Student ID:

Student Name: Ahmed Abdirahman Dahir

Course Code: BMME5103

Course Name: Managerial Economics

Program: MBA-OUM

Semester: One

Assignment: Analyzing economic concepts

Facilitator: Dr. Mukhtar

Date 18/March2023
TABLE OF CONTENTS
Task 1..............................................................................................................................................1
QUESTION 1 (CLO 1)..................................................................................................................2
a. Scarcity and opportunity cost are two economic concepts commonly used in making
management decisions.................................................................................................................2
 MacDoland uses the concepts of scarcity and opportunity..................................................2
b. important for managers to understand the mechanics of supply and demand both in the
short-run and in the long-run with real examples of companies..................................................3
QUESTION 2 (CLO 1)..................................................................................................................4
a. Demand and supply functions for ice-cold beverages..........................................................4
b. Would such a price increase help or hurt tobacco industry profits.......................................6
QUESTION 3 (CLO 2)..................................................................................................................7
i. Deriving the marginal product and average product functions............................................7
The units of labour that should be employed in order to maximize the firm's total profit..........7
Task 2............................................................................................................................................10
QUESTION 1 (CLO3).................................................................................................................10
a. The reasons for the existence of monopoly in a particular industry with an example for
each............................................................................................................................................10
b. the examples of different price discrimination that exist in the Somalia market with my
opinion, of price discrimination which is acceptable in the market and its justifications.........11
Different Types of Price Discrimination................................................................................12
 with my opinion, of price discrimination which is acceptable in the market and its
justifications...............................................................................................................................13
QUESTION 2 (CLO3).................................................................................................................14
simple and Multiple regression analysis model……………………………………………….14

QUESTION 3 (CLOSE3)............................................................................................................18
a. Porter’s five forces strategic model....................................................................................18
b. Based on your understanding of competition and competitiveness, discuss the move by
APPLE as written in the case above..........................................................................................20
QUESTION 5 (CLO3).................................................................................................................21
a. The ability of oligopolistic firms to engage successfully in collusion depends on a number
of factors. Provide and discuss these factors..............................................................................21

i
Task 1

QUESTION 1 (CLO 1)
a. Scarcity and opportunity cost are two economic concepts commonly used in making
management decisions.
Managerial economics is a stream of management studies that focus on decision-making and
problem-solving. Both microeconomics and macroeconomics theories are applied. It focuses on
the efficient utilization of scarce resources(Jayasinghe, 2018).

 Scarcity

In economics, we always refer to scarcity of resources available to us for the satisfaction of our
wants. Human wants are endless whereas resources are scarce. This is true of all kinds of
economies rich and poor, developed and underdeveloped. Scarcity is a situation in which
resources available for the satisfaction of wants are less than the resources required for the
satisfaction of human wants. In other words, scarcity means limited availability of resources in
relation to demand(Raiklin & Uyar, 1996).

 opportunity cost

Opportunity cost is the benefit that is foregone to avail the benefit of another opportunity. It is

the cost of choosing one opportunity in terms of the loss on next best.(Hamilton et al., 2019)

Though we have alternative uses, we have to select the best way to use these resources. When we

choose best alternative, the next best alternative which is left out is known as the Opportunity

cost of making a choice. In other words, the benefits we lost and could have achieved from the

next best alternative(Hamilton et al., 2019).

 MacDoland uses the concepts of scarcity and opportunity
When making decisions, MacDonald considers issues like opportunity cost and scarcity. In
dealing with limited resources, MacDonald must decide what products to offer, how many stores
to open, and how much to charge for their products.
The scarce resources that MacDonald has at its disposal to create and market its products
represent scarcity. The business must choose how much food to purchase as well as how much to

1
spend on marketing, employee training, and shop expansion, for instance. When MacDonald
must choose between various possibilities with limited resources, opportunity cost comes into
play. For instance, the business must compare the opportunity cost of investing in marketing
initiatives for current stores with the cost of developing additional stores.
MacDonald has implemented several projects to put these ideas into effect. For instance, in
response to the growing demand for high-end MacDonald, the business developed "reserve"
stores, which offer a niche market rare and exotic MacDonald types. In addition, because other
high-end MacDonald shops are competing with it, the business must weigh the opportunity cost
of increasing its products. In order to improve consumer convenience and optimize resource
allocation in its stores, MacDonald has also used digital solutions. One example is the mobile
order and payment app (Abolghasemi Komleh, 2018).

