Why Is an Oligopoly Characterized by Mutual Interdependence? - Essay Sample

Introduction

Mutual interdependence refers to the case in which the actions of one company have a significant effect on other companies in the industry. A relevant example is the soft drinks industry in the United States where there is the participation of so many companies. However, the two dominant companies present are Coca-Cola and Pepsi. In such a market, in the case where Coca-Cola decides to lower their product prices in an attempt to boost their sales, then such an action would have a substantial impact on Pepsi. Therefore, it is evident that Coca-Cola's behavior affects Pepsi and this is what illustrates the aspect of mutual interdependence.

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Mutual interdependence exists because each oligopolist possesses a sizeable part of the market available and so changes in pricing and other marketing strategies will possibly affect other companies within the industry. With regards to the soft drinks companies, a company such as Lucozade would not affect other companies if at all it chooses to make changes in the prices. This is apparent since Lucozade has a small share of the market in the United States and so it is not among the dominant ones.

What is the difference between fixed costs and variable costs? Explain the shape of the Total Variable cost curve and explain why and how the total cost and total variable cost curves differ.

Fixed costs are typically a direct function of the level of capital investment and do not vary with the production. Once a company is established, the associated fixed costs will be incurred regardless of the output. Such costs include return on investment, taxes, insurance, administrative costs, depreciation, rents, and normal profit. On the other hand, variable costs refer to the costs that vary with the level of output. Such costs include fuel costs, raw materials, wages (labor costs), and operations and maintenance costs.

The Total Variable Cost curve depicts the graphical behavior between total variable cost and the output quantity. The curve illustrates the increasing marginal returns at small amounts of the output and falling marginal returns at large output quantities. The curve usually emerges from the origin, then takes twists and turns depending on the company being analyzed. The total variable cost, however, provides the foundation upon which the total cost curve is plotted.

It should be captured that the total cost and the total variable cost curves are parallel, the equivalent gradient for gradient at each quantity; the equal distance between them being the total fixed costs. Similar slopes imply that both of the graphs can be used to obtain marginal costs. Also, the total variable cost curve is vital as the source for getting the average variable cost curve.

Explain why airlines price discriminate. Describe the various degrees of price discrimination. For example, why would an airline lower price for special weekend getaways or senior citizens? Do charging different prices to coach and first-class passengers represent price discrimination? Why or why not?

The main idea behind price discrimination in airline companies is because the firms are trying to make use of various price elasticities of demand in a bid to make more profits and revenues. Some clients usually have inelastic demand and are therefore willing to pay more. Other customers exhibit elastic demand, meaning they are sensitive to prices and so they shall respond to special offers and price discounts.

The degrees of price discrimination include the following:

• First degree- Customers are charged the maximum price they are willing to pay.
• Second degree- Prices are charged differently based on the tickets bought.
• Third degree- Prices vary with different groups of people.
• Fourth degree- Charges are similar for all passengers.

Premium pricing- Airlines charge different prices for slightly different variations of the ticket. For instance, the Airline Company may charge an extra fee for beverages during the trip.

An airline company would lower prices for a special weekend getaway because it is usually a period when most of the clients are ones who are sensitive to rates and have a more elastic demand; Unlike during the weekdays when most of the customers are businessmen who have no choice but to travel using the fastest mode.

Charging different prices to coach and first-class passengers is not entirely price discrimination because it is like buying a different product, even though the airline company can charge higher rates to customers having more inelastic demand slightly.

Explain what a fixed input is and give an example of fixed inputs that a restaurant would have. How are these fixed inputs treated in the short-run? And in the long-run? Why is the law of diminishing marginal returns applicable only in the short run?

Fixed inputs refer to the factors of production. They cannot be changed in the short-run. They are the same throughout, and they are a constraint. A good example of fixed input for a restaurant is the building where people eat from. Rent for the building has to be paid for regardless of whether the production is as reasonable or below average. It is more of a contract with the landlord, and the same payment has to be made every single month. When people talk about the short run, it implies that one cannot expand immediately or get out of the current lease and that is why it is fixed. Whenever the contract is up, the restaurant owners can renegotiate the contract terms, and in this point it becomes long-run. The long-run can be termed as the period when all inputs are variable and are something that can be altered. Once the contract is renegotiated, the restaurant can incorporate changes in the long-run. The law of diminishing marginal returns is applicable in the short run because it is only during that period that there is a fixed input/factor of production.