Managerial Economics - Coursework Example

Econ a) Describe the limit pricing strategy that could be used by a manager of a company that has market power in any particular industry and desires to keep challengers at bay and from entering the market. Recall, if a challenger should be able to enter the market, then the market would then become a duopoly structured market.SolutionThe company that has the market power will practice limiting price strategy by lowering the prices of the product below the monopolistic market price or may either threaten to lower the prices of the product in any case the other company enters the same market.

This will put off the company that is to enter the market as the profit margin will seem to be very low and might even constitute to losses. This leaves the first company to enjoy monopolistic markets.b) Then tell us how a manager of such a company may determine the profitability of such a pricing strategy to keep challenger firms from entry into a specific market.SolutionThe manager of this company will reduce the products’ prices to monopolistic market prices there by enjoying the monopolistic profits.

By decreasing the prices of the products the company that is to enter into the market will be discouraged as the profit margin will be very low and may also leading to losses. c) What happens to the profitability of the firm with market power as borrowing costs become more expensive (that is interest on capital increases)?SolutionThe profitability of the firm with the marketing power will decrease with increase in capital interest as the borrowing costs increases there will be a decrease in supply there by attracting another company to satisfy the demand.

This forces the companies to sell at a lower price than the monopolistic market price. If this continues, the company is bound to go into losses in the long run.2. IHC hospitals are thinking of using a smart phone system to send health record data, laboratory test results data, and charge/payment data to the Mountain Star hospitals system when patients use any combination of medical services between the two hospital organizations. Mountain Star has been thinking of a similar idea of exchange.

Going forward with such inter-hospital data communication means that a given data sharing network has to be developed. The cost savings involved in initiating such a system are the driving force of the decision but there are questions about these savings and the standard upon which the intercommunication is to be operated. The projected cost savings (in $millions) for each standard (Apple relative to Android) are given in the normal form payoff table below for each hospital conglomerate, with IHC cost savings given first in going from left to right.

Mountain StarStandard strategyAppleAndroidIHCApple10, 32, 2Android2, 23, 11a) Does the decision on communication technology depend on which hospital organization chooses the standard first? Explain.Yes because if mountain stars chooses it first, then it would have the dominant strategy.b) Does this decision made by Mountain Star and IHC reflect a network good/technology? Briefly explain.It reflects a good technology. This is because independent of the smart phone mountain star opts for IHC will go for apple phone as it yields the best pay off.

The decision is good as the communication between the two hospitals will be much efficient and effective in terms of cost. c) The mixed strategy probabilities as calculated by a game theory consultant are (9/10, 1/10) for IHC and (1/9, 8/9) for Mountain Star. What do these mixed strategy probabilities tell us about communication network preferences of Mountain Star and IHC? Explain.SolutionThe mixed strategy insinuates that IHC will go for apple phone as it payoffs more and makes it dominant while the Mountain stars will go for android as it will pay off more.

In this mixed strategy both firms can opt for their own choices and still have the best pay off. Therefore, IHC will use apple while on the other side mountain star will use android in their communication. This is what is referred to as a mixed strategy as their no single strategy. d) Identify and explain any pure Nash Equilibriums in this problem.SolutionBased on the table above mountain star should reason that if IHC chooses apple as the smart phone to be used as it is the dominant strategy.

Mountain stars on the other end will earn 3 if they choose apple while earn 2 if they go for android. A dominant strategy is the strategy that pays off much regardless of the choice of the other. 3. What is the difference between a “bundling strategy”, a “block pricing strategy”, and a “tying strategy” in deriving product prices for goods? Explain.SolutionBundling strategy is the market strategy which joins or combines services or products together with an aim of selling them a single unit.

For instance, an individual can sell computers with accessories.Block pricing strategy packs the same product’s units and sell them in form of one package. The customer is therefore forced to buy the package or none. For example, a dozen of cups sold to the customer instead of one. A tying strategy is a strategy that besides the product being sold, an attached mandatory product is also sold. For instance, if one buys toothpaste and a toothbrush is tied and must be paid for. 4. Define or otherwise explain “psychological pricing”, “price-quality perception”, and “loss-leader pricing”.

Psychological pricing is a strategy of using the consumer emotions and behavior to encourage sale of goods and services. For instance, a seller can make a buyer believe that a product is very valuable and hence encourage him to purchase it a higher price. Pride quality perception is where by the price of a product is set according to how the consumers rate the product’s quality. The seller sets the price according to how the buyer perceives the quality of the good to be.Loss leader pricing is a pricing strategy where by the price of some highlighted goods are lowered than their cost with an aim of attracting customers.

This is then compensated for by purchasing more goods that are profitable to the enterprise. 5. In the table below neither user of a network has the incentive to unilaterally switch from network 1 to network 2 even though predicted payoff is more (apparently) by using network 2. Both users would benefit if they could switch to network 2. So, is there Nash equilibrium in the more inefficient network?SolutionThe more inefficient network is when user A opts for network 2 and the user B uses the network 1 and if user A opts for network 1 and the user B uses the network 2.

Nash equilibrium exists in the given situation as both options will lead to the same pay off which is 10. In this case, none of them pays off than the other. They are all equal. How does one initiate and coordinate the possible move to the apparent more efficient network? If there is a strategy to induce switch from network, N1, to network, N2, then describe or provide a table with the new solution induced by the strategy you suggest. Describe or illustrate any Nash solutions. The initiation to the more efficient network is when the user A opts for network 2 and the user B opts to use network 2.

Both the users will benefit Nash equilibrium where the best payoff is 20 and both parties benefit in the same way. None of the users is disadvantaged as both of them benefit from the payoff in the same measure. Network Game (first table)User BUser ANetwork ProviderN1N2N120, 1010, 20N210, 1020, 206. Miriam’s Machines, Inc. produces motors which generate electricity for sale to construction and contracting companies. Miriam’s Machines is a vertically integrated company with the assembly and sales unit being the downstream division and the parts division being the upstream division.

The going marginal revenue per motor is currently $870 with markup. The downstream division marginal cost is running $580 per assembled motor while the marginal cost of parts from the upstream division is running $410. What should be the “Transfer Price” between the upstream division and the downstream division in order to avoid double marginalization? Derive and explain.SolutionsThe transfer price will be 70 dollars, this because the payoff in the marginal costs will be the difference in the costs.

Cited Works. Baye, M. R. Managerial Economics and Business Strategy. New York, NY: McGraw- Hill Irwin (2006)