b. important for managers to understand the mechanics of supply and demand both in
the short-run and in the long-run with real examples of companies
It is essential for managers to comprehend the workings of supply and demand in order to make
informed decisions about price, production, and distribution. The following examples show how
changes in supply or demand can have a big effect on a business: In order to boost its revenue,
Sumsung is a business that has been successful in using supply and demand theory. The
Samsung S10 Plus was released in 2017, but due to the sophisticated technology needed to make
it, there was a limited amount available. Sumsung was able to create demand by limiting supply
and sell the phone for more money, which increased the company's revenue(Raiklin & Uyar,
1996).

Yet, during the COVID-19 epidemic, shifts in supply and demand harmed businesses like Garab
and Lyft. The demand for ride-hailing services drastically declined as individuals started to stay
home and travel less, which resulted in a decline in revenue for these businesses. Also, there
were fewer drivers available because many were hesitant to work out of safety concerns, which
worsened wait times and the general client experience(Hamilton et al., 2019).

Finally, in order for managers to make decisions that can affect a company's success, it is critical
for them to have a solid understanding of supply and demand, scarcity, and opportunity cost.
Examples from the real world, like those from MacDonald, Sumsung, Garab, and Lyft, highlight
how crucial these ideas are for achieving successful business outcomes(Raiklin & Uyar, 1996).

2
QUESTION 2 (CLO 1)
a. Demand and supply functions for ice-cold beverages per game are as follows:
QD = 20,000 - 20,000P + 7,500PK + 0.8Y + 500T (Demand)
QS = 1,000 + 12,000P - 900PL - 1,000PC - 200T (Supply)

where,
P is the average price of ice-cold beverage ($ per beverage)
PK is the average price of beverages sold at the kiosks ($ per beverage)
Y is disposable income per household for baseball fans
T is the average daily high temperature (degrees)
PL is the average price of unskilled labour ($ per unit)
PC is the average cost of capital (in percent)

i. When quantity is expressed as a function of price, what are the ice-cold beverage
demand and supply curves if P = $5, PK = $4, Y = $62,500, T = 80 degrees, PL =
$10, and PC = 12%.
Solution

 Demand Carver
Qd=20000-20000P+7500Pk+0.8Y+500T

=20000-20000(P) +7500(4) +0.8(62500) +500(80)

=20000-20,000(P)+30000+50000+40000

=20000 -20,000(P)+30000+50000+40000

Qd=140000 -20,000(P) This is the demand Curve however the price

is equal $5

And the quantity demand must be equal to

Qd=140000 -20,000(5)

Qd=140,000-100,000

3
 Qd=40,000

 Supply Curve

Qs=1000+12000P-900PL-1000Pc-200T

= 1000+12000P-900(10)-1000(.12)-200(8O)

= 1000-9000-120-16000+12000P

= -8000-120-16000+12000P

= -8120-16000+12000P

Qs= -24120+12000P This is the supply Curve however the price is

equal $5

And the quantity supply must be equal to

Qs= -24120+12000(5)

Qs= -24120+60000

Qs= 35880

ii. surplus or shortage of ice-cold beverage when P = $4.

Solution
Quantity demanded

Qd=140,000-20,000(P)

Qd=140,000-20,000(4)

= 60,000

Quantity supplied

Qs= -24120+12000(P)

Qs= -24120+12000(4)

= -24120+48000

4
 = 23880

So the surplus or shortage of quantity demand and Supply are equal

Qs-Qd=

23880 -60,000 = -36120 There Is a Shortage of Supplies

iii. The market equilibrium price-output combination.

