Question

A. Explain in detail why a firm maximizes its profit by producing the level of output at which marginal revenue equals marginal cost. B. Explain in detail how mutual interdependence impacts oligopoly markets. C. Explain in detail how managers make use of Lock-in market power to increase market share for the firm.

Answer 1

ANSWER (A) Total profit reaches its maximum point where MR=MC. This happens because a producing unit will produce until marginal profit is equal to zero and Marginal profit is equal to marginal revenue minus marginal cost. If the firm is producing more from a point where MR=MC, then MR<MC, which implies a producing unit will incurr losses from each additional unit produced by them.

Incidentally MC will rise as the cost of production will rise. If MC will rise to equal MR, producing unit will earn profit. On the other hand, MC>MR then a producing unit should cut back to the point where these two attributes were equal.

ANSWER (B). Oligopoly is a market situation where there are few sellers of a commodity. Under this type of market system there is a very high degree of interdependence. In this market, price and output decisions have a significant effect on the rival firms. Mutual interdependence is a significant factor in this type of system because each firm has a sizable part in the market. As a result when any firm changes its price and output decisions, it is likely to affect the slae of the other firms in the industry.

ANSWER (C). Two major components of market share is customer acquisition and customer retention through lock-in. Once new customers are acquired, it is essential to retain them. Lock in ensures a barrier for the customers to switch from one brand to another. This can be done by increasing cost of switching and persuading the customer to remain with a bigger brand. Technology up gradation, customer service, after sale services etc could prove to be a better ways of lock in used by managers to achieve bigger market share.