Mba500

MARKET STRUCTURE SIMULATION: PRICING AND NON-PRICING STRATEGIES

Market Structure Simulation: Pricing and Non-Pricing Strategies

Quasar Computers enters as a single market seller with an all-optical notebook computer product branded “Neutron,” who’s patented technology legal blocks usage (competition) for 3 yrs. In its monopolistic state, the monopolist has to take care of high demand as well as a normal demand, therefore they investment in economies of scale, causing average total cost to be higher than marginal costs. The marginal revenue curve (MR) lies below the demand curve because the “gain in revenue from an extra unit of output is less than the price charged for that unit of output” (McConnell and Brue, 2004, p.11). This makes Quasar a price maker, not a price taker. Consequently, the pricing strategy determined by Quasar will affect demand, revenues and profits. As Quasar’s price increases, demand increases, and total revenue and profit increase at a diminishing rate. Total revenue (TR) is maximized at 13.5($bn), when marginal revenue equals marginal cost; in this instance, at 5.3(mn units). For productive and allocative efficiency, the socially optimal price should be set at $1,250 and 9(mn units) produced, however this would result in a profit loss of 4.12($bn) because it does not cover average total costs (ATC). To cover ATC and get a fair-return, Quasar would have to sell 7(mn units) at a price of $1950, giving a TR of 13.7($bn). This looks like a better option, since it increases TR by .2($bn), compared to TR maximization, however companies look for total profit maximization and not just TR. Maximum economic profit can be achieved when total costs is the lowest, and total revenue is the highest, or the monopoly price where MC equals MR.

Three months later Quasar is wondering if increasing consumers will increase its profit in a monopoly and decides to invest $600 million in advertising. The VP of finance wanted to slash advertising, which would reduce total costs, but also decrease total profits. Quasar quickly realized it was a new product and without advertising, consumer sales would not increase. The investment raised demand, quantity produced, TR and TC, yet managed to make a profit of approximately 1($bn), if we kept our price the same, however it would profit 1.4($bn) if we maximized TR at a $100 higher price. Two years later, although not pressured by competition Quasar decides to look into improve production efficiencies. The higher savings of the per unit cost in controlling the wastage in the production process, allowed Quasar to decrease price and increase demand, and gained Quasar a profit of 1.53 ($bn).

Graphical Analysis

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