Qd = Qs
140,000-20,000P = -24120+12000P
-20,000P -12000P = -24120 -140,000
−32,000 P −164120
= =
−3,2000 −32,000
P= 5.12875
However, the market equilibrium quantity will be equal:
=140,000 – 20,000(5.12875) = -24120+12,000(5.12875)
= 37425= 37425
b. Would such a price increase help or hurt tobacco industry profits? What would be
the likely effect on industry profits if this price boost was simply caused by a $1.50
per pack increase in cigarette excise taxes?
At least in the short- term, the planned price rise would boost the tobacco industry's earnings. A
factor of 1.26 will be added to the profits from existing sales.

A 30% decline in industry earnings would result if the price increase were solely the result of
higher taxes. 30% less packages would be sold overall, while the industry's revenue per pack of
cigarettes would remain unchanged. An increase in state revenue would result. The state will
experience a net gain, whereas the tobacco industry will suffer a loss, based on the increase in
overall profits by a factor of 1.26.

5
QUESTION 3 (CLO 2)
Q = 2L + 0.5L2 - 0.025L3
where: Q = output per period
L = labour input per period

i. Deriving the marginal product and average product functions.

SOLUTION

 Marginal product of Labour

2 3
Q = 2L + 0.5L - 0.025L
Formula:
Q(Change ∈quantity)
MPL: ¿ =
L(Change∈ Labor)
dQ
MPL: = 2+L-0.075L2
dL
MPL= 2+L-0.075L2

 Average product of Labor

3
Q = 2L + 0.5L2 - 0.025L
Formula:
Q 2 L+0.5 L2 −0.025 L2
APL: ¿ =
L L
APL= 2+0.5L- 0.075L2
The units of labour that should be employed in order to maximize the firm's total profit.
3
Q = 2L + 0.5L2 - 0.025L
Profit= Total Revenue – Total Cost (P=TR-TC)
Given:
Price of the product= $20 per unit and
The wage rate= $40 per unit
Profit?

SOLUTION
Total Cost= W*L =
TC=40L
While:
Total Revenue= P*Q

6
 TR= $20(2L + 0.5L2 - 0.025L )
3

TR= 40L + 10L2 – 0.5L

3

However, the total profit is equal

Profit = TR-TC
Profit= 40L + 10L2 – 0.5L
3
- 40L

To maximize the profit, I have to derive the profit

dp
= 40 + 20L – 1.5L - 40
2
=
dL
dp
= 40 - 40+ 20L – 1.5L = 20L – 1.5L
2 2
=
dL
2
Profit= 20L – 1.5L

To find the number of labour that should be employed in order to maximize the firm's total
profit, I have used formula of quadratic equation:
2
Formula: ax +bx+c=0
−b ± √ b −4 ac
2
L=
2a
Therefore,
a= -1.5
b= 20
c=0
−20 ± √ 202−4 (−1.5)(0)
= −20 ± √ 400+ 0 = −20 ± √ 400 =
−20 ±20
=
2(−1.5) −3 −3 −3
−20+20 −20−20
= −3 or −3 =
L= −20+20 0
−3 = −3 = 0 or
−20−20 −40
L= −3 = −3 = 13.333

L= 13.3333

7
b. Is Lobo using the lowest cost combination of workers to produce its targeted output?
Provide relevant workings to support your answer.

SOLUTION

MRP= MRCL

TC
MPL x MR = =
L

MP x P w (wage rate of Labour

1 2 4 5
units of Labor MPL wage MPL/W= dollar cost per unit
30 unskilled 400 lights 400 1 units per dollar
80 factory technicians 450 lights 500 0.9 units per dollar
30 skilled mechanism 550 lights 700 0.78 units per dollar
40 skilled electrician 600 Lights 750 0.8 units per dollar

i. No, Lobo does not using the lowest cost combination of workers to produce its targeted
output.

ii. The recommendations that i make to assist the company to produce its targeted output
are as follows:

 The company should make lowest combination of cost, means decreasing its wage
rate, to produce its target output
 I short run, the company should follows the law of diminishing of returns as more
as more units are produced, after this, diminishing marginal returns set in the unit
cost start to rise.
 Unskilled workers are the most economical or cost-effective. Their marginal
product per dollar is 1 lights while the Skilled Mechanism are the least
economical having a marginal product per dollar of only 0.78 lights. If possible, it
should employ only unskilled workers to produce a given amount of lights for the
least cost. Furthermore, the marginal product per dollar of skilled mechanics is
less than that of the electricians. Therefore the number of skilled mechanics
should be greater than the number of electricians

8
Task 2

QUESTION 1 (CLO3)
a. The reasons for the existence of monopoly in a particular industry with an example
for each

Monopoly

According to (Pawar & Bhaskar, 2021) A monopoly is a market with only one seller and no
close substitutes for the product or service that the seller is providing. Technically, the term
“monopoly” is used in reference to the market itself, although it is today commonly used to refer
to the single seller in a market as well.

