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Ashford 5: - Week 4 - Discussion 1





Your initial discussion thread is due on Day 3 (Thursday) and you have until Day 7 (Monday) to respond to your classmates. Your grade will reflect both the quality of your initial post and the depth of your responses.

 

Strategic Behavior Oligopolies

An interesting example of strategic behavior comes from a 1997 article about Microsoft’s investment in Apple (New Straits Times, 1997). The article is included in the Required Readings list. Facing tough anti-trust scrutiny from government agencies, Microsoft provided financial support to Apple in order to ensure Apple’s survival and, therefore, to ensure that competitiveness in the industry remains. Moreover, the partnership with Apple provided an additional market for Microsoft’s products – the MS Office and the IE products were to be bundled with the MAC OS as one of the conditions for this financing. Discuss this case in the context of market structure and strategic behavior. What market structure do these firms operate in? Why did Microsoft need to preserve competitiveness in the industry? What was Microsoft afraid of in the event that Apple did not survive?

Guided Response:
In 300 words or more, please, provide your response to the above discussion question. Further, do you think Microsoft regrets taking action in light of Apple’s performance today? Respond substantively to at least two of your classmates’ postings. Substantive responses use theory, research, and experience or examples to support ideas and further the class knowledge on the discussion topic.

Carefully review the Discussion Forum Grading Rubric for the criteria that will be used to evaluate this Discussion Thread.

Here are students to respond to

Burton_Brad_Week 4_Discussion 1

Brad BurtonEmail this Author

4/19/2016 10:32:36 AM

 

            In the late 90’s, Microsoft was operating in an oligopoly market structure. An oligopoly market structure is where a few sellers dominate a given market and sell identical or differentiated products (Douglas, 2012).

            At the time, Attorney General Edwards technology analyst said this move from Microsoft was understandable as it is in its own interest to maintain competition since US Anti-Trust authorities were “breathing down” Microsoft’s neck; it is in Microsoft’s interests regarding those trust matters to keep Apple from failing (Strait Times, 1997)

            If Apple didn’t survive, Microsoft could potentially be at the mercy of the Justice Department, Federal Trade Commission, and US Anti-trust authorities which could ultimately break up Microsoft. Microsoft believed that keeping Apple alive, even at a slightly higher market share, is not only beneficial so the aforementioned could be “deflected”, but it wouldn’t hurt their business the slightest bit.
            It is extremely ironic that Microsoft decided to take this action to prevent potential violation of the Sherman Anti-trust Act. Only a couple of years later, Microsoft determined to be operating as a monopoly and forced to split its company into one part that produced its OS and one that produced software, compared to before where they were intertwined.  Looking back, hindsight is always 20/20 and I am sure Microsoft would have rather not thrown the lifesaver to Apple with how successful they’re now. However, it was what seemed like there only play to avoid being labeled a Monopoly which would force a breakup anyway.

References

 

Douglas, E. (2012). Managerial Economics (1st ed.). San Diego, CA: Bridgepoint Education.

 

Straits Times. (1997, August 8). Microsoft-Apple Partnership Stuns Computing Industry. New Straits Times -  Google search. Retrieved April 19, 2016,  fromhttp://news.google.com/newspapers?            id=rZxOAAAAIBAJ&sjid=HBUEAAAAIBAJ            &pg=6732,188074&dq=apple+partnership+with+microsoft&hl=en  

Week 4- Discussion 1- Strategic Behavior Oligopolies

Collin HinchmanEmail this Author

4/19/2016 11:48:31 AM

 

            The market structure that both Apple and Microsoft operate in, especially at the time this article was written back in 1997, is an oligopoly.  Douglas (2012) describes an oligopoly market is a market in “which relatively few sellers each supply identical or differentiated products, such as automobiles, aircraft, steel, and other building materials” (“The Four Basic Market Structures,” para. 1).  The primary reason that Microsoft wanted to preserve a more competitive market is that they did not want to face regulatory scrutiny from the government which, Douglas (2012) states is what monopolies, market structure where there is only one seller and no direct substitutes, are subject to.  In Microsoft’s case they would be particularly concerned with antitrust laws that are regulated by the Federal Trade Commission and United States Justice Department.  The New Straits Times (1997) article referenced a tech industry analyst as stating it was in Microsoft’s interest in “terms of antitrust matters, to keep Apple from failing” (para. 17).

            Working for T-Mobile this topic reminds me of working through the attempted buyout of T-Mobile by AT&T.  I worked on the divestiture project where T-Mobile had to divest assets to help stimulate more wireless competition to help move along the merger and have it approved by regulators.  My role particularly limited and only concerned routing of customer calls and how automation would work within our SIVR, but it was an interesting and particularly anxious time to work in. The divesting of assets and hope of strengthen more wireless competition, i.e. Leap Wireless at the time, failed to convince regulators that it would strengthen competition by merging the #2 and #4 carriers and strengthen another that was far too small to compete nationally.  As a result of this AT&T had to pay $3B in cash and $1B in wireless spectrum in a “breakup fee” for the failed merger.             

