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While there is a degree of differentiation between major grocery chains like Albertsons and Kroger, the
regular offering of sale prices by both firms for many of their products provides evidence that these firms
engage in
suggests that these two stores simultaneously announce one of two prices for a given product: a regular
price or a sale price. Suppose that when one firm announces the sale price and the other announces the
regular price for a particular product, the firm announcing the sale price attracts 1000 extra customers to
earn a profit of $5000, compared to the $3000 earned by the firm announcing the regular price. When
both firms announced the sale price, the two firms split the market equally (each getting an extra 500
customers) to earn profits of $2000 each. When both firms announced the regular price, each company
attracts only its 1500 loyal customers and the firms each earned $4500 in profits. If you were in charge of
pricing at one of these firms, would you have a clear-cut pricing strategy? If so, explain why if not explain
why not and propose A mechanism that might solve your dilemma. (Hint: unlike Walmart, neither of these
two firms guarantees “Everyday low prices”.)
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- Make a case for why monopolistically competitive industries never reach long-run equilibrium.arrow_forwardConsider the curve in the figure below, which shows the market demand. marginal cost, and marginal revenue curve for firms in an oligopolistic industry. In this example, we assume firms have zero fixed costs. Suppose the firms collude to form a cartel. What price will the cartel charge? What quantity will the cartel supply? How much profit will the cartel earn? Suppose now that the cane] breaks up and the oligopolistic firms compete as vigorously as possible by cutting the price and increasing sales. What will be the industry quantity and price? What will be the collective profits of all firms in the industry? Compare the equilibrium price, quantity, and profit for the cartel and cutthroat competition outcomes.arrow_forwardContinuing with the scenario in question 1, in the long run, the positive economic profits that the monopolistic competitor earns will attract a response either from existing firms in the industry or film outside. As those films capture the original films profit, what will happen to the original films profit-maximizing price and output levels?arrow_forward
- Aside from advertising, how can monopolistically competitive films increase demand for their products?arrow_forwardIf the firms in a monopolistically competitive market are earning economic profits or losses in the short run, would you expect them to continue doing so in the long run? Why?arrow_forwardWhen OPEC raised the price of oil dramatically in the mid-1970s, experts said it was unlikely that the cartel could stay together over the long term-that the incentives for individual members. to cheat would become too strong. More than fort),r years later, OPEC still exists. Why do you think OPEC has been able to beat the odds and continue to collude? Hint: You may wish to consider non-economic reasons.arrow_forward
- Is it true that the four-firm concentration ratio puts more emphasis on one or two very large films, while the Herfindahl-Hirshmau Index puts more emphasis on all the films in the entire market? Explain briefly.arrow_forwardWhat is predatory pricing? How might it reduce competition, and why might it be difficult to tell when it should be illegal?arrow_forwardSuppose that, due to a successful advertising campaign, a monopolistic competitor experiences an increase in demand for its product. How will that affect the price it charges and the quantity it supplies?arrow_forward
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