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HOMEWORK UNIT 3 WEEK 11

Andrés Bello Online
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Topic 1 : Oligopolies and strategic behavior

Activity 1 : The case addresses determinations of quantities and reactions in production in

an oligopolistic model.

Expected Learning: Understand and apply concepts such as expected productivity in these
models, and how the interaction between companies affects the market in
terms of higher prices.

Suggestions for work strategies

Take into account each of the learning resources at your disposal on the platform, as well as
the reference bibliography on the topic.

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Formal Aspects

You must comply with the formal aspects identified below:

• Use Word format of deliverable task.

• Follow the instructions of the task in the order requested in the instructions.
• A font size corresponding to 12 Arial, 1.5 line spacing and a maximum of 15 pages,
letter size, must be used.
• Proper use of citations and references according to APA standards.

This activity is group in nature. Remember that a colleague in the group must submit
this task no later than 11:55 p.m. on Sunday of this week. This group activity counts 5%
of the final course grade.

CASE 1: Duopoly in the crusher market for small mining

The basic data is:

1. An engineer has successfully invented and patented a crusher for small mining that he
builds with imported parts and pieces, added to the casing of his design and that are
manufactured to order in national metallurgical plants.

2. The engineer has set up two crusher assembly plants, but he can set up as many as he
wants. They can all be the same and can assemble, for example, 8 crushers per year at the
average cost of 1,500 UF each (which is the minimum possible average cost).

3. It is currently producing at the rate of 16 crushers per year, which it sells at a price of
7,650 UF each. He estimates that he could double production and sales, keeping the average
cost at a minimum, but the price would have to decrease to 5,600 UF per crusher. For the
commercial distribution of its crushers it uses the many companies that sell used machinery
for small mining.

4. The engineer knows very well his production function and the costs of a typical assembly
plant:

minimum CMe=1,500 UF producing 8 crushers per year, and minimum CMeV=479 UF. It has
a technology with constant returns to scale and can produce the number of crushers you
want at CMe=1,500

UF, but as long as it is to produce 8 or more crushers per year.

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5. The following graph illustrates the company's short- and long-run average and marginal
costs. The short-term ones are presented for only 4 production scales, but can be expanded
to a greater number of plants and maintain the minimum CMeT=1,500 UF, as indicated:

6. The owner of the company has received an offer to purchase his business from Brazilian
investors for 50,000 UF. It seems like a ridiculous figure and he concludes that he would sell
but for 1,000,000 UF.

He concludes that it is a proposal to buy Monopoly from him.

7. Brazilian investors produce crushers in their country and could sell them to small national
mining companies for 2,600 UF each, which is the import parity price.

8. If competition came from Brazilian crushers with a price of 2,600 UF, he estimates that
he would not be able to sell any of his own at the price P=7,650 UF at which he currently
sells them. He even concludes that he will not be able to sell any even at P=2,600 UF each,
because the Brazilian ones are superior in quality.

9. Depending on how the industry is organized, the result has been estimated in terms of its
economic gains:

Industrial
Observation
organization Short-term economic gains Long-term economic gains
101,845 UF/year 130,400 UF/year Protected from competition with
Pure Monopoly producing with 2 plants Producing with 4 plants industrial patent.
Competence 0 UF/year
0 UF/year producing with 1 or Loses patent protection. Number
Perfect producing with 2 plants
more plants of companies is undetermined.
Monopolistic 840 UF/year 0 UF/year
Brazilian competition sells superior
Competition producing with 1 plant Long-term balance
quality crusher for 2,600 UF each.

10. The previous results consider a demand for crushers:

Demand: Q=75.7073-0.007805∙P and Reverse Demand: P=9,700- 128.125∙Q

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I developed:

Duopoly with market perfectly segmented by quality.

1.1. Identify the concept of residual demand.

1.2. Identification of the optimal price for the competition.

1.3. Identification of the optimal reaction of the national company.

1.4. Conclusion on the viability of this form of industrial organization.

Assessment of the potential to collude with the Brazilians. Producing is defined as a

monopoly and the market is distributed

Collusion is attractive, since it is known that a duopoly by maximizing joint profits allows
obtaining the best possible result.

The background information we have is:

• CMgLP of the company: 1,500 UF/crusher (same as CMeLP).

• Brazilian CMgLP: 2,600 UF/crusher (equal to CMeLP).

• Demand for small mining crushers: Q = 75.7073 - 0.007805·P, with inverse demand: P
= 9,700 - 128.125·Q and marginal income function: IMg = 9,700 - 256.25·Q. These
antecedents are consistent with the available demand data: (Q=16, P=7,650) and
(Q=32, P=5,600).

• Cartel Optimum as Pure Monopoly. It depends on the CMg:

• For CMg=1,500: Q=32 and P=5,600

• For CMg=2,600: Q=27.71 and P=6,150

And the first doubt arises:

Since the maximum joint profits of the Cartel are obtained with greater production from the
most efficient company, it would have to be concluded that all production should be its own.
Brazilians will not accept that they do not contribute any production quota, to sell.
Impossible.

So the Cartel solution is tentatively postulated as a Pure Monopoly with CMg=2,600 UF. This
implies:

• Joint production: Q=27.71

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 • Production distributed between the two members of the Cartel: 65% of the
production is national and the remaining 35% is produced by the Brazilian company.
So:

QN=0.65∙27.71=18.01 crushers per year

QB=27.71-18.01=9.70 crushers per year

• Price P=6,150 UF/crusher

2.- Determine profits of the companies when applying the cartel.

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