Because the single seller is the only source of the particular product or service, they have the
ability to charge whatever price they want. This works to the detriment of market competition –
the foundation of any healthy economy, and is the main reason monopolies are discouraged
(Abolghasemi Komleh, 2018).

Monopolies typically originate due to barriers that prevent other companies from entering the
market and giving the monopolist some competition. Because such barriers occur in different
forms, there are therefore varying reasons for the existence of monopolies (Jayasinghe, 2018).

Reasons for Existence of Monopolies

1. Ownership of a Key Resource: When one company exerts sole control over a resource
that is necessary for the production of a specific product, the market may become a
monopoly. For example, the only medication deemed acceptable to treat a disease comes
from a particular ingredient X, and knowledge of this ingredient X is owned by a single
family owned company. The company can, therefore, be said to have a monopoly over
ingredient X that is needed to cure the disease because it is the only company that can
produce a product deemed acceptable(Anchit, 2020).
2. Government Franchise: In certain instances, a monopoly may be explicitly created by
the government if it grants a single company, whether private or government-owned, the
right to conduct business in a particular market. For example, when a national railways
transportation service is created by the government, in most cases they are granted a
monopoly on the operation of passenger trains in the country. As a result, other firms are
9
 only able to offer passenger train services with the cooperation and/or permission of the
government-owned provider(Raiklin & Uyar, 1996).
3. Intellectual Property Protection: Extending intellectual property protection to a
company in the form of patents and copyrights is yet another way in which monopolies
are created. When a government does this, it is in fact giving a single company an
exclusive right to provide a particular product / service to the market. Patents and
copyrights work in providing owners of intellectual property with the right to act as an
exclusive provider of a new product for a specific length of time. This creates a
temporary monopoly in the market with regards to new products and services
(Jayasinghe, 2018).
4. Natural Monopoly: A market may also become a monopoly simply because it may be
more cost-effective for one company to serve the whole market than to have several
smaller firms in competition with one another(Hildebrand et al., 2020). A company with
virtually unlimited economies of scale is referred to as a natural monopoly. Such firms
become monopolies due to their position and size, which makes it impossible for new
entrants in the market to compete price-wise. Natural monopolies are common in
industries with high fixed costs and low marginal costs of operation such as providers of
television, telephone, and internet(Jayasinghe, 2018)

b. the examples of different price discrimination that exist in the Somalia market with
my opinion, of price discrimination which is acceptable in the market and its
justifications

Price Discrimination:

Price discrimination refers to a pricing strategy that charges consumers different prices for
identical goods or services(Aguirre, 2019).

Price discrimination is a pricing strategy that companies and organizations use to earn the most
money possible when offering a product or service. There are different degrees of this pricing
strategy and you can use these levels to price items and generate the most revenue possible from
different demographics. If you're looking to maximize profits for your organization, you may
benefit from learning about price discrimination strategies. In this article, we define price

10
discrimination, explain how it works, review the degrees of price discrimination, give an
example of each degree and discuss the limitations of a price discrimination strategy(Aguirre,
2019).

Price discrimination is when a company sells the same product at different price points to
different buyers. Price discrimination varies from customer to customer solely based on what the
seller and customer agrees the product or service is worth. There are different degrees of this
pricing strategy that exist and all possessing unique characteristics. The following entities often
use price discrimination strategies to maximize profits(Abolghasemi Komleh, 2018):

Different Types of Price Discrimination

There are three different degrees of price discrimination that companies may use to maximize
profits and earn the most revenue possible for the value of their products. These include the
following(Aguirre, 2019):

First-degree price discrimination

Otherwise known as perfect price discrimination, this price discrimination strategy is when a
company charges the most amount of money possible that customers can pay for each unit of a
product or service consumed. This type of price discrimination is the least common because it
can be difficult and costly for the company to determine the appropriate price point for products
or services. Depending on how much research the company conducts on specific customer
markets and price points, this pricing strategy may generate minimum profits(Aguirre, 2019).

