Price Wars and Market Share Competition

The assignment delves into the competitive landscape of oligopolies, focusing on price discrimination tactics employed by firms. It compares the pricing strategies of Chinese, Japanese, and Spanish companies, exploring instances where price wars are waged to secure a dominant market share. The analysis draws upon scholarly articles discussing various forms of price discrimination, including refund contracts, purchase history-based pricing, and the impact of minimum wages on employment dynamics.

Running head: PRINCIPLES OF ECONOMICS
Principles of economics
Name of the university
Name of the Student
Author Note

1PRINCIPLES OF ECONOMICS
Answer 1:
a)
i) Some real life examples of monopolistic competitive market are restaurants,
hairdressers, designing clothes, different petrol stations and different television programmes.
They operate under this market structure because there are large numbers of similar
organisations and every one operates independently (Parenti, Ushchev & Thisse, 2017).
Though they are selling same types of products, all products are not exactly same. They are
closely substituted with each other. Hence, product differentiation can be seen here.
Moreover, each firm can easily enter or exit from this market.
Under monopolistic competitive market, profit maximising condition of each firm
under short-run can be described. Firstly, marginal cost (MC) and marginal revenue (MR) a
firm will be equal to each other, that is, MR=MC. Secondly, product differentiation will help
each organiser to increase their profit level in the short-run (Nikaido, 2015). Moreover, the
demand curve or average revenue (AR) curve and marginal revenue (MR) curve will be
elastic.

O Output
AR= Demand curve
MR
MC AC
ATC
Price, MR, AR, ATC, AVC, MC
A
B
C
D
2PRINCIPLES OF ECONOMICS
Fig 1: Short-run profit maximising condition: Monopolistic Competitive Market
Source: (created by author)
In the above figure, average revenue curve or demand curve and marginal revenue
curve are drawn by a negatively sloped line. In the vertical axis, marginal cost (MC), average
total cost (ATC) and average variable cost (AVC) of short-run monopolistic competitive
market are drawn. Moreover, average revenue (AR), marginal revenue (MR) and price are
also measured in this axis (Nikaido, 2015). In the horizontal axis, total output is measured.
ABCD area indicates short-run profit of a monopolistic competitive firm.
ii) Some examples oligopoly market in Australia is motor vehicle industry (Holden and
Ford), supermarket industry (Woolworths and Coles) and banking industry (National
Australian Bank, Commonwealth Bank, Australia and New Zealand Banking Group) and so
on.

3PRINCIPLES OF ECONOMICS
D = ARMR
MC
Price, MC, AR, MR
O OutputQo
Po
Under dominant firm price leadership concept, a dominant firm set prices for its
products. Other follower firms only follow this same price level (Ibrahim, Saaban & Zaibidi,
2017). Dominant firm enjoys maximum shares of the market. Leader firms set its price when
marginal costs and marginal revenues equate with each other, that is, MC=MR. Here, the
demand curve of both leader and follower firms are negatively sloped.
Fig2: Dominant firm price-leadership model
Source: (created by author)
In this above figure, average revenue, marginal revenue and marginal cost curve of a
leader firm is drawn (Cabral, 2017). The leader firm set its equilibrium price at Po. Hence, this
price is the equilibrium price level, which other follower firms will follow.
b)

4PRINCIPLES OF ECONOMICS
Under monopolistic market, a pricing strategy can be applied by each producer. This
pricing strategy is known as price discrimination (Gavious & Segev, 2017). By applying this
process, a producer or organiser can charge different prices for a same product under
different market situation.
i) Under an airlines industry, a company can charge different prices from different
customers for the same airline. When a passenger will buy a ticket long time ago before the
scheduled date, then he or she will pay fewer prices for this ticket. However, if the passenger
will buy a ticket two or three days before the scheduled flight, then he or she will pay higher
price for the same ticket (Borenstein & Rose,2014). Hence, the chief factor of price
discrimination is time. Moreover, age is also an important factor to discriminate price. For
senior citizens, airlines can offer lower prices. On the other hand, an airline company can
offer some discounts on ticket prices to its customers. This discount will be charged for those
customers, who frequently buy tickets from this airline (Escobari & Jindapon, 2014). For
choosing preferable seats, an airline company can charge higher prices. Sometimes, airlines
industry offer coupons to its selected customers.
ii) In a cinema industry, two types of price discrimination strategy can be seen. These are
the puzzle related to movie and the puzzle related to show-time. Under this industry, different
cinema halls of Australia charge different ticket prices for a particular cinema (Foutz, 2017).
This ticket prices may vary from age to age. For adult citizens, cinema halls reduce ticket
prices by 40 %, for students 25% and for children 20%. Moreover, almost every cinema halls
offer tickets with discount prices for every Tuesday. On the other hand, ticket prices may
vary with show times. For a particular cinema, a cinema hall company can charge different
prices for different show-time (Beirne, 2015). During peak time, halls charge higher prices
for a particular movie. In this context, salary of a film actor can also be discussed. For
different movies, actors can charge different salaries.

