Emergence of Oligopoly in Economics from HelpWithAssignment.com

Emergence of Oligopoly in Economics

An Oligopoly is a market structure with a small number of firms. A good example of an oligopoly is the petroleum industry in which a few firms have accounted in recent years for much of the industry’s refining capacity. Each of the major oil firms must take into account of the reaction of the others when it formulates its price and output policy is likely to affect theirs.

Oligopolistic industries like others, often pass through a number of stages – introduction, growth, maturity and decline. The industry’s sales grow very rapidly in the introduction phase, less rapidly in the growth phase and even less rapidly during maturity. In the stage of decline, the industry’s sales fall. As an industry goes through these stages the nature of competition often shifts.

During the early stages of Oligopoly when industry sales are growing relatively rapidly, there frequently is a great deal of uncertainty about the industry’s technology. Which product configuration will turn out to be the best? Which process technology will be most efficient? Because of small production volume and the newness of the product, production costs tend to be higher than those that the industry will eventually achieve.

At an early stage of an industry’s evolution in Oligopoly, one of the major strategic questions facing managers is: which markets for the industry’s new product will tend to open up early and which ones will open up relatively late? This question is important both because firms should allocate marketing efforts and R&D resources to relatively receptive markets and because the nature of the early markets can exert a significant influence on the way the industry evolves. To forecast which markets or market segments are likely to be most receptive to a new product, one should consider some factors.

Most of the receptive buyers tend to be those for which the new product is most profitable. For example, if a new robot is much more profitable in the railroad industry than in the agricultural equipment firms. It is more likely to be used first by railroads, not by agricultural equipment firms.

Buyers who face a relatively low cost of product failure are likely to be quicker to adopt a new product than those for which the potential costs are very high. Thus, if the new robot could cause millions of dollars of losses in the auto industry but only minor losses in the steel industry, it is more likely that steel producers will take chance on it than that auto firms will do so.

The buyers who would experience relatively low costs in switching from old products to new one sold by this industry are likely to be more receptive to this industry’s product than buyers who would experience high changeover costs.

Eventually, most industries enter the maturity phase, when industry sales grow much more modestly then before. This is often a critical phase for many members of the industry. Since firms cannot maintain the growth rates to which they are accustomed merely by protecting their market share, there is often a tendency for firms to attack the market shares of their rivals in the same industry.

During the maturity phase, rivalry among firms often centers on cost and service, rather than new or greatly improved products. Because of slower growth, more knowledgeable customers and greater technological maturity, competition tends to focus on cost and service, which may prompt a significant reorientation of firms that have competed on other grounds in the past. Also, as the industry adjusts to slower growth, there generally is a reduction in the additions to productive capacity. Often, firms do not realize that they have entered this maturity phase until after they have installed more capacity than is required. Thus, for a time, the industry suffers overcapacity.

After the maturity phase, many industries enter a stage during which sales decline. One reason for such a decline may be that the product is being supplanted by a new one. Another reason may be shrinkage in the size of the customer group that buys the product, perhaps because of demographic changes. Still another reason may be a change in buyers’ tastes and needs.

Although firms in declining industries are often advised to curtail investment and get lots of cash out of the business as quickly as possible this is not always the best strategy. Some industries, like some people, grow old more gracefully and profitably than others. Some firms have done well by investing heavily in a declining industry, thus making their businesses better “cash cows” later. Others have avoided losses subsequently experienced by their rivals by selling out before it was generally recognized that the industry was in decline.

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This article is in continuation with our previous articles on Economics which include Inflation, Business Cycles, Solow's Growth Model, Phillips Curve

Center of Gravity, Location Strategy in Operations Management from HelpWithAssignment.com

Center of Gravity, Location Strategy in Operations Management

Location Strategy in Operations Management is an important factor to be considered. It is important because it helps in determining the place of manufacture. The place of manufacture needs to have certain qualities of features where manufacturing process takes place hassle-free.

Center of Gravity is one such method or strategy which can determine the effectiveness of a location.

Firms throughout the world are using the concepts and techniques in Operations Management to address the location decision because location greatly affects both fixed and variable costs. Location has a major impact on the overall risk and profit of the company. For instance, depending on the product and type of production or service taking place, transportation costs alone can total as much as 25% of the product’s selling price. That is, one-fourth of a firm’s total revenue may be needed just to cover freight expenses of the raw materials coming in and finished products going out. Other costs that may be influenced by location include taxes, wages, raw material costs and rents.

