Economics decision making
Economics for Managerial Decision Making: Market Structures JOSE E ORTIZ ANDINO ECO/561PR – ECONOMICS 12/03/2013 ADELAIDA TORRES-DILAN Introduction This review paper shines a light on how vital the use of economic tools is in making managerial decisions as reflected in the simulation. Decision making process of management is described in different market structures. Just as it pertains to any for-profit business organization, the goal is to cut and maximize profits in each type of market structure.
Based on the information provided in the simulation, Quasar Computers were involved in an extensive research in developing a pioneer product “the Optical Notebook. ” In 2003, the company launched the first all-optical notebook computer and branded it the “Neutron”. This product is described as an energy saving optical technology with its rechargeable batteries capable of lasting up to three days; hence, transcending it into a leading technological product in its unique class.
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With the assistance of senior executives in the company, the decisions on operational and business strategies relative to a variety of market conditions are taken and discussed. Monopoly Quasar emerged as the only player in the market for its unique optical notebook computer; therefore, establishing a monopoly market structure. Within this monopolist market structure, maximizing profit tends to occur at the point where marginal cost equals marginal revenue based on the result shown by toggling the demand curve.
In the initial scenario, it was presented that Quasar had the patent rights on all-optical technology for three years from the launch year leaving the company faced with the objective of maximizing profit in this monopolistic situation. In order to accomplish this, the price per unit is set at $2,550. 00, as this enables Quasar to control the demand for the product while earning a maximum total profit of $1. 29 billion. If for any reason the price is increased at this point, it will result in a decline in the profit as well as unit quantity demanded.
The total quantity demanded at this price level was 5. 3 million units. Quasar is able to control the quantity supplied as well as price due to absence of competitors and substitutes. In order to increase the awareness of the product among large corporations, it would be appropriate to spend $600 million in advertising with appropriate pricing policy. This decision optimizes profit for Quasar by increasing demand and sales of the product. Setting a price tag of $2,450 for the computers produces a total profit of $2. 4 billion in the year 2004. This led to an increase in quantity demanded from 5. 3 million to 7. 7 million. However, in 2005 the decision to upgrade the production process was taken in order to maximize profit. This resulted in increased sales revenue, while reducing the total cost for the business (Tata Interactive Systems, n. d. ). The price per unit is then reduced from $2,450 to $2,200, yielding a profit of $2. 21 billion as a result of the optimization of the production process.
With the implementation of these decisions, the company maximized the bottom line for three years due to its patent rights. Oligopoly At the end of Quasar’s patent rights to its optical notebook computer, Orion technologies ventured into the same market – leading to a reduced market share for Quasar by 2006 as it managed only a 50% market share. The splitting of the market share introduced an oligopoly market structure for the product because each firm acts like a monopolist; however, whatever decision is made by one company affects the other.
As Jain (2002) indicated, a key characteristics of an oligopoly is that competitors are mutually interdependent – meaning that a competitive move by one company will almost certainly affect the fortunes of other companies in the industry and they will generally respond to the move sooner or later. In this scenario, the revenue, profit, and market share depends on the price strategy of each company as well as their competitors.
For Quasar to optimize the profits and market share, the price was set to $1,950 with a market share of 44%, which led to an increased profit for both companies. However, Quasar earned a total profit amount of $216 million with a stabilized market. Monopolistic Competition By the year 2010, an increase in the number of competitors with less interdependency in the pricing policy reduced Quasar’s market share. Product differentiation led to the creation of a competitive monopolistic market structure for the company; hence, leaving the company faced with a brand development decision.
A brand development budget of $200 million resulted to an increase in the production capacity and provided a combined profit of $1,305 million (Tata Interactive Systems, n. d). This also reduced the cost due to ‘economies of scale’. The objective of the new brand is to withstand competition from other similar products and increase Quasar’s market share by creating a non-price competition in the market. Perfect Competition As Grant (2010) explained, perfect competition “exists where there are many firms supplying an identical product with no restrictions on entry or exit” (p. 8). By 2013, the market for Quasar’s “Neutron” had matured and profit was stabilized. In this scenario, for Quasar to maximize profit, the company should focus on the cost reduction activities as the prices are set by the market forces in this market structure. To achieve the cost savings objective, two successive investments of $40 million will be effective as it will reduce the inventory level, increase the production efficiency as well as reduce the rejection rates that could cause an increase in profits.
The increase in the difference of production cost and market price when compared to the competitors would produce normal profits for the company (Tata Interactive Systems, n. d. ). Conclusion This analysis highlights important points that must be considered in managerial decision making as it pertains to the role of a market structure or competitive position while trying to utilize profit optimizing tools like pricing, advertising, and other investment proposals.
The different market structures includes different types of demand and supply characteristics that help determine the appropriate pricing strategy; therefore, it is important for the management of any company to consider all activities relating to competitors and changes in customer preferences. As Porter (2010) stated, “the bargaining power of suppliers and customers is an important element of the five force model that is vital in making the pricing decision. When customer sensitivity affects the pricing decision of a company, the bargaining power of customers tends to be high. In this scenario, the company would concentrate on buyers more than concentrating on companies. In the case of high bargaining power of suppliers, a company can charge the high prices for its unique resources. The threat of substitutes, threats of rivalry or new competitors, and intensity of competitive rivalry also affect the managerial decision in different market structures.
References Grant, R. M. (2010). Contemporary strategy analysis (7th Ed. ). Malden, MA: Blackwell. Chapters 3-5. Jain, V. K. (2002). Note on industry structure. Retrieved from http://info. umuc. edu/mba/public/AMBA607/IndustryStructure. html. Porter, M. E. (2010), Competitive Strategy: Techniques for Analyzing Industries and Competitors Tata Interactive Systems. (n. d. ). Economics for Managerial Decision Making. Retrieved from http://info. umuc. edu/mba/public/TIS/economics/market/economics_market_part1. sw