5PRINCIPLES OF ECONOMICS
Answer 2:
a)
i) The firm will maximise its profit when its marginal cost (MC) equals with its
marginal revenue (MR). From table 1, it can be seen that the firm will produce 5 units of
output to maximise its profit level. In this output level, MC of this firm is 27 and MR is also
27.
ii) Social efficient level of an output occurs when marginal social benefit (MSB) and
marginal social cost (MSC) equates with each other. Here, marginal social benefit equates
with marginal benefits (Keohane & Olmstead,2016). Moreover, marginal benefits equates
with average revenue. That implies MSB= MB = AR. From table 1 it can be seen that a firm
will produce 4 unit of output to achieve socially efficient level of output.
iii) Marginal external cost is the difference between marginal social costs (MSC) and
marginal private costs (MPC). Here MSC at output level 4 is 42. Moreover, the marginal
private cost or MC is 25. Hence, MEC= (42-25) = 17.
iv) To reduce the output level at a socially efficient level, the firm will charge less tax.
Here, the firm’s socially efficient level of output is 4. However, this firm obtains its profit
maximising level of output at 5. However, marginal cost and marginal social cost are lower at
output level 4 compare to output level 5.
v) Tax will be less than marginal externality. This is because higher level of tax will
increase the marginal social cost of a firm. As a result, the firm will produce lower level of
output than before.
b) The reason behind less tax compare to marginal externality is explained. If tax
becomes higher than marginal externality, then marginal social cost will be increased.

6PRINCIPLES OF ECONOMICS
i) Public Good: Public goods are generally offered by the government of any country.
Three chief points of any public goods are non-excludability, non-rivalry and free-rider
problem. Non-excludability means the government cannot exclude anyone from consuming
any products. Each person will equally consume this product without owning it (Schelling &
Monroe, 2015). Non-rivalry means a person cannot prevent other person from consuming a
particular product. Free-rider problem indicates that there is no possibility to exclude
someone from enjoying any particular goods when other person is consuming this. Some
examples of public goods are government hospital, roads and light houses.
ii) Private Goods: Private goods, on the other hand, follow opposite characteristics of
public good. Hence, any private good follows rivalry and excludability. When a person owns
a private good, other person cannot enjoy this good (Etzioni, 2014). Moreover, they become
excluded from consuming this good. Only one person or a group of person can enjoy a
private good at a time.
Answer 3:
a)
i) Net injection implies differences between overall injections and overall withdrawals
of a country. When Australian investors earn higher dividends, it increases the gross domestic
income of this country. Hence, it will be the net injection for this country.
ii) Net savings decrease the circular flow of income of a country. When Australian
people are saving money for holiday, they are acutely withdrawn their money from the
economy. Hence, net withdrawal will be increased here.

7PRINCIPLES OF ECONOMICS
b)
Nominal GDP for the year 2015 indicates total price of all products that are produced
in this year (Barnett, Chauvet & Leiva-Leon, 2016). In 2015, price of 40 units of computers
were $800. For 80 cans coke, price was $2.
i) Hence, Nominal GDP2015 = $ (40*800+80*2)
 Nominal GDP2015 = $ (32000+160)
 Nominal GDP2015 = $ 32,160
ii) Nominal GDP2016 = $ (50*1000+240*3)
 Nominal GDP2016 = $ (50,000+720)
 Nominal GDP2016 = $ 50,720
iii) Here real GDP in 2016 is measured by the 2015 price level(Laubach & Williams,
2016).
Real GDP2016 = $ (50*800+240*2)
 Real GDP2016 = $ (40,000+480)
 Real GDP2016 = $ 40,480
c)
i) Gross domestic product (GDP) is calculated below (Laubach & Williams, 2016).
GDP = C+I+G+NX
 GDP = $( 4204+ 900+ 270+ 735+ 780- 675)
 GDP = $ 6,214

