Friday, 4 January 2013

Cartel Theory of Oligopoly

 

A cartel is defined as a group of firms that gets together to make output and price decisions. The conditions that give rise to an oligopolistic market are also conducive to the formation of a cartel; in particular, cartels tend to arise in markets where there are few firms and each firm has a significant share of the market. In the U.S., cartels are illegal; however, internationally, there are no restrictions on cartel formation. The organization of petroleum-exporting countries (OPEC) is perhaps the best-known example of an international cartel; OPEC members meet regularly to decide how much oil each member of the cartel will be allowed to produce.

Oligopolistic firms join a cartel to increase their market power, and members work together to determine jointly the level of output that each member will produce and/or the price that each member will charge. By working together, the cartel members are able to behave like a monopolist. For example, if each firm in an oligopoly sells an undifferentiated product like oil, the demand curve that each firm faces will be horizontal at the market price. If, however, the oil-producing firms form a cartel like OPEC to determine their output and price, they will jointly face a downward-sloping market demand curve, just like a monopolist. In fact, the cartel's profit-maximizing decision is the same as that of a monopolist, as Figure 1 reveals. The cartel members choose their combined output at the level where their combined marginal revenue equals their combined marginal cost. The cartel price is determined by market demand curve at the level of output chosen by the cartel. The cartel's profits are equal to the area of the rectangular box labeled abcd in Figure 1 . Note that a cartel, like a monopolist, will choose to produce less output and charge a higher price than would be found in a perfectly competitive market.

Figure 1

Profit maximization by oligopolistic cartel

Once established, cartels are difficult to maintain. The problem is that cartel members will be tempted to cheat on their agreement to limit production. By producing more output than it has agreed to produce, a cartel member can increase its share of the cartel's profits. Hence, there is a built-in incentive for each cartel member to cheat. Of course, if all members cheated, the cartel would cease to earn monopoly profits, and there would no longer be any incentive for firms to remain in the cartel. The cheating problem has plagued the OPEC cartel as well as other cartels and perhaps explains why so few cartels exist.

Relation of Marginal Revenue and Average Revenue under Perfect Competition

 

In a perfect competition a single seller can not influence the market price. The firm has to sell the product at the market price. Factors of production can freely move from one sector to another sector . In a perfect competition, there will be one price of a commodity in all the parts of the market.
We can explain the nature of AR and MR curves by the following schedule and diagram :

EXPLANATION :- The demand curve which a firm has to face in a perfect competition is a horizontal straight line. The ARC is a horizontal straight line because a firm can sell the commodity at the rolling market price only.
Curve DD'. represent three things AR = MR = Price. Under perfect competition AR,MR and price are same while in imperfect competition MR always remains below than AR.

Friday, 7 December 2012

Temporary Post Used For Theme Detection (84b6e8f6-00a3-4ce2-b145-e321cfd842b5 - 3bfe001a-32de-4114-a6b4-4005b770f6d7)

This is a temporary post that was not deleted. Please delete this manually. (a0e0e81f-aff3-463a-b705-769ad32d6b67 - 3bfe001a-32de-4114-a6b4-4005b770f6d7)