Companies make location decisions relatively infrequently, usually because demand has out-grown the current plant’s capacity or because of changes in labor productivity, exchange rates, costs or local attitudes. Companies may also relocate their manufacturing or service facilities because of shifts in demographics and customer demand.

Location options include

• Expanding an existing facility instead of moving
• Maintaining current sites while adding another facility elsewhere and
• Closing the existing facility and moving to another location.

The location decision often depends on the type of business. For industrial location decisions, the strategy is usually minimizing costs, although innovation and creativity may also be critical. For retail and professional service organizations, the strategy focuses on maximizing revenue. Warehouse location strategy, however, may be driven by a combination of cost and speed of delivery. The objective of location strategy is to maximize the benefit of location to the firm.

Location and costs: because location is such a significant cost and revenue driver, location often has the power to make or break a company’s business strategy. Key multinationals in every major industry, from automobiles to mobile phones, now have or are planning a presence in each of their major markets. Location decisions to support a low cost strategy require particularly careful considerations.

Once management is committed to a specific location, many costs are firmly in place and difficult to reduce. For instance, if a new factory location is in a region with high energy costs, even a good management with an outstanding energy strategy is starting at a disadvantage. Management is in similar bind with its human resource strategy if labor in the selected location is expensive, ill-trained or has a poor work ethic. Consequently, hard work to determine an optimal facility location is a good investment.

Location and Innovation: When creativity, innovation and research and development investments are critical to the operations strategy, the location criteria may change from a focus on costs. When innovation is the focus, four attributes seem to affect overall competitiveness as well as innovation.

• The presence of high-quality and specialized inputs such as scientific and technical talent
• As environment that encourages investment and intense local rivalry.
• Pressure and insight gained from a sophisticated local market.
• Local presence of related and supporting industries.

Center of Gravity Method:

The Center of Gravity Method is a mathematical technique used for finding the location of a distribution centre that will minimize distribution costs. The method takes into account the location of markets, the volume of goods shipped to those markets and shipping costs in finding the best location for a distribution center.

The first step in the centre of gravity method is to place the locations on a coordinate system. The origin of the coordinate system and the scale used are arbitrary, just as long as the relative distances are correctly represented. This can be done easily by placing a grid over an ordinary map. The centre of Gravity is determined using equations

x-coordinate of the centre of gravity = ∑_i d_ix Q_i/∑_I Q_i

y-coordinate of the center of gravity = ∑_i d_iy Q_i/∑_I Q_i

where d_ix = x-coordinate of location i

d_iy = y-coordinate of location i

Q_i = Quantity of goods moved to or from location i

Since the number of containers shipped each month affects costs, distance alone should not be the principal criterion. The centre of gravity method assumes that cost is directly proportional to both distance and volume shipped. The ideal location is that which minimizes the weighted distance between the warehouse and its retail outlets, where the distance is weighted by the number of containers shipped.

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This article is in continuation with our previous articles on Operations Management which such as Decision Tree, Demand Chase, Deterministic Inventory Model, Discrete Manufacturing

Responsive Supply Chain Management in Manufacturing Industry from HelpWithAssignment.com

Responsive Supply Chain Management in Manufacturing Industry from HelpWithAssignment.com

Responsive Supply Chain management in manufacturing industry is one of the aspects of emphasis.

In Supply Chain Management, we can see that supply chain managers are overwhelmed with a range of leading-edge supply chain strategies and new business initiatives. However, not all these initiatives and strategies are appropriate for all businesses. Supply chain managers need to understand the constraints of the supply of their products and the uncertainties with the right supply chain strategies.

In designing supply chain in an e-biz environment, companies have to integrate various aspects of competitive priority, the nature of the product and the complexity of the manufacturing process in order to be successful. When designing a supply chain, some fundamental principals of value chain should be exploited to respond quickly to the dynamic business environment. As such, supply chain design needs to be fine-tuned constantly to match the evolving industry paradigm.

When new product introductions are frequent and product variety is high, the responsive supply chain option is more attractive as it reacts quickly to market demand. When product life cycle is long, demand is relatively stable and demand volume is high, efficient supply chain is more appropriate. Both responsive supply chain and efficient supply chain can be applied to fast, medium and slow clock speed products.

A product clock speed can be fast, medium or slow. A product life cycle and its manufacturing process life cycle is associated wit the product clock speed.