8PRINCIPLES OF ECONOMICS
ii) Gross National Expenditure (GNE) is calculated below (Kim, Jung, Norrving,
Ovbiagele & Saposnik, 2017).
GNE = C+I+G
 GNE = $ (4204+735+900+270)
 GNE= $ 6109
Answer 4:
a)
i) The level of injection (J) and Withdrawal (W) for Dream-Zealand is calculated below
(McClure & Thomas, 2017).
Injections (J) = investment (I) + government expenditure (G) + export expenditure (X)
 J= $ ( 900+ 735+ 270+ 780)
 J= $ 2,685
Withdrawals (W) = net saving (S) + net taxes (T) + import expenditure (M)
 W = $ (350+600+675)
 W = $ 1,625
ii) The GDP level of Dream-Zealand will be increased as the level of injection is greater
than level of withdrawal (Bocken, de Pauw, Bakker & van der Grinten, 2016). More money
will be included in the circular flow of income. Hence, the country will produce more and as
a result, GDP will be increased further. It will be good for this country’s economy.

9PRINCIPLES OF ECONOMICS
Aggregate Expenditure
National IncomeO
Deflationary Gap
NfNE
Total Expenditure
Aggregate Demand
b) Deflationary-gap= Deflationary gap occur when an economy reaches to its
equilibrium level before attaining full employment (Kinoshita, 2016). Here, aggregate
demand can be increased further to attain full employment level.
Fig3: Deflationary gap
Source: (created by author)
In the above figure, equilibrium level of output occurs at point NE. However, full level
of employment can be reached at point Nf (Burdekin & Hu, 2017). Hence, the gap between
aggregate expenditure and aggregate demand is called deflationary gap.
Inflationary-gap= the concept of inflationary gap is given by Keynes. At full
employment level, aggregate demand of a country may exceed the aggregate level of output.
This situation is called inflationary gap. In this situation, the country cannot produce more
output as full employment level is reached (Levrero, 2015). On the other hand, people

10PRINCIPLES OF ECONOMICS
Increased Aggregate Demand
Aggregate Demand
Total expenditure
Full level of employment
Inflationary gap
Aggregate Expenditure
O
demand more output. Hence, excess demand will be occur in the economy. As a result,
product prices will be increased. This will further create inflation.
Fig 4: Inflationary Gap
Source: (created by author)
In the above figure, an aggregate demand curve and increased aggregate demand
curve are drawn. Moreover, a 45 degree line is also drawn from the origin. This line
represents the total expenditure of this country (Goga, Papadimitriou, Matthaiou &
Chrysanthidou, 2015). The country will reach to its equilibrium level of output when total
expenditure and total output equate with each other. However, before reaching that point, full
employment occur. Hence a gap between total demand and total expenditure is created. This
gap is indicated as inflationary gap.
c)
National output

11PRINCIPLES OF ECONOMICS
In an economy, full employment occurs when all available workers are fully
employed. Every skilled and unskilled worker, who is willing to work, can get job. In other
words, no involuntary unemployment can be seen in this situation. Those workers can work
with the existing wage level (Beveridge, 2014). The economy can fully and efficiently utilise
its entire labour force. Every economy tries to achieve this full employment level. However,
full employment cannot be seen in real world. It is only a theoretical concept.
Each worker wants to do a job for a minimum wage level. By this minimum wage
level, the worker can spend his or her life normally (Meer & West, 2015). On the other hand,
if the worker is offered some amount of wage, which is below this minimum level, then he or
she will not work. Hence, by offering this minimum wage level, a firm can hire maximum
amount of workers. Under full employment situation, each worker is getting this minimum
wage level.

12PRINCIPLES OF ECONOMICS
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Beirne, R. (2015). Piracy, geoblocking, and Australian access to niche independent
cinema. Popular Communication, 13(1), 18-31.
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13PRINCIPLES OF ECONOMICS
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