            With regard to if Microsoft feels any regret about helping Apple in the 90s considering how well they are doing today?  I don’t think they regret it.  The $150 million that Gates and Microsoft invested, was an investment and they received preferred stock, and with investments companies take calculated risk.  Also, the $150M was likely far less than what it would have cost to break up Microsoft if they were deemed a monopoly and forced to break up by regulators.  So even though Apple is doing incredibly well, partly as a result of the $150 million they received, Microsoft profited after they sold their stock, albeit not nearly as much as they would have had they held onto it.  However, with Bill Gates, being the philanthropist that he is, it was likely never about profiting from the investment.  It was the right thing to do to stimulate competition that continues to drive innovation and is overall better for consumers.

Resources:

Douglas, E. (2012). Managerial Economics (1st ed.). San Diego, CA: Bridgepoint Education.

Retrieved from https://content.ashford.edu/books/AUBUS640.12.1/sections/fm

New Straits Times. (1997). Microsoft-Apple partnership stuns computing industry. 

Retrieved From http://news.google.com/newspapers ?id=rZxOAAAAIBAJ&sjid=HBUEAAAAIBAJ&pg=6732,188074&dq=apple+partnership+with+microsoft&hl=en

 

Ashford 5: - Week 4 - Discussion 2





Your initial discussion thread is due on Day 3 (Thursday) and you have until Day 7 (Monday) to respond to your classmates. Your grade will reflect both the quality of your initial post and the depth of your responses.

 

Local Market Power

Bulls Eye department store specializes in the sales of discounted clothing, shoes, household items, etc. similar to the offerings at a regular Walmart or Target. Bulls Eye is the only department store in Show Low and the nearest other discount retailer is Target, located 49 miles away in Eagar. Bulls Eye, therefore, has some market power in its local area. Despite having some market power, Bulls Eye is currently suffering losses. An analyst at Bulls Eye is recommending to the manager to raise prices, so that profitability can be improved. The manager is unsure of this strategy as recent data points to increasing numbers of individuals shopping more and more. What are the pros and cons of raising the prices at Bulls Eye and would that strategy be profitable?

Guided Response:
Consider demand elasticity and market structure in your response. How is increasing of the price going to impact the company’s revenues given its demand elasticity? In 300 words or more, please, provide your response to the above discussion questions. Respond substantively to at least two of your classmates’ postings. Substantive responses use theory, research, and experience or examples to support ideas and further the class knowledge on the discussion topic.

Carefully review the Discussion Forum Grading Rubric for the criteria that will be used to evaluate this Discussion Thread.

Here are students to respond to

Burton_Brad_Week 4_Discussion 2

Brad BurtonEmail this Author

4/19/2016 10:33:36 AM

 

 

            Bullseye department store is a low cost discount clothing, shoes, and household items store whose competition are similar to stores such as Walmart and Target. Bullseye does have an advantage over them in that they’re the only store within 49 miles for the town of Show Lowe, thus providing a convenience factor for those local residents. In this context, I believe Bullseye operates in a pure competition market structure. A pure competition market structure is one where many sellers supply identical products (Douglas, 2012). The analyst for Bullseye believes that the manager should raise prices so that profitability can be improved, which the manager is unsure of since demand is increasing among individuals shopping more and more.

Pros of Raising Prices

-          If the excess demand data is correct, upward pressure forces the market price higher

-          No reaction from rivals if price is raised

Cons of Raising Prices

-          If Bullseye has excess supply, raising prices is counterintuitive

-          Raising the price with upward pressure and no reaction from rivals will provide a cheaper alternative at Walmart and Target, and that excess demand could flow towards them instead.

            For Bullseye, there price elasticity of demand is elastic. They will ultimately sell more when the price is lower and vice-versa. However, since demand is expected to increase, this will shift the slope to the right. In this case it could be an advised strategy to increase prices, but only to the point where there isn’t excess demand or supply.

 

Reference

Douglas, E. (2012). Managerial Economics (1st ed.). San Diego, CA: Bridgepoint Education.

Chatman_W4_D2

Rodney ChatmanEmail this Author

4/19/2016 2:37:16 PM

 

In this scenario, Bullseye is a department store that specializes in discounted clothing, shoes, household items, etc. and it is the only store of its kind in the town called Show Lowe. This being the case, Bullseye falls into the pure competition market. “Pure competition markets have many sellers supplying identical products such as farmers selling milk, eggs, or corn, or individuals selling shares on the Stock Exchange (Douglas, 2012).  Stores like Wal-mart and Target are considered the competition; however Target is located 49 miles away. The distance factor and location automatically give Bulleseye a competitive advantage and price elasticity of demand is elastic. Since Bullseye is suffering losses, an analyst has recommended raising prices to improve profitability. On the other hand, recent data points to increasing numbers of individuals shopping so the manager isn’t quite sure that Bullseye should raise prices. For a store like Bullseye, consumers can postpone the purchase of the products if they aren’t a necessity. “Managers should understand that price elasticity depends on two main drivers, the substitution effect and the income effect.” (Douglas, 2012)  Due to Bullesye’s competitive advantage and location, if they decide to increase the prices, the company will see an increase in revenue.