Responsive supply chain in manufacturing industry

Responsive supply chain and fast clock speed product – personal computer

• The PC industry is a fast clock speed industry. Here the industry faces short product life cycles. The product is generally made in a make-to-order production environment. Facing this business environment, PC producers adopt the responsive supply chain strategy to reduce order cycle, production cycle and procurement cycle. Let us consider Dell Computer as example.
• Dell Computer designs, manufactures and markets a wide range of systems that include desktops, notebooks, workstations and network servers. Dell also markets software and peripherals as well as service and support programs.
• It is centered on two key elements: a direct business model and intense customer focus, Dell strives to eliminate retailers and other resellers so as to reduce product delivery cycle time and cost. Dell sells computer systems and related services directly to customers in the global market through internet and call centers.
• To reduce order cycle, Dell uses the internet and call centers to promote its direct order model. The traditional PC supply chain has distribution network as an additional link in the supply chain. Customers can order PCs directly from Dell and configure computers to meet their needs.
• The orders are directly routed to the manufacturing floor. From there the PCs are built, tested and sent to the customers all within 5-7 business days after the customers placed the orders. Dell’s direct model allows for better understanding of customer needs.
• To reduce its procurement cycle time, Dell shifts from a traditionally fashioned assembly line to cellular manufacturing techniques and established strategic alliances with its key suppliers.
• It forges partnerships with reputable suppliers rather than integrating backward into parts and components manufacturing. Since new parts and components are introduced so fast that inventory is obsolete in a matter of months or even quicker. Dell only holds its inventory for not more than 10 days.
• Meanwhile Dell supplies its inventory data and production needs to its suppliers at least once a day. Collaboration with suppliers is close enough to allow Dell to operate with only a few hours of inventory for some parts and a few days of inventory for other components. Dell’s direct model capitalizes the benefits of e-commerce.

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This article is in continuation with our previous article on Supply Chain Management

Price Discrimination in Economics from HelpWithAssignment.com

In Economics, Price Discrimination is an important concept. Price Discrimination occurs when the same product is sold at more than one price.

For example, an airline may sell tickets on a particular flight at a higher price to business travelers than to college students. Even if the products are not precisely the same, price discrimination is said to occur if very similar products are sold at prices that are in different ratios to marginal costs.

Thus, if a firm sells boxes of candy with a label saying, “Premium Quality” in rich neighborhoods for $12 and sells the same boxes of candy without the label in poor neighborhoods for $5, this is discrimination. The mere fact that differences in prices exist among similar products is not evidence of discrimination; only if these differences do not reflect cost differences is there evidence of this kind.

For a firm to be able and willing to engage in price discrimination, the buyers of the firm’s product must fall into classes with considerable differences among classes in the price elasticity of demand for the product and it must be possible to identify and segregate the product easily from one class to another, since otherwise persons could make money by buying the product from the low-price classes and selling it to the high-price classes, thus making it difficult to maintain the price differentials among classes.

The differences among classes in income level, tastes or the availability of substitutes. Thus, the price elasticity of demand for the boxes of candy may be lower for the rich than for the poor.

If a firm practices discrimination of this sort, it must decide two questions: how much output should it allocate to each class of buyer, and what price should it charge each class of buyer?

Suppose that there are only two classes of buyers. Also, for the moment, assume that the firm has already decided on its total output and consequently that the only real question is how it should be allocated between the two classes. The firm will maximize its profits by allocating between two classes in such a way that marginal revenue in one class is equal to marginal revenue in the other class.

For example, if marginal revenue in the first class is $25 and marginal revenue in the second class is $10, the allocation is not optimal, since profits can be increased by allocating 1 less unit of output to the second class and 1 more unit of output to the first class. Only if the two marginal revenues are equal is the allocation optimal.

(1+ 1/n₂) ÷(1+ 1/n₁)

If the marginal revenues in the two classes are equal, the ratio of the price in the first class to the price in the second class will equal n₁ is the price elasticity of demand in the first class and n₂ is the price elasticity of demand in the second class. Thus, it will not pay to discriminate if the two price elasticities are equal. Moreover, if discrimination does pay, the price will be higher in the class in which demand is less elastic.

Turning to the most realistic case in which the firm must also decide on its total output, it is obvious that the firm must look at its costs as well as demand in two classes. Specifically, the firm will choose the output where the marginal cost of its entire output is equal to the common value of the marginal revenue in the two classes.

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This article is in continuation with our previous articles on Economics which include Capital Markets, Market Structure, Factor Markets, Economic Surplus

Supply Chain Management at HelpWithAssignment.com

Supply Chain Management:

A supply chain is defined as a set of three or more companies directly linked by one or more of the upstream and downstream flow of products, services, finances and information from the source to a customer.