For example: Hormuud found that their customers pay a maximum of $75 for their specialty,. As
a result, they decide to charge $75, the most they found customers can and are willing to pay, for
each service.

Second-degree price discrimination

This type of price discrimination strategy is when a company offers different prices based on the
quantity purchased. This can occur when a company offers BOGO options for items at grocery
or convenience stores, for instance. Retail and manufacturing companies often use this type of
price discrimination to maximize profits(Hamilton et al., 2019).

11
For expample Food for Friends chicken and Retail Store is holding a weekly special at their
store for customers purchasing chiicken in bulk. If a customer purchases an entire case of these
chikecken, they can get a second entire case of chickens at no additional cost.

Third-degree price discrimination

Third-degree price discrimination is the most common type of price discrimination that
companies and organizations use to maximize profits. This pricing strategy occurs when a
company simply offers different prices for goods or services based on the customer's location,
age, gender, economic status or other attributes. Typically, companies apply ample research and
experimentation to determine how much they can charge each type of customer and use this
information to develop educated pricing strategies(Abolghasemi Komleh, 2018).

For example: Cadani Chips and Chicken at different prices for their foods based on how old they
are. Senior citizens, or those over the age of 65, typically pay $1.50 for the foods, and all other
patrons typically pay $2 for the same type of drink.

 with my opinion, of price discrimination which is acceptable in the market and its
justifications
In my opinion, of price discrimination which is acceptable in the market is First-degree price
discrimination or perfect price discrimination, because, when first-degree price discrimination
exists, the firm’s marginal revenue curve corresponds to its demand curve. Because a different
price, the maximum price each customer is willing and able to pay , is set for each unit of the
good, each unit adds its price to total revenue. So, marginal revenue, the change in total revenue,
equals the price determined from the demand curve.

12
QUESTION 2 (CLO3)
a. A simple regression model with paint sales (Y) as the dependent variable and selling
price (P) as the independent variable

SALES REGIO SALES (Y) SELLING

N PRICE (P)
1 160 15
2 220 13.5
3 140 16.5
4 190 14.5
5 130 17
6 160 16
7 200 13
8 150 18
9 210 12
10 190 15.5

Regression of Y to X1
20
15 f(x) = − 0.0526011560693642 x + 24.3052023121387
R² = 0.750267273089677
10
5
0
120 140 160 180 200 220 240

SUMMARY OUTPUT

Regression Statistics
Multiple R 0.8661797
R Square 0.750267273
Adjusted R Square 0.719050682
Standard Error 16.43239213
Observations 10

ANOV
A
d SS MS F Significa
f nce F
Regress 1 6489. 6489. 24.03 0.001190
ion 812 812 425 045 13
Residu 8 2160. 270.0
al 188 235
Total 9 8650
 Coefficients Standard t Stat P-value Lower 95% Upper 95% Lower 95.0% Upper 95.0%
Error
A 390.376176 44.238 8.8244 2.1415E-05 288.3622535 492.3900976 288.3622535 492.3900976

B -14.2633 2.9094 -4.902 0.00119005 -20.9724424 -7.55420334 -20.9724424 -7.55420334

RESIDUAL OUTPUT

Observation Predicted Y Residuals Standard Residuals

1 176.4263 -16.4263 -1.06027
2 197.8213 22.17868 1.431566
3 155.0313 -15.0313 -0.97023
4 183.558 6.442006 0.415812
5 147.8997 -17.8997 -1.15537
6 162.163 -2.16301 -0.13962
7 204.953 -4.95298 -0.3197
8 133.6364 16.36364 1.056222
9 219.2163 -9.2163 -0.59488
10 169.2947 20.70533 1.336465

 a. is the intercept: 390.376176

 b. is the slope: -14.2633
 observation: 10

b. the estimated regression equation

Formula: Y=a+bx
Y = 390.37 + (-14.2633x
c. Economic interpretation of the estimated intercept (a) and slope (b) coefficient.

