Question

Consider the pizza restaurants and explain the following issues.

1. What is the type of market that this industry represents?
2. Explain the concentration of the industry.
3. Explain the relationship between the elasticity of the industry demand and that of an individual firm.
4. Explain the pricing behavior of the firms in this industry.
5. Explain the effect of a horizontal integration of all the firms in the industry on the pricing behavior of the merger.
6. Given the merger in point 5, explain the changes in the concentration of the industry.
7. Given the merger in point 5, explain the relationship between the elasticity of the industry demand and that of the firm.
8. Given the merger in point 5, explain how entry into the industry is affected.
9. Explain the value of the Lerner index for the competitive market.
10. Explain why the competitive market has a very low concentration.

Answer 1

1- The industry of the pizza restaurants represents the monopolistic type of market. The price of the pizza of various kinds is not decided by the market but it defers from restaurant to restaurant. The restaurants are not the price takers hence the market is not part of the perfect competition.

2- The industry does not has harsh restrictions on the entry and the exit of new firms in the market hence the no. of components in the market are high due to the free entry and exit. The concentration level is higher where one restaurant competes with the other with the help of the price differentiation which means that they can manipulate the price by adding some different flavors than the other to .charge the different price.

3 -The elasticity of demand is high with respect to the industry as well as the firm. The reason for this is that the firm are the substitute of each other. The rise in the price of pizza of one restaurant will motivate the consumer to shift the consumption to the other restaurant offering pizza at lesser price. Hence the demand is elastic in case of this industry.

4- The main factor which determines the prices in this industry is the product specialization and the price differentiation. The specialization in the product allows the producer to charge different price from the consumer with comparison to the other restaurant. The products are homogeneous but with little differences allowing to charge different price for the same commodity.

The industry is not the price taker which is also the reason for different prices prevailing. The lack of perfect knowledge about the product to the consumer is also a factor for these price differentiations.