In discussing the pros of raising prices, Bullseye will benefit from increased profitability and revenue. Since the closest competitor is at least 49 miles away, Bullseye is at an advantage and doesn’t have to worry about price wars. The cons of raising prices could lead to potential loss of customers. If the demand decreases, Bullseye could end up with an overage of stock.

Reference

Douglas, E. (2012). Managerial Economics (1st ed.). San Diego, CA: Bridgepoint Education.

 

Ashford 5: - Week 4 - Journal

 

Economics in the Current News

Take some time to think about the ways in which your learning in this class relates to the real world. Has the knowledge you gained been valuable in helping you understand or evaluate events or policies? Are there any current events in the news that you can directly link to concepts or theories covered so far?

Guided Response:
Review the popular news websites listed in the Current Events required readings section for this week. In 300 words or more, discuss one current event article and explain how economic theory can be applied to analyze the information presented. Make sure to provide an APA reference to your article.

Ashford 5: - Week 4 - Assignment

 

Market Structures and Pricing Decisions Applied Problems

Please complete the following two applied problems:

Problem 1: 

Robert’s New Way Vacuum Cleaner Company is a newly started small business that produces vacuum cleaners and belongs to a monopolistically competitive market. Its demand curve for the product is expressed as Q = 5000 – 25P where Q is the number of vacuum cleaners per year and P is in dollars. Cost estimation processes have determined that the firm’s cost function is represented by TC = 1500 + 20Q + 0.02Q2. 

Show all of your calculations and processes. Describe your answer for each question in complete sentences, whenever it is necessary.

  1. What are the profit-maximizing price and output levels? Explain them and calculate algebraically for equilibrium P (price) and Q (output). Then, plot the MC (marginal cost), D (demand), and MR (marginal revenue) curves graphically and illustrate the equilibrium point.
  2. How much economic profit do you expect that Robert’s company will make in the first year?
  3. Do you expect this economic profit level to continue in subsequent years? Why or why not?


Problem 2: 

Greener Grass Company (GGC) competes with its main rival, Better Lawns and Gardens (BLG), in the supply and installation of in-ground lawn watering systems in the wealthy western suburbs of a major east-coast city. Last year, GGC’s price for the typical lawn system was $1,900 compared with BLG’s price of $2,100. GGC installed 9,960 systems, or about 60% of total sales and BLG installed the rest. (No doubt many additional systems were installed by do-it-yourself homeowners because the parts are readily available at hardware stores.) 

GGC has substantial excess capacity–it could easily install 25,000 systems annually, as it has all the necessary equipment and can easily hire and train installers. Accordingly, GGC is considering expansion into the eastern suburbs, where the homeowners are less wealthy. In past years, both GGC and BLG have installed several hundred systems in the eastern suburbs but generally their sales efforts are met with the response that the systems are too expensive. GGC has hired you to recommend a pricing strategy for both the western and eastern suburb markets for this coming season. You have estimated two distinct demand functions, as follows: 

Qw =2100 – 6.25Pgw + 3Pbw + 2100Ag - 1500Ab + 0.2Yw 

for the western market and 

Qe = 36620 - 25Pge + 7Pbe + 1180Ag - 950Ab + 0.085Ye 

for the eastern market, where Q refers to the number of units sold; P refers to price level; A refers to advertising budgets of the firms (in millions); Y refers to average disposable income levels of the potential customers; the subscripts w and e refer to the western and eastern markets, respectively; and the subscripts g and b refer to GGC and BLG, respectively. GGC expects to spend $1.5 million (use Ag = 1.5) on advertising this coming year and expects BLG to spend $1.2 million (use Ab = 1.2) on advertising. The average household disposable income is $60,000 in the western suburbs and $30,000 in the eastern suburbs. GGC does not expect BLG to change its price from last year because it has already distributed its glossy brochures (with the $2,100 price stated) in both suburbs, and its TV commercial has already been produced. GGC’s cost structure has been estimated as TVC = 750Q + 0.005Q2, where Q represents single lawn watering systems. 

Show all of your calculations and processes. Describe your answer for each item below in complete sentences, whenever it is necessary.

  1. Derive the demand curves for GGC’s product in each market.
  2. Derive GGC’s marginal revenue (MR) and marginal cost (MC) curves in each market. Show graphically GGC’s demand, MR, and MC curves for each market.
  3. Derive algebraically the quantities that should be produced and sold, and the prices that should be charged, in each market.
  4. Calculate the price elasticities of demand in each market and discuss these in relation to the prices to be charged in each market.
  5. Add a short note to GGC management outlining any reservations and qualifications you may have concerning your price recommendations.
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