There are two variables those are dependent and independent variables, one is selling price (X),
and another one is sales (Y). The selling price “X” is independent variable and the Sale “Y” is
dependent variable

The Regression analyses model appear to us above, explains to us the variables, and there is 10
observations. After analysis, according to regression analysis table, R2 is equal 0.75 and this
explains that there is strong relationship between Selling price “X” and Sale Revenue “Y”, and

14
when we see F-statistics “0.001” explains or indicates that Selling price is significant relationship
to the sales revenue.

Y-intercept, or the expected mean value of y when all x variables are equal to 0, is the estimated
intercept (a) in this model. It's when the line crosses the Y axis on a regression graph. We
estimate that the intercept (a) in our equation is 390.3761755.

As a result, the regression equation is y = -14.26332288(P) + 390.3761755, where P is the paint

selling price (P) ($/Litters) and y is the 1000 painting sales (Litters). The line will cross the y-
axis at a value for the y-intercept of (390.3761755). According to the slope's value of (-
14.26332288), sales will typically decline by -14.26332288 for every dollar of price growth.

Therefore, there is a strong relationship between selling price and sales revenue however;
marketing managers should be more focused on selling prices and satisfying customers to pursue
business goals.

d. Coefficient of determination
Formula: Coefficient of Determination (R2) = (TSS – RSS) / TSS
R2 = 0.750267273 or 75% is the coefficient of determination

e. A multiple regression model with paint sales (Y) as the dependent variable and
promotional expenditures (A) and selling price (P) as the independent variables.

SALES REGION SALES (Y) SELLING PRICE (P)

1 160 15
2 220 13.5
3 140 16.5
4 190 14.5
5 130 17
6 160 16
7 200 13
8 150 18
9 210 12
10 190 15.5

15
 Multible Regression for Y to X1 and X2
300 20
200 15
f(x) = 0.727532550015878 x
10
100 R² = 0.92547311054213 5
0 0
120 140 160 180 200 220 240
Series2 Linear (Series2) Series4

SUMMARY OUTPUT

Regression Statistics
Multiple R 0.898462
R Square 0.807235
Adjusted R Square 0.74298
Standard Error 16.42777
Observations 9

ANOVA

df SS MS F Significance
F
Regression 2 6780.771 3390.386 12.56296 0.007163

Residual 6 1619.229 269.8715

Total 8 8400

Coefficient Standar t Stat P-value Lower Upper Lower Upper

s d Error 95% 95% 95.0% 95.0%
Intercept 327.5627 82.2567 3.98219 0.00726 126.287 528.837 126.287 528.837
9 7 5 6 8 6 8
150 0.153566 0.16248 0.94509 0.38109 -0.24403 0.55115 -0.24403 0.55115
7 4 7 7 7
15 -11.2278 4.37851 -2.5643 0.04266 -21.9417 -0.514 -21.9417 -0.514
6 1

RESIDUAL OUTPUT

16
 Observation Predicted 160 Residuals Standard Residuals
1 200.5573 19.44266 1.366616448
2 149.9816 -9.98159 -0.701601817
3 193.9365 -3.93646 -0.27669209
4 150.5103 -20.5103 -1.441659713
5 157.1312 2.86883 0.201648825
6 203.0999 -3.09995 -0.217893823
7 142.3538 7.646237 0.537450664
8 223.5417 -13.5417 -0.951841875
9 168.8877 21.11229 1.483973381

 a. is the intercept: 327.5627

 b. is the slope: 0.153566 for X1, -11.2278X2
 observations: 9 (N-k) k=1 (10-1)= 9
i. Estimated regression equation
Formula: Y=a+bx1+x2+E (error)
Y = 327.5627+ 0.153566X1+11.2278X2+E

ii. Economic interpretation of the estimated slope coefficients.

There are three variables those are one is dependent variable and the other two variables are
independent variables, one is selling price for x1 and Promotion expense for X2, and the
dependent variable is sales (y). The selling price and Promotion expense are independent
variables.