Management is on the verge of a major breakthrough in understanding how industrial company success depends on the interactions between the flows of information, materials, money, manpower and capital equipment. The way these five flow systems interlock to amplify one another and to cause change and fluctuation will form the basis for anticipating the effects of decisions, policies, organizational forms and investment choices.

The reasons for the popularity of Supply Chain Management are because:

• Corporations have turned increasingly, to global sources for their supplies. This globalization of supply management has forced companies to look for more effective ways to coordinate the flow of materials into and out of the company.
• Companies and distribution channels compete more today on the basis of time and quality. Making a defect-free product and selling it to customer faster and more reliably than the competition is no longer seen as a competitive advantage but simply as a requirement in the market. Customers demand products consistently delivered faster, exactly on time and with no damage. Each of these necessitates closer coordination with suppliers and distributors.
• This global orientation and increased performance-based competition combined with rapidly changing technology and economic conditions all contribute to market place uncertainty. This uncertainty requires greater flexibility on the part of individual companies and distribution channels, which in turn demands more flexibility in channel relationships.

But, there are not many corporations that actually take up the concept of Supply Chain Management very seriously. In a survey conducted by Accenture, Stanford University and global business school INSEAD tried to figure out why aren’t even big corporations are not inclined towards Supply Chain Management. It was found that more than half of the companies that tried to implement encountered unexpected problems.

• Some companies complained that the technology implementation did not work out properly.
• Some companies complained that the cost of the project was very high and it never came close to meeting service targets.
• Some companies complained that the supply chain projects were inconsistent with the company’s current business strategy.
• Some companies complained that it was too difficult in managing things internally and externally.

Now, a question arises, is implementing supply chain management so difficult? Yes, not all companies have succeeded in implementing supply chain management. Some of the companies which have successfully implemented it have for many years aggressively attacked their inventory problems, committed resources to improving its customer service levels and partnered with their key suppliers to take control of its supply chain.

Top performing supply chains do things a little differently than everybody else. Most supply chain companies:

• They aim for balance. These companies may not be the very best in every category, but they are consistently good enough in all areas that they add up to be the best in class.
• They increase demand visibility. Having a high level of forecast accuracy is the key to reach perfect order fulfillment, which is the holy grail of customer service.
• They isolate high costs. The best companies know where they hold their costs and why, so that’s where they focus their best practices and technology investments.

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Industrial Policy for Overall Economic Development in Economics from HelpWithAssignment.com

Industrial Policy:

Beyond support for basic science and technology, an aggressive approach has been proposed for encouraging technological development is industrial policy. Generally, industrial policy is a growth strategy in which the government – using taxes, subsidies, or regulation – attempts to influence the nation’s pattern of industrial development. More specifically, some advocates of industrial policy argue that the government should subsidize and promote “high-tech” industries, so as to try to achieve or maintain national leadership in technologically dynamic areas.

The idea that the government should try to determine the nation’s mix of industries is controversial. Economic theory and practice suggest that under normal circumstances the free market can allocate resources well without government assistance. Thus advocates of industrial policy must explain why the free market fails in the case of high technology. Two possible sources of market failure have been suggested and borrowing constraints and spillovers.

Borrowing Constraints: Borrowing constraints are limits imposed by lenders on the amounts that individuals or small firms can borrow. Because of borrowing constraints, private companies, especially start up firms, may have difficulty obtaining enough financing for some projects. Development of a new supercomputer, for example, is likely to require heavy investment in research and development and involves a long period during which expenses are high and no revenues are coming in.

Spillovers: Spillovers occur when one company’s innovation stimulates a flood of innovations and technical improvements by other companies and industries. The innovative company thus may enjoy only some of the total benefits of its breakthrough while bearing the full development cost. Without a government subsidy (argue advocates of industrial policy), such companies may not have a sufficiently strong incentive to innovate.

A third argument for industrial policy has less to do with market failure and more to do with nationalism. In some industries (such as aerospace) the efficient scale of operation is so large that the world market has room for only a few firms. For the world, the most desirable outcome is that those few firms be the most efficient, lowest – cost producers. However, in terms of a single country, like the United States, at least some of the firms in the market should be US firms so that profits from the industry will accrue to the United States. Moreover, having US firms in the market may enhance US prestige and yield military advantages. These perceived benefits might lead the US to subsidize its firms in that industry, helping them to compete with the firms of other nations in the race to capture the world market.

