MICRO ECONOMICS

ASSIGNMENT 2

FEBRUARY 21, 2021

SATHISH L R
Question 1. Assume food delivery firms like Swiggy are making huge
profits. Higher profits may attract entry of new firms into the food
delivery industry. Explain what could be the impact of entry on the firms
and the industry as a whole.

a. Average cost of rendering the delivery service for the existing players
b. Price/commissions that they charge from their customers
c. Profitably
d. How would the break-even point impacted due to entry of new firms?

Ans: Swiggy enters the market by differentiating themselves as app based food
delivery service by making ease of ordering and choosing from different
restaurants and quick delivery and make them as monopolistic competition for
some time and enjoys the good profits for short time

Q is the number of customer (Quantity)that can serve to get the profit where
their marginal cost is equal to their marginal revenue and they could get at the
average cost of AC and operating at the price of P and enjoying the profits

As swiggy is making profits and these profits attracts the other companies like
zomato and uber deliveries to enter into the food delivery industry

As the more number of firms enter into the competition, and it became perfect
competition market, companies has to invest more to sustain in the market in
terms promoting, quick service and offering discounts to customers makes and
hence average cost of firms increases to AC1.

And also as the competition increases, price/commission they charge from their
customers will reduce, which in turn effect the profits they operate and now,
average cost of the firm and operating price both are becomes equal and hence
firms earns zero economic profits

As the firms reach break-even point at where their total cost is equals to the
total revenue.

Total Revenue = Total Cost

P*Q = TFC+TVC = TFC+AVC*Q
Q(P-AVC) =TFC 0r Q = TFC/(P-AVC), Where P-AVC is Contribution margin
Due to entering the new firms, Average Cost has increases and profits are
coming down its take lot of time and efforts to reach the break-even point

Question 2. Suzuki has huge car production facility in India. It exports

cars to European nations too. Should it exercise price
discrimination?

a. What is price discrimination?

b. Where have you observed it?

c. What are the conditions required to exercise price discrimination?

d. Is Suzuki doing it in Indian market?

e. Can it do between India and European countries?

Ans:

In a monopolistic market, as monopolistic supplies are a price maker, hence we

would like to charge different prices from different customers is called price
discrimination.

Price discrimination works on the principle that, different customers may have
different willingness to pay to differentiate themselves from others or to get
special treatment, monopolistic is looking to identify customer who are willing to
pay at higher prices, if the same price is charged then the customers will have
different consumer surplus

Few examples for price discrimination are:

Amazon is offering a special treatment for their PRIME members with free/quick
deliveries and accessing one day before for their sales offers and movies by
charging the extra amount on account of membership from their customers who
are willing to have such special treatments

We could also find in cinema theatres, they are offering different types of seating
availability in the auditorium, it’s comprises recliner, lounges, sofa seats and
main stream seating with different prices were customers are willing to pay
based on their requirements

Railways are also offering tatkal booking facility with extra prices than their
regular reservation prices for the customer who are booking with short time of
plan

And they are few temples also offering VIP darshan and special darshan with
special tickets with higher amounts

There are different types of price discrimination, they are

First Degree Price Discrimination: It is a price discrimination where seller is able

to identify the willingness to pay of each customer and prices them to capture all
consumer surplus

For example, few hotels having different types are Dine-In treatments, having
different rooms like AC Cabins, Family cabin, non AC where though the serve of
food is same but they charge different prices based on the treatment they are
offering.

And also, we could see in cinema theatres, they charge on higher prices for the
customers for reservation than they sell in their ticket counters.

Second Degree Price Discrimination: In this type of discrimination, seller is able

to price the product by discriminating between a large buyer and a small buyer
or initial buyer and late buyer

For example,

Phone manufacturers, keep their new model launch prices on higher side while
launching time and time goes on or when their upgraded another model launch
they reduces the old model launch price, a perfect example of an I Phone

Similar we could also see in shopping malls, there will be an offers in old model
dresses and there won’t be any discounts on just arrivals as an examples of
initial buyer and late buyer

In a retail market, there is a slab prices where it 0 to 100Nos one price and 100-
500Nos one price and so on, it will help the marketers to attract the large buyers
and sell more quantities

Third Degree Price Discrimination:

In this situation, seller is operating in two or more markets having different price
elasticity of demand, for example a seller is having a cinema theatre one in
metropolitan city and another in a small town, he can’t operate the same prices
at both the places as the customer’s income level as well as spending capacity
will be more in cities than in towns, and hence he could operate more price in
city and low prices in town

In Indian market, its difficult to operate with different prices with different
customers since there is no difference in price elasticity of demand and and
hence suzuki un able to do the price descrimination in india

And at the same time as suzuki is also exporting to european countries where
suzuki is operating in two different markets having different price elasticity of
demand, suzuki can operate with price descrimination with Indian and european
markets
As the people income level of UK are more than the Indians, and their spending
capacity is more and hence price sensitivity is low, hence European market is
price inelastic compare to Indian market and hence demand curve will be more
flatter than UK demand curve

As shown in above price demand graph of UK, Indian and joint demand, Suzuki
could operate with more prices in UK market than in Indian market whose price
sensitivity is more

Where joint marginal revenue is equating with Indian market as well UK market,
as an example they could sell 70Nos with 50K$ in Indian market and 30Nos with
80K$ in UK market