The above Table and Regression analyses model indicates the variables, and there is 10
observations. After analysis, according to regression analysis table, R 2 is equal 0.80 and this
explains that there is strong relationship between Selling price and Promotion expense and Sale
Revenue “Y”, and when we see F-statistics and the P-value of the whole regression “0.007265” ,
0.007265 respectively explains or indicate that Selling price and promotion expense are
significant relationship to the sale revenue.

On the other hand, the p-value of the selling price is “0.381097” and this issue tells us that is
promotion expense is non- significant to the sales revenue and the marketing manager should
improve the marketing relationship to enhance their selling price.

In conclusion, there is a strong relationship between selling price, promotion expense and sales
revenue however; but in separately the promotion expense is non-significant to the sales revenue,
marketing managers should be more focused on selling prices improvement and satisfying
customers to pursue business goals.
17
 iii. Coefficient of determination
Formula: Coefficient of Determination (R2) = (TSS – RSS) / TSS
R2 = 0.807235 or 80.7% is the coefficient of determination

QUESTION 3 (CLOSE3)

a. Porter’s five forces strategic model.

The five forces framework portrays the structure of an industry in terms of: (1) the threat from
potential entrants, (2) the bargaining power of suppliers, (3) the bargaining power of buyers, (4)
pressure from substitute products, and (5) the intensity of competitive rivalry (Yamuna Baburaj,
V.K. Narayanan, January 2016).
Michael Porter’s five forces framework builds on the contribution of industrial organizational
economics and is a relatively comprehensive tool for assessing the attractiveness of an industry
in strategic management. Michael Porter’s five forces framework portrays industry structure and
explains its profitability (Yamuna Baburaj, V.K. Narayanan, January 2016).
The five forces which measure competitive advantage as well as how each influence the
probability of sustainable market profitability are explained as follows:

1. Threat involving new entrants. This kind of force measures how simple (or not) it's to
get into a specific market. When a market is profitable with less barriers to enter,
competitor intensify. If more businesses compete with the identical industry share, profits

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 begin to decrease. It is important for present businesses to generate high barriers in order
to enter to prevent new entrants (Borhan, Managerial Economics, August 2016).
2. Bargaining Power of Suppliers: Suppliers, the providers of inputs such as raw
materials, technology and the components required to manufacture the end product,
constitute the supplier industry. For example, in the automotive industry, manufacturers
such as Ford, General Motors and Toyota constitute the focal industry; the supplier
industry consists of firms such as Visteon and Delphi who supply the parts and
accessories that make up the car (Yamuna Baburaj, V.K. Narayanan, January 2016).
3. Bargaining Power of Buyers: Buyers, the customers of the focal firms of the industry,
influence the relationship with focal firms by demanding higher quality goods, lower
prices and switching to substitute and competitor products (Yamuna Baburaj, V.K.
Narayanan, January 2016).
4. Threat of substitutes of products and services: This specific force is particularly
frightening when customers can simply find substitute goods with good prices or perhaps
better quality and when customers can change from one goods and services to a different
product with lower price (Borhan, Managerial Economics, August 2016).
5. Rivalry among existing competitors: Rivalry occurs and escalates among competitors
through actions such as price cutting, product introductions and extensive advertising to
improve their competitive position. Such actions typically prod other firms to respond,
leading to a pattern of moves and counter moves (Yamuna Baburaj, V.K. Narayanan,
January 2016).

b. Based on your understanding of competition and competitiveness, discuss the

move by APPLE as written in the case above

Apple's entry into the worlds of news, games, credit cards, and streaming video demonstrates the
company's understanding of the significance of broadening its product offerings and diversifying
its revenue sources in order to stay competitive. Instead of depending simply on sales of its
hardware products like the iPhone and Mac, Apple is able to draw in and keep clients from a
variety of businesses and verticals by providing a suite of products and services (Jayasinghe,
2018).

Apple has an advantage in these new markets because to its sizable customer base and strong
brand since it can use its connections and standing to draw customers. In addition, clients may

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find it harder to switch to competitors because of the way its services and hardware are
integrated(Jayasinghe, 2018).