Sunday, 11 November 2012

Strategic MBA Orientation

Preparing a Case Analysis

Conducting case analyses will assist you in digesting the MBA curriculum in several ways. Because the cases assigned to you will typically include both positive and negative examples of managerial decisions, you will gain a great understanding of what managers should and should not do in order to steer their organizations toward success. You will develop the ability to evaluate your organization's strengths and weaknesses, particularly with respect to the condition of your industry and of your competitors. You will acquire some experience in analyzing strategic issues, generating and evaluating alternative strategies, and creating action plans. You will learn to rely on your own judgment in unfamiliar business territory. And you will be exposed to some new industries, which may pay off in your long-term career planning. This section of the orientation will introduce you to recommended process for analyzing a case.
  1. Read the case twice. During the first reading, you are not looking for details--you're just trying to get a sense of the situation and issues involved. If the case includes any study or discussion questions, read these carefully. Then read the case a second time, paying more attention to the actual facts of the case. You may find it useful to answer any study or discussions questions provided at this point, or simply write yourself a summary of the situation the case describes.
  2. If the case includes exhibits, look at them carefully. When you are first preparing cases, you may be tempted to skim over exhibits that relate to business disciplines where you believe you are weaker--for instance, putting aside financial statements because you're not sure you understand them. Resist temptation and make sure you understand the information which each exhibit is intended to convey.
  3. Make a preliminary diagnosis. Decide what the real issues of the case are. You won't be able to conduct an effective analysis of the case until you understand all of the issues it raises.
  4. Crunch the numbers. If the case includes numeric information, such as financial statements, growth rates, etc., take the time early in your analysis to calculate financial ratios, profit margins, cost per unit, or any other statistics which the available data will allow. Some of the calculations you perform may turn out to be unnecessary to your analysis, but doing a quantitative analysis of the case up front will prevent you from missing hidden information and will also give you a sense of progress on the case if you've having trouble determining where to start.
  5. Check your analysis arsenal. The point of a case assignment is to give you experience using the tools that you are picking up in your MBA courses. Whenever you approach a new case, consider which tools you've been given most recently and start there. However, never lose sight of the fact that your MBA program uses a building-block approach, and that tools you have picked up in previous coursework may be critical to conducting an effective analysis of the case at hand.
  6. Form your own opinions. Often, the cases you analyze will include the opinions of one or several people, and often you'll be given conflicting perspectives on the issue. Examine the data, consider the reliability of your sources, and make an informed judgment about which perspectives are valid and which are questionable.
  7. Answer the question "Why?" Go back and review the analysis you've conducted up to this point, and make sure that you could offer a defense of your diagnosis and judgments if you were called upon to do so.
  8. Form a plan. As a manager, you would not be able to stop with correctly summarizing your organization's issues and identifying a problem--you would need to develop and implement a solution. Use what you've learned to propose an appropriate course of action to correct the problems you've identified.
  9. Prepare to lead class discussion of your case. You won't always be leading the discussion of the case you've analyzed, but it is always good practice to be prepared to do so. In a case discussion, the instructor will typically be lead questioner or devil's advocate, but the majority of the discussion will be among your classmates. Be prepared to answer the question "Why?" for any conclusions you've drawn or recommendations you've made. Don't be surprised if someone disagrees with you or challenges your viewpoint, and don't be alarmed if you find that your own views on the case are changing as a result of the feedback you are receiving from classmates or the questions that you are fielding from your instructor. A good case discussion will hone your analysis skills and make the next case analysis you conduct a better one.
  10. Prepare a written case. By the time you are ready to write a case analysis, the hardest part of your work is over. Your written case analysis will typically consist of three sections.
    1. In the first section, you will offer your diagnosis of the issues and problems in the case based on the information available. This section should include an overview of the organization's current circumstances, the steps it has taken previously relevant to your case analysis, and the problem that management needs to solve. Resist the urge to reiterate every piece of information offered in the case itself--you are now an expert on this case and know which details are relevant and which can safely be excluded.
    2. In the second section, evaluate the steps the organization has already taken, and the direction management is leading it in. Include any relevant calculations you performed, and provide visual aids (charts, tables, graphs) where necessary to communicate the information effectively. Make sure that your evaluation is composed of logical arguments supported by evidence. If you find yourself writing statements that could easily begin with, "Everybody knows that . . .," delete them--your evaluation should not assume that everyone knows anything that is useful in managerial decision-making. Try taking a sentence from your evaluation and tacking the word "because" on the end, and see if you can finish the clause. If you can't, you haven't completed your evaluation. Finally, make sure that your evaluation is reasonable and objective. Reaching a conclusion that someone else might not have because your knowledge and experiences are unique is good, but doing so because you already had a strong opinion about the organization or industry before you read the case is not.
    3. The final section should address your action plan. You should evaluate your own recommendations in light of three issues. First, you should be relatively confident that your recommendations would succeed. Risk-taking is often called for in management, but unless an organization is in such dire straits that options are extremely limited, betting the farm is generally not the best management style. Second, your recommendations should offer enough detail that a manager who sought your advice would understand exactly how to implement your plan. Finally, your action plan should be one that you would be willing to implement yourself if it were your job on the line.
  11. Edit the written case. Refer to the Writing Papers section of this orientation for advice on reviewing and editing your own work, and/or ask the Academic Center staff for assistance in making sure your case analysis is well-organized and free from grammatical errors.