These theoretical arguments for government intervention all assume that the government is skilled at picking winning technologies and that its decisions about which industries to subsidize would be free from purely political considerations. However, both assumptions are questionable. A danger of industrial policy is that the favored industries would be those with the most economic promise.

The available evidence on the arguments for industrial policy has been surveyed by Gene Grossmann. Grossmann concluded that, in general, industrial policy is not desirable because, in choosing industries to target governments have frequently “backed the wrong horse”, the costly attempt of European governments to develop Supersonic Transport (SST) and other new types of commercial airplanes is a case in point. Grossman also points out that alternative policies – such as tax break for all research and development spending – promote technology without requiring the government to target specific industries.

However, Grossman also concedes that government intervention may be desirable in some cases, notably in the early development stages of technologically innovative products, such as computers and CAT scanners. Empirically, the potential for beneficial spillovers in these cases appears so large that the government may choose to support ultimately will not prove worthwhile.

This article is in continuation with our previous article on Government Policies to Raise Living Standards

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Government Policies to Raise Long run Living Standards in Economics from HelpWtihAssignment.com

Increased growth and a higher standard of living in the long run often are cited by political leaders as primary policy goals. We will take a closer look at government policies that may be useful in raising a country’s long run standard of living whether changing the form of government – democratic or nondemocratic – affects the long run growth rate of an economy.

Policies affecting the Saving Rate

The Solow Model suggests that the rate of national savings is a principal determinant of long run living standards. However, this conclusion doesn’t necessarily mean that the policymakers should try to force the saving rate upward, because more saving means less consumption in the short run. Indeed, if the “invisible hand” of free markets is working well, the saving rate freely chosen by individuals should be the one that optimally balances the benefit of saving more, against the cost of saving more.

Despite the argument that saving decisions are best left to private individuals and the free market, some people claim that Americans save too little and that US policy should at raising the saving rate. One possible justification for this claim is that existing tax laws discriminate against saving by taxing away part of the returns to saving; a “pro-saving” policy thus is necessary to offset this bias. Another view is that Americans are just too shortsighted in their saving decisions and must be encouraged to save more.

Now, here comes the question of ‘what policies can be used to increase savings?’ If saving were highly responsive to the real interest rate, tax breaks that increase the real return that savers receive would be effective. For example, some economists advocate taxing households on how much they consume rather than on how much they earn, thereby exempting from taxation the income that is saved. Although saving appears to increase when the expected real return available to savers rises, most studies find this responsive too small.

An alternative and perhaps more direct way to increase, the national saving rate is by increasing the amount that the government saves; in other words, the government should try to reduce its deficit or increase its surplus. Many economists also argue that raising taxes to reduce the deficit or increase the surplus will also increase national saving by leading people to consume less. However, believers in Ricardian equivalence contend that the tax increases without changes in current or planned government purchases won’t affect consumption or national saving.

Policies to Raise the Rate of Productivity Growth

Of the factors affecting long-run living standards, the rate of productivity growth may well be the most important in that – according to the Solow Model – only ongoing productivity growth can lead to continuing improvement in output and consumption every year. Government policy can attempt to increase productivity in several ways.

Improving infrastructure: Some research findings suggest a significant link between productivity and the quality of a nation’s infrastructure – its highways, bridges, utilities, dams, airports and other publicly owned capital. The construction of the interstate highway system in the United States, for example, significantly reduced the cost of transporting goods and stimulated tourism and other industries. In the past 25 years the rate of US government investment in infrastructure has fallen, leading to a decline in the quality and quantity of public capital. Reversing this trend, some economists argue that might help achieve higher productivity.

Building Human Capital: Recent research findings point to a strong connection between productivity growth and human capital. The government affects human capital development through educational policies, worker training or relocation programs, health programs, and in other ways. Specific programs should be examined carefully to see whether benefits exceed costs, but a case may be made for greater commitment to human capital formation as a way to boost productivity growth.

One crucial form of human capital, which we haven’t yet mentioned, is entrepreneurial skill. People with the ability to build a successful new business or to bring a new product to market play a key role in the economic growth.

Encouraging Research and Development: The government also may be able to stimulate productivity growth by affecting rates of scientific and technical progress. The US government directly supports much basic scientific research. Most economists agree with this type of policy because the benefits of scientific progress, like those of human capital development, spread throughout the economy, Basic scientific research may thus be a good investment from society’s point of view, even if no individual firm finds such research profitable.

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This article is in continuation with our previous articles on Economics which include Balance of Payments, Economic Development and Growth, Inflation, Business Cycles