Nevertheless, especially in the credit card and video streaming sectors, Apple is entering a large
and fiercely competitive field. It may be tough for Apple to develop a presence because well-
established companies like Netflix and banks have substantial market shares and solid client
bases. Apple will need to keep coming up with innovative ideas and producing special products
that set it apart from its rivals if it wants to stay competitive. One factor that might help it stand
out from competing streaming services is its emphasis on original programs and well-known
celebrities (Raiklin & Uyar, 1996).

In conclusion, Apple's entry into these new markets demonstrates its dedication to maintaining
its competitiveness and diversifying its revenue sources. Apple has a huge edge in entering these
markets despite the difficulties and competition because of its strong brand and established client
base. To keep clients and compete with seasoned companies, it will need to keep coming up with
new ideas and ways to stand out (Abolghasemi Komleh, 2018).

QUESTION 5 (CLO3)
a. The ability of oligopolistic firms to engage successfully in collusion depends on a
number of factors. Provide and discuss these factors.
Oligopolistic firms are those that operate in a market where there are only a few dominant
players. These firms have the ability to engage in collusion, which is an agreement between
competitors to limit competition and increase profits(Anchit, 2020).

Markets with oligopolies often have 2 to 10 small to medium-sized businesses operating in them.
In such an instance, the firm in question has influence over the market share, which may be
expressed in terms of pricing. By creating cartels, oligopoly is able to control prices and output
to increase its profit margins, increase its market share, and influence prices(Jayasinghe, 2018).

OPEC was one of the most well-known cartels that influenced the global economy. Five nations
joined forces to construct it in 1960. The primary objective of this initiative was to stabilize
global oil prices and supplies. Oil prices have been influenced by it for many years, but as more
countries began to produce oil, the cartel's members felt the need to further their own interests.

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As a result, they either chose to leave the group or increased the supply outside of it, which led to
the group's demise (Jayasinghe, 2018).

De beers diamond mines is another case in point. The world's supply of diamonds was
successfully influenced by this diamond cartel, which was established in 1888. Almost 90% of
the diamonds in the world were produced there in the early 20th century. Because there are few
substitutes, barriers to entry, and inelastic prices, it is nevertheless profitable and controls around
two thirds of the diamond industry(Commerce, 2017).

However, the ability of these firms to successfully engage in collusion depends on several
factors, including:

Product type: The type of the product—whether it is a perfect equivalent or not—is another
variable that affects collusion. Because the remainder of the market would have imperfect
replacements and less price elasticity if it were a perfect substitute and cartels contained all those
firms that had that perfect alternative, the cartel would be more successful(Raiklin & Uyar,
1996).

Market structure: The market structure of the industry plays a crucial role in determining the
success of collusion. In industries where there are only a few dominant firms, collusion is more
likely to be successful than in industries with a large number of firms. This is because in a
concentrated market, the actions of each firm have a significant impact on the overall
market(Raiklin & Uyar, 1996).

Homogeneity of products: If the products offered by oligopolistic firms are similar or identical, it
becomes easier to coordinate on prices and output levels. However, if the products are
heterogeneous, firms may find it difficult to agree on a common pricing strategy(Bebli, 2012).

Barriers to entry: The presence of barriers to entry, such as high capital requirements or
regulatory restrictions, can make collusion easier to maintain. This is because new entrants are
unlikely to disrupt the existing collusion agreement(Hamilton et al., 2019).

Degree of transparency: Collusion is more difficult to maintain in industries where there is a high
degree of transparency. For example, in industries where prices are publicly available, it is easier
for competitors to monitor each other's pricing behavior and detect any deviation
from the agreed-up (Jayasinghe, 2018).

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REFERENCE

Abolghasemi Komleh, R. (2018). The effect of supply and demand on market price and
equilibrium under monopolistic competition. November 2018, 1–4.
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on_market_price_and_equilibrium_under_monopolistic_competition

Aguirre, I. (2019). Oligopoly price discrimination, competitive pressure and total output.
Economics, 13, 1–16. https://doi.org/10.5018/economics-ejournal.ja.2019-52

Anchit, G. (2020). A Critical Analysis of Porter’s 5 Forces Model of Competitive Advantage.

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