Question

1. What is an industry that has only one significant supplier? What is the nature of the product? How easy would it be to start a similar firm or stop offering the product/service? How easy is it to attain information about the industry or product or service?

2. Are there any products that are sold in a market in which the seller is able to charge different prices to different consumers? How are the sellers able to do this?

3. Suppose you own one of two gas stations in a town of 5,000. The two gas stations are right across the street from each other. How would you react to changes in your competitors prices? What would cause you to increase or decrease prices? How would you get more business? Would your pricing strategy change if you were friends with the owner of the other station?

4. Can you think of an industry that is dominated by only 2-3 firms? What is the nature of the product? Would it be easy to begin offering the product or service? Do you feel that the prices of the products they are offering are fair?

Answer 1

1. An industry that has only one single supplier is known as a monopoly industry. Generally the nature if the product produced by a monopoly is essential and it has no substitutes. The starting a similar firm or stopping to provide service is very difficult in such market, there is large barriers to entry and exit. It is also very difficult to attain information about the product or services in these industry as at first these products and services are new and no one knows about it, so in you want to start such new firm there is large cost needed on research and development.

2. Yes the goods and services sold in a monopoly market may have different prices for different customers. Here the seller is able to charge different prices to different consumers. This process is known as price discrimination.

This is possible in monopoly because in this market there is no substitute of the good and the seller can charge different prices because there is different elasticity if demand for the same product to different buyers. Normally they charge higher prices to those who have lower price elasticity of demand.

3. If there are only two gas stations in a market and both compete, than a change in the price of one will effect other. If my competitor decreases price I have to decrease my price because if I don't than I will loose customers and hence revenue and profit will also decrease. But I may not respond if my competitor increases price in this case my revenue and hence profit will increase.

If the owner of the other station and I were friends, the pricing strategy may change as we may decide jointly not to compete with each other and decrease price. Bit rather we will decide to form a cartel and keep price high so that both can earn higher profit.

4. An example of an industry which is dominated by only 2-3 firms may be soft drinks industry. In these industry the firms sell goods which are close substitutes of each other. In these type of industry it is not so easy to begin offering the product or service because there 2-3 old and big firms are so well established that it is very hard to compete with them because they have low cost advantage. The other reason may be the brand loyalty of its customers, they are addicted to these brands and will not buy other brands. The prices at which these products are offered may not be fair because these firms may form a cartel and charge a higher price.