Question 1a
To get the Herfindahl Index of the industry, the formula used involves squaring the market shares for the different companies as a percentage and adding them up. In this case, the Herfindahl Index is
Apple (45^2) = 2,025 + Samsung (30^2) = 900 + LG (9^2) = 81 + Motorola (8^2) = 64 + HTC (6^2) = 36 + Nokia (2^2) = 4 = 3110.
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On the question of whether the government would be willing to approve a merger between Apple and Samsung, it is important to use the Herfindahl Index to find the market share that the two companies would hold. In this case, the total market share for the entity from the merger will be Apple (45) + Samsung (30) = 75. Therefore, the Herfindahl Index will be (75^2) = 5625 . Based on the Herfindahl Index from the entity that will be formed from the merger, it is clear that it will have a sense of market dominance, which will affect the competitive nature of the market in a significant way. When making the decision on whether or not to approve a merger, the government makes use of the Herfindahl Index, which determines the force that the new entity will have on the market. In this case, Apple/Samsung will exert a significant market force that is likely to have a significant impact on the viability of the market.
Question 1b
In the event that Nokia and Motorola work on new smartphones that take away a significant chunk of Apple’s and Samsung’s market share, the Herfindahl Index based on the new market share will be
Apple (25^2) = 625 + Samsung (20^2) = 400 + Motorola (20^2) = 400+ Nokia (20^2) = 400 +
LG (10^2) = 100+ HTC (5^2) = 25 = 1950 .
A merger between Apple and Samsung, the market share for the new entity will be Apple (25) + Samsung (20) = 45. The entity will have an Herfindahl Index of Apple/Samsung (45^2) = 2025 . Based on the new Herfindahl Index, the government is still not likely to approve the merger between Apple and Samsung on the basis that the merge between these two companies is likely to create a sense of market dominance. Similar to the previous position that had been taken, the government is much more likely to look at the force exerted by the new entity based on the Herfindahl Index, which, in this case, is notably higher than may be expected.
Question 2a
|
Quantity |
Price |
Fixed Cost |
Variable Cost |
Total Cost |
Marginal Cost |
Total Revenue |
Profit/ Loss |
|---|---|---|---|---|---|---|---|
| 0 | 150 | 200 | - | - | |||
| 1 | 150 | 200 | $140 | 140 | 340 | 150 | -190 |
| 2 | 150 | 200 | $240 | 240 | 440 | 300 | -140 |
| 3 | 150 | 200 | $320 | 320 | 520 | 450 | -70 |
| 4 | 150 | 200 | $410 | 410 | 610 | 600 | -10 |
| 5 | 150 | 200 | $520 | 520 | 720 | 750 | 30 |
| 6 | 150 | 200 | $650 | 650 | 850 | 900 | 50 |
| 7 | 150 | 200 | $810 | 810 | 1010 | 1050 | 40 |
| 8 | 150 | 200 | $1,010 | 1010 | 1210 | 1200 | -10 |
| 9 | 150 | 200 | $1,310 | 1310 | 1510 | 1350 | -160 |
| 10 | 150 | 200 | $1,710 | 1710 | 1910 | 1500 | -410 |
Based on the table above, the company should produce 6 items, as this is the number of items that allows the company to achieve the highest profit margin. The decision by the firm to produce any other number of items would mean that it is likely to find itself in a position where it may face significant losses. However, producing 6 items allows for the company to achieve the best possible outcomes in terms of ensuring that it is able to gain uttermost profits from the items that it produces.
Question 2b
In the event that the scenario would change leading to the company becoming a monopoly, the pricing margins for the items it is offering are likely to change significantly. That would mean that the company will be in a much more likely position to get higher revenues from the items that it is producing. That will be attributed to the fact that the market would be facing inelasticity affecting its ability experience a change in the pricing of the items. On the other hand, if the shift in scenario would result in oligopoly, the change from the current pricing margin would not be significant taking into account that the company would need to ensure that it maintains its ability to compete effectively.
Question 3
|
Opponent |
My Pay Off |
Opponent’s Pay Off |
|
1 |
30 |
20 |
|
2 |
13.6 |
11.2 |
|
3 |
10.8 |
9.6 |
|
4 |
14.4 |
14.4 |
|
5 |
6 |
18 |
|
TOTAL |
64.8 |
73.2 |
In the prisoner’s dilemma, several strategies have been noted. The first strategy that can be seen allows for cooperation every single time leading to a situation where the opponents would cooperate. The second strategy involved cooperating for a short time and then defecting where it was noted that the opponents continued cooperating regardless of the defect. Based on this outcome, it can be argued that the most appropriate strategy would involve having to engage in a process through which to cooperate initially. The expectation is that this would help towards ensuring that the opponents gain a sense of trust and confidence, which would mean that in the event that there is defection, they are must more likely to continue cooperating.
