Macro Analysis of Cream Industry

Table of Contents

Introduction to Oligopoly Game 3

Short Run Cost Diagram for Moisturising Cream Industry 4

Short Run Cost Analysis for Cement Industry in Embaria 6

Long Run Function in the Moisturising Industries 7

Long Run Function in the Cement Industry in Embaria 8

Elasticity 9

Price Elasticity in the Embarian Moisturising Cream Market 9

Marketing Elasticity of Demand for Moisturising Cream 10

Price and Marketing Elasticity of Demand of Cement Industry in Embaria 11

Macroeconomics 11

Conclusion 11

References 11

Introduction to Oligopoly Game

This paper attempts to analyse the micro and macro economic conditions in Embaria and Pieland on the basis of a series of oligopoly games that used the concepts of Game theory in it. Oligopoly is a structure of market where a small number of large firms compete with each other with different strategies. These firms have high market power and hence have to plan every aspect of their business based on the moves of other competitors. The smallest form of this is a duopoly where two players compete in a market. This can be represented on a "Prisoner's Dilemma" Matrix. A simple business form of this matrix can be shown as Fig.1, where the parties don't co-operate with each other and face possible consequences based on the actions of others and vice -versa.

Fig.1- A simple model of Prisoner's Dilemma Matrix

Soft Cosmetics LTD is a moisturising firm operating in Embaria, a developed economy. There were five competitors in this country in its category. The performance of each firm is evaluated and analysed based on their actions over a period of 14 oligopoly games. To enhance the scope of this analysis the overall results are compared with the moisturising industry in the developing industry of Pieland. A comparative study of the same is done with the Embarian Cement industry as well.

In the Embarian moisturising industry, each competitor made a fair attempt to plan strategies based on the actions of the competitors. On a whole, none of the firms were able to make reasonable profit at the end of the 14 periods. A few of them (including Soft Cosmetics LTD) suffered heavy loss that will force them to exit of the market in the long run. Fig.2 below shows the total market shares each firm had at the end of 14 periods.

Fig.2

Actions in the previous periods have a direct impact on the final market share. However, it is to be noted that at the end of the last period, F1 and F3 had a huge overstock. Towards P10 and P11, all the firms came to a general agreement to increase the price. This was intended to make advantage of the economic boom.

The consumer behaviour is common and almost the same in all the markets. What determines the overall sales of a market is not just the price of the product. But, the perception of the consumer on a particular brand, the strength of a firm's advertising, and brand loyalty etc. are also factors. However, in general, consumers tend to shift to a different supplier based on the price at which it is sold. The price the consumer saves as the result of choosing to buy a substitute product at a lesser price from a set of choices is called Opportunity Cost. In the Embarian moisturising cream market, P8 and P9 are examples for this. F4 and F5 had already lost their market shares and had been struggling to find its stand in the market. However, in P9 since F3 increased the price of their product by $6, they lost a considerable deal of their market shares to F1 and F2.

Short Run Cost Diagram for Moisturising Cream Industry

A production process is considered short- run, if there is at least one fixed input in the process.

Fig.3

The above diagram shows the trend of average fixed cost (AFC), average variable cost (AVC), average total cost (ATC) and marginal cost (MC) of the moisturising cream in Embarian market. The economy here is relatively developed. Since the variable cost in this industry doesn't vary with increase in capacity utilisation in the industry, MC and AVC remain constant and same at a given point of time. Consider the moisturising cream for women's industry in Embaria, for a given period, say P4.

Table.1

The ATC is the sum of both AFC and AVC. The lesser the quantity produced, the higher the AFC will be. As seen in Table.1 and Fig.3, at maximum utilisation of capacity, the lesser the AFC will be. F1 and F3 made the maximum use of the fixed labour. This is the point at which both the AFC curve and MC curve meet. The AFC for F5 $3.33 where as for F1 and F3 who made maximum utility of capacity was $2.22. If there was a variation in the variable cost along with an increasing capacity utilisation the marginal cost curve would have been more like a U- shaped curve. However this is not the case here. Because the average cost of production is less for F1 and F3, they not only had the advantage of producing more but also to sell the products at a lesser price.

As for F5, F4 and F2 who have had a higher average cost, to gain profit, had to sell their products at a higher price. In this way, the firms who produced lesser in this period faced difficulty to sell more.

In short run, this has been the general trend with the moisturising industry in Pieland. Though this is a developing nation, since the time period for which the analysis is done is a short term, the response of each firm in a short run cost function perspective has been the same.

Short Run Cost Analysis for Cement Industry in Embaria

Fig.4

Fig.4 shows the short run cost analysis of the cement industry in Embaria. Here again, since the marginal cost is constant the AVC is also constant and is equal to that of the MC. When any firm produces above 2000 tonnes per period, the AFC becomes quite negligible and therefore, that firm again have the competitive advantage of selling more products at