Economics_for_Managerial_Decision_Making__Market_Structures

In week four, the innovative firm, Quasar, is introduced in the market structures simulation. Quasar is leading the way in the computer industry with the design and manufacturing of an all optical notebook computer. Through the market structures simulation, examples on how decision-making differ among the market structures of monopoly, oligopoly, monopolistic competition, and perfect competition. This simulation and the real-life scenarios detailed within, provide insight and understanding to the intricate decisions that are made in each type of market structure and the impact of those decisions. In the Quasar simulation, the C.E.O. utilized pricing as tool for optimizing profits, and with the input from the board of advisors decided to allocate funds to advertising, technology, and other ventures. (University of Phoenix, 2008) Through the course of this paper, a solution will be created using strategic variables, in order to sustain the economic profits that the firm can earn. This paper will also look to identify pricing and non-pricing strategies that will further facilitate the goal of maintaining economic profits. Finally, this paper will ascertain what kind of innovations will best prolong Quasar’s distinctiveness. In 2003, Quasar launched the world’s first all optical notebook computer branded Neutron. Because of Neutron’s processor, memory use and high-speed optical conductors, Neutron boasts approximately 5 times the speed of existing microchip-based computers. Neutron employs high energy saving technology with rechargeable batteries that last up to 3 days and due to the patented technology, Quasar and Neutron have a monopoly on this product line for the next 3 years. According to McConnell and Brue a pure monopoly exists when a single firm is the sole producer of a product for which there are no close substitutes. (McConnell and Brue, 2004) A pure monopoly is also identified by having blocked entry or certain economic, technological or legal, barriers keep potential competitors from entering the industry. (McConnell and Brue, 2004) In the case of the Neutron the Government allowed and created a legal barrier to entry by awarding patent on the technology that Quasar developed. McConnell and Brue define a patent as the exclusive right of an inventor to use, or to allow another to use, her or his invention. McConnell and Brue continue by stating that patents and patent laws aim to protect the inventor from rivals who would use the invention without having shared in the effort an expense of developing it, while at the same time, providing the inventor with a monopoly position for the life of the patent. (McConnell and Brue, 2004) Uses of the patent and establishing a monopoly are strategic variables that Quasar utilized in order to obtain and prolong economic profits. The initial offering of Neutron was $2,550 USD. At this price point 5.3 million units would be demanded and produced at a total cost (TC) of 12.18 billion and total revenue (TR) of 13.5 billion and yielding a total profit (TP) of 1.29 billion. This pricing strategy was formulated and utilized in order to achieve the marginal revenue being equal to the marginal cost, which in turn maximized profits. As McConnell and Brue note that any monopolist in search of maximizing total profit will employ the same rationale as a profit-seeking firm in a competitive industry and will produce up to the output at which marginal revenue equals marginal cost or MR = MC. (McConnell and Brue, 2004) After the first successful year, in year two, if the same price point of $2,550 and an advertising budget of $400 million retained, the units demanded and produced would slightly increase to 5.4 million. At a TC of 12.72billion and TR of 13.8 billion but yield a TP that would decrease to 1.04 billion. Jane Sarandon VP of Finance advised to decrease the advertising budget to 100 million. This action would result in a MC being greater than MR as a quantity demanded and produced reduced to 4.7 million units at a TC of 12.31, a TR of 11.9, and TP of -0.41. Even if the price point of the Neutron were reduced to $2450 the difference would be marginal and still result in a – 0.27 TP. Conversely, Robert Spencer VP of Marketing recommended increasing the marketing budget to $600 million, and with a price point of $2450 this decision produced and increase in production to 7.7million units demanded and produced at a TC of 16.06 billion, TR of 18.8 billion and yielding a TP increase to 2.74 billion. The impact of a successful marketing and advertising campaign is obviously significant and an extremely powerful non price strategy After the 2nd year Quasar has done well, touting a successful advertising campaign and optimal pricing which has resulted in spikes in sales and profits. In looking to improve and maintain their growth, the focus now shifts to the production processes. The question now becomes can the process be done better or more efficiently. Can investing in technology in the manufacturing process aid in the goal of increased profits' (University of Phoenix, 2008) The optimal price point for year 3 is $2200. If no changes are made to the production process, the TP is severely impacted and reduced to .63 billion, as quantity demanded and produced increases to 9.4 million at a TC of 19.99 billion and a TR of 20.7 billion. Jane Sarandon suggests only specific improvements be made to the production process rather than an entire upgrade. This decision results in a slight reduction in TC to 19.15 billion TR of 1.46 billion. David Pinto VP of Technology and brain behind the creation of Neutron is always looking for was to improve technology in his creation. David recommends the capital investment in upgrading the production process. The decision to invest is the correct one as evidenced in the quantity demanded and produced increased to 9.4 million units at a TC of 18.53 billion, TR of 20.7billion and resulting in the highest possible TP of 2.21billion. Quasar reduced their costs through the discovery and implementation of new technology. The technological advance exemplified in the process innovation improved productive efficiency by increasing the productivity of inputs. In conclusion, even though a monopoly is the price maker, the scenario dictates that cost cannot always be passed to the consumer. The challenge of a downward sloping curve that is faced by any monopolistic organization shows that any increase in price will decrease demand. Therefore to improve profits, even a monopoly has to invest in non pricing strategies like advertising, innovations like improve productivity, as well as reduce prices to maintain an economic profit. References McConnell, C. R. & Brue, S. L. (2004). Economics: Principles, problems, and policies (16th ed.). New York: McGraw Hill/Irwin. University of Phoenix. (2008). Economics for Managerial Decision Making: Market Structures Simulation. Retrieved June 25, 2009, from University of Phoenix, Week Four, ECO561 - Economics.