patent. The strategy will be based on the right choice of price for optimized profits.

Table1. Pricing under Monopoly
Price ($) 2,550
Quantity (mn units) 5.3
Total Cost ($bn) 12.18
Total Revenue ($bn) 13.5
Total Profit ($bn) 1.29

In 2004, the company realizes that the Neutron computer is still a product unknown to the some public. With the right pricing strategy based on a $ 600 millions advertising campaign (targeting large corporations), Quasar will optimize its profits by boosting demand and sales (with minor price reduction) as seen in table 2.
Table2. Effect of advertising under Monopoly
Advertising Budget ($mn) 600
Price ($) 2,450
Quantity (mn units) 7.7
Total Cost ($bn) 16.06
Total Revenue ($bn) 18.8
Total Profit ($bn) 2.74

In 2005, after two years without optimization, the company anticipates the opening of its markets and is focused on reducing its production cost. Considering the alternatives of improving limited loss areas or making no changes, upgrading the production process is having the highest incidence on the reduction of cost. Since cost can not be passed to clients, any increase of price is unthinkable and will lead to reduced demand. By stimulating demand by advertising and reduction of costs, Quasar is able to increase sales from 5.3 to 9.4 millions, reduce TC per unit from $ 2,086 to $ 1,971 and increase its last three years total profits to $ 6.24 billions.
Table3. Cost Reduction Effect of upgrading Production Process under Monopoly
Price ($) 2,200
Quantity (mn units) 9.4
Total Cost ($bn) 18.53
Total Revenue ($bn) 20.7
Total Profit ($bn) 2.21

In 2006, with the expiration of digital patent, Orion Technologies (OT) has captured 50% of Quasar’s market. In this duopoly, “each firm is a price maker; like the monopolist, it can set its price and output levels to maximize its profit (Mc Connell & Brue, 2000, p. 467). Quasar and Orion must carefully assess their pricing strategies according to mutual reactions to price variation. In this situation, “the revenues, market share and profits depend on your absolute price and to the price relative to your competitor’s” (University of phoenix, 2009). In order to optimize profits and market’s share, Quasar is to lower its price to $ 1950 and to get close to OT last month price of $ 1,700. An anticipated response of OT would be to align itself in order to increase its profits (which were only of $ 91 millions compared to the Quasar’s $ 325 millions). In the scenario, after a series of pricing strategy and mutual responses, equilibrium is found as seen in table 4. With the previous optimization process achieved, Quasar is able to have much higher profits despite a reduced 44% market share.
Table 4. Stabilized Market prize with Orion’s sales price at $ 1,900
Neutron Price ($) 1,950
Quasar Market share 44%
Quasar Total Revenue ($mn) 1,045
QuasarTotal Profit ($mn) 216

In 2010, Quasar’s market share is reduced, the optical technology is available to large number of competitors, and pricing policies are no more interdependent. In this situation, the “monopolistic competition is distinguished by product differentiation“ (Mc Connel & Brue, 2000, p. 461). Competitors have some control on the pricing strategy, but should be careful due to the numerous product substitutes in the market. With a brand development budget of $ 200 millions, Quasar is able to increase its production capacity from 20 to 27 millions, reach full production efficiency and lower production cost without a corresponding investment in new features (reference made to table 5). The new brand (Ceres) will compete with other brands and will increase Orion’s market share. At the end, advertising for the launch of a new differentiated product oriented at a different segment of the market is much more profitable than sticking to the same product which has already reached its peak demand. The goal of product differentiation and advertising—so-called non-price competition—is to make price less of a factor in consumer purchases and make product differences a greater factor (Mc Connell & Brue, 2000, p. 462).
Table 5. Effect of Brand Development in Monopolistic Competition
Neutron Ceres
Used Capacity ($mn) 18 12
Revenue ($bn) 21.6
Profit ($mn) 520 785
Combined Profit ($mn) 1,305

In 2013, Quasar acquires Opticom which is operating in the perfectly competitive market of Optical Display Screens (ODS). In this situation, since the market is dictating the price, maximized profits are reached when costs are reduced through continuous improvement. In this case, optimized cost savings are achieved doing two successive investments of $ 40 millions (reduction of inventory, increase in material usage efficiency, reduction in rejection rate or reduction of downtime). Even if these improvements are replicated by competitors over time, Quasar is able to take the lead on continuous improvement, and achieves supernormal profits due to its increased differential between continuously improved production costs and reduced market price for all competitors.

In order to remain the cost leader in the future in this competitive market and optimize profits, Quasar should start a structured long term cost reduction approach based on Design For Manufacture and Assembly (DFMA) and using Digital Manufacturing for its new screens. By doing so, the “company will be able to achieve an improved lean design that leads to less labor, less tooling and facility investment, less material usage, less inventory and excellent product quality” (Wen & Anandarajan, 2004).

Bibliography
McConnell, C. R. & Brue, S. L. (2004). Economics: Principles, problems, and policies (16th ed.). New York: McGraw Hill/Irwin.
University of Phoenix. (2009). Economics for Managerial Decision Making: Market Structures. Retrieved August 3, 2009 from University of Phoenix, Week 4 assessment, Open rEsources, ECO/561—Economics Course Web site: https://ecampus.phoenix.edu/secure/aapd/vendors/tata/sims/economics/economics_simulation1.html
Wen, Joseph., & Anandarajan, Asokan. (2004). Successful Cost Reduction Methodologies. Strategic Direction, 20(4), 31-33

All Rights Reserved Theme by 404 THEME.