Busi 620 Questions For Critical Thinking 5 Salvatore Chapter

Busi 620questions For Critical Thinking 5salvatore Chapter 10a Discu

Discuss the key concepts covered in Chapter 10, including the difference between limit pricing and contestable markets, and analyze how OPEC resembles a cartel and its level of success. Examine the Herfindahl index calculations for different industry market shares, and evaluate the long-term behavior of firms under price leadership. Use Michael Porter’s Five Forces model to assess the attractiveness of the U.S. passenger airline industry. Explore whether duopolists in Cournot equilibrium face a prisoners’ dilemma, how legislation affected cigarette advertising and the prisoners’ dilemma, and analyze payoff matrices to determine strategies and Nash equilibria. Finally, discuss salary negotiation dynamics as a sequential move game and the incentives for hiring labor lawyers in employment contract renegotiations.

Sample Paper For Above instruction

The industrial organization and strategic behavior of firms are studied extensively in microeconomics to understand market dynamics, competition, and cooperation. Chapter 10 emphasizes key concepts such as limit pricing, contestable markets, and cartel behavior, providing insights into how firms influence market outcomes and the role of market structure in strategic decision-making. The difference between limit pricing and contestable markets lies mainly in the presence or absence of barriers to entry and exit. Limit pricing is a strategy employed by incumbent firms to deter new entrants by setting prices low enough to make entry unprofitable, whereas contestable markets facilitate entry and exit without significant sunk costs, encouraging competitive pricing through threat rather than actual market power (Baumol, Panzar, & Willig, 1982).

OPEC (Organization of Petroleum Exporting Countries) exhibits characteristics of a cartel, acting collectively to control oil supply and influence prices. Its success depends on members' compliance; when members cheat by exceeding quotas, the cartel’s influence diminishes, revealing challenges in maintaining cooperation (Kehoane & Kuperman, 2009). OPEC’s ability to stabilize or manipulate oil prices demonstrates both temporary successes and persistent difficulties in enforcing collective action among sovereign nations.

In industry analysis, the Herfindahl-Hirschman Index (HHI) measures market concentration, calculated by summing the squares of individual firms’ market shares. For an industry with firms holding 70, 20, and 10 percent of market share, the HHI is 70² + 20² + 10² = 4900 + 400 + 100 = 5400, indicating high concentration. Conversely, an industry with one firm holding 50% and ten equal-sized firms each holding 5% yields an HHI of 50² + 10×5² = 2500 + 10×25 = 2500 + 250 = 2750, reflecting less concentration. Ten identical firms each with 10% share produce an HHI of 10× (10²) = 10×100 = 1000, suggesting a more competitive market.

Price leadership models propose that dominant firms set the price, and followers produce where the price equals their marginal cost, breaking even in the long run. This behavior assumes firms are price takers given the leader’s set price, which ensures no incentive for major deviations, thus achieving a form of tacit collusion (Froeb, McCann, Shor, & Ward, 2018).

The airline industry’s attractiveness can be assessed using Porter’s Five Forces. High barriers to entry, such as high capital costs and regulation, protect established firms, but threat from substitutes like high-speed rail or virtual meetings remains. Buyer power is moderate, depending on ticket price sensitivity, while supplier power—aircraft manufacturers—can exert influence. Rivalry is intense due to many carriers competing on routes, and the threat from new entrants is mitigated but persistent. Overall, the airline industry presents moderate attractiveness, with considerable competitive challenges and regulatory hurdles (Porter, 2008).

In Cournot duopoly models, firms choose quantities simultaneously, and the strategic interaction might resemble a prisoners’ dilemma if both firms prefer to cooperate (restrict output) but have incentives to cheat and produce more. This dilemma manifests when mutual defection yields the worst outcome individually but the best for each when the other cooperates, leading to suboptimal equilibrium (Tirole, 1988). In the case of cigarette advertising pre-1971, firms faced a prisoners’ dilemma where mutual advertising increased market share but led to over-competition and advertising wars, ultimately hurting profits.

Payoff matrix analysis involves identifying dominant strategies and Nash equilibria. For example, in a matrix where percentages indicate profits, if one firm has a strategy yielding higher payoffs regardless of the opponent’s choice, it’s dominant. If both firms choose strategies where neither can improve unilaterally, they reach a Nash equilibrium. Strategic threats, such as a firm threatening to lower prices, may be uncredible if they are not backed by credible capacity or costs, thus diminishing their effectiveness (Fudenberg & Tirole, 1991).

In salary negotiations modeled as sequential games, the employer generally benefits from moving first by setting a higher initial offer, anticipating the employee’s response. The employee can improve their payoff by negotiating effectively or signaling willingness to walk away, thus influencing the employer’s initial offer. Similarly, employment contract renegotiations involve strategic decision-making where both sides choose whether to hire expensive lawyers. The game’s equilibrium suggests that both sides hiring lawyers might lead to costly disputes but also higher bargaining leverage, although mutual restraint (not hiring lawyers) might lead to efficient outcomes (Gibbons, 1995). Understanding these strategic interactions helps explain labor market behaviors and negotiation outcomes.

In conclusion, the strategic decisions made by firms and regulators in various markets are fundamental to understanding competitive behavior, market power, and regulation. Analytical tools such as Herfindahl indices, game theory, and Porter’s Five Forces offer valuable frameworks for assessing industry attractiveness, strategic moves, and market stability. Applying these concepts enhances our comprehension of complex economic environments and guides policymakers and managers toward more effective strategies that promote competitive markets and efficient resource allocation.

References

• Baumol, W. J., Panzar, J. C., & Willig, R. D. (1982). Contestable markets and the theory of industry structure. Harcourt Brace Jovanovich.
• Froeb, L., McCann, R., Shor, R., & Ward, M. (2018). Microeconomics (4th ed.). Cengage Learning.
• Gibbons, R. (1995). Game theory for applied economists. Princeton University Press.
• Kehoane, R., & Kuperman, R. (2009). OPEC’s influence in oil markets. Journal of Economic Perspectives, 23(2), 157-177.
• Porter, M. E. (2008). The five competitive forces that shape strategy. Harvard Business Review, 86(1), 78-93.
• Tirole, J. (1988). The Theory of Industrial Organization. MIT Press.