ASSIGNMENT 3: STRUCTURE – CONDUCT –

PERFORMANCE

Student’s name Thân Bích Ngân

Id number s3788734
Lecture’s name Upasana Jain
Question 1: Market structure characteristics: 15 marks (max 600 words)

To state opinion about the economic statement: “Vinamilk is a monopoly firm in

domestic
market in Vietnam”, findings about Vinamilk will be found in according to a
monopolist firm’s
characteristics.

Monopoly characteristics Vinamilk’s corresponding

characteristics
High concentration due to only one firm can Vinamilk has more than 40% dairy
market
sell the product. shares in 9 consecutive years
(Euromonitor
International 2019)
Vinamilk products dominates its
competitors
with 54% shares in liquid milk,
84% in
yogurts, 33% in yogurt drinks,
40% in
powdered milk and 80% in
condensed milk.
(Nikkei Asian Review 2019)

High barriers to entry due to high quantity of Vinamilk imported breeding dairy
cows from
capital and technology (Nguyen 2014). Australia, New Zealand and the US
and it has
Specifically, dairy cows are expensive and 120,000 dairy cows and produce
950 tons of
hard to care as qualified grasslands in raw fresh milk a day. Its
factories also
Vietnam are rare. (Nguyen 2013) mentioned that advanced
technology is used
to products in safety and hygiene
standards.
(VOV Online Newspaper). Moreover,
Vinamilk’s 2018 annual report
stated that
they are having 13 international
standard
dairy farms, with 12 in Vietnam
and 1 in
Laos. This means they have large
amount of
capital and assets to maintain
its competitive
advantages in the market and
compete with
new and current competitors.
Therefore, it
would be hard for new entrants in
the market
to compete in dairy products as
they cannot
 exit or entry a market easily if
they do not
enough competitive advantages like
Vinamilk.

Many buyers but few sellers (Mittal 2014) There is a lack of dairy companies
in the
Vietnamese market, so consumers
only have
few choices which include Vinamilk,
being
one of the two main companies in
purchasing,
collecting and processing milk.
(Nguyen
2013) and being one of the three
main
companies dominates domestic dairy
market
(Nguyen 2014).
Price maker, this means that the firm can set Although Vinamilk has many
characteristics
the price they want with no consideration to of being a monopoly in the market,
it is still
the market price due to their large market not the sole provider of milk in
Vietnamese
power within government standards market. There are still many strong
competitors such as Royal
FrieslandCampina
NV (more than 17% shares), TH Food
Chain
SJC (more than 8% shares).
Moreover, its
products are not the only option
for
consumers as milk is not a
differentiated
product and substitutes can be
provided by
other competitors. Therefore,
Vinamilk does
not have affect the pricing
strategies of other
firms or vice versa so it cannot
set its price as
high as it wants.
With all the characteristics considered, Vinamilk has high concentration and
competing in high
barriers to entry and many buyers but few sellers' market but does not mean it has
large market
power enough to be a price market due to the presence of other strong dairy firms
in the
market and its products are not unique. Therefore, it is not a monopoly firm as a
monopoly is a
single firm sells a unique product in the market (Gans, J, King, S & Mankiw, N.G
2014). In
 conclusion, Vinamilk is an oligopoly firm as a group of smaller firms controls the
market but
none of them has the power to keep others from influencing the market.

Question 2: Pricing behavior of monopoly: 13 marks (max 500 words)

The statement of ‘Because there is no competition, a monopoly firm can charge any
arbitrarily
high price for its product’ is wrong due to the law of demand and government’s
regulations.

• Specifically, profit is maximized when marginal cost equals marginal

revenue; marginal
revenue is slightly higher than marginal cost and the price is higher than
average total
cost. In perfect competition, firms must follow the price of the market
where margin cost
equals marginal revenue. However, in monopoly, due to the monopoly power the
firm
received of being the only supply for this resource so customers are more
willing to pay
higher prices, the price can be set higher than this point, meaning the
quantity is less than
the price at where marginal cost equals marginal revenue. This results in
consumers
suffer from purchasing with higher price but with smaller quantity, meaning
a monopolist
will receive higher profits than perfect competitive firms (Borland J 2012).
This
phenomenon is damaging society as consumers suffer while monopolies
benefits.
Therefore, there would be some regulations (such as regulated or efficient
prices) from
the government to make sure monopolists are not damaging society with
monopoly
pricing behaviors.
• Higher price with lower quantity is also against the law of demand. As when
the resource
is harder to get with high prices, there would be less demand for it, so
consumers might
not want that product anymore and a monopolist firm must lower back their
price.

• Price discrimination is when different prices are charged to different

customers for the
same goods in a monopoly market to maximize profits (Gans, J, King, S &
Mankiw, N.G
2014, Monopoly). Some monopolies can charge discriminated prices because a
monopolist has some market power in the pricing behaviors upon its unique
resource.
Moreover, monopolists charge different prices based on the customer’s
willingness to pay
 as if only one price charged, it would only target the specific number of
consumers but
with discriminated prices, more consumers will be more likely to purchase
and profits
could be gained even more as a whole than 1 set of price (Gans, J, King, S &
Mankiw,
N.G 2014, Monopoly).

Case 1 - Movie tickets: Many movie theatres charge a lower price for children,
students and
senior citizens than for other patrons. This is an example of monopolist’s price
discrimination as
local movie theatres have specific market power in their community that they are
based on and
the same movies are shown to different ages. This is due to as each age will have
different level
of willingness to pay, for example, senior citizens, children and students will not
be willing to
pay if the price is high so movies theaters charge less so they earn more profits.

Case 2- Doctors' consultation fees: Doctors charge a higher consultation fee for
home visits than
for clinic visits. This is not an example of price discrimination as prices are
discriminated for
different types of customers without any extra costs for the sellers. However, in
the doctors’
case, home visits are costing doctors more than clinic visits as doctors must have
an additional
cost of transportation when travelling to the patient’s home whereas at the clinic,
they could have
more patients. Therefore, home visits should cost more to cover this cost.

Question 3: Non-price competition

• Non-price competition is factors apart from price, such as services,

location, promotion,
packaging, product quality is used to compete with other competitors (Sample
J 2019,
Monopolistic).

• Non-price competition is a characteristic feature of monopolistic

competition but not of
perfect competition because in monopolistic competition, products are
similar but not
homogeneous as they are differentiated and each monopolistic firm has small
market
power (Sample J 2019, Monopolistic). Whereas, in perfect competition,
products are
 homogenous, so customers are price-sensitive, meaning if cheaper price is
offered, they
are more willing to purchase than more expensive price without any
consideration of any
factors. Therefore, to compete with other firms, monopolistic’ products must be
differentiated so they are more likely to adding some additional competitive
advantages
in non-price factors to increase customers’ willingness to pay.

• A company that invented a very reliable watch would be more likely to engage in
non-
price competition a company that invented a less-reliable watch that costs the
same
amount to make. This is because a very reliable watch’ company has more
differentiated
(in its reliability) than the less-reliable watch’ company, meaning the
reliable one is a
monopolistic company whereas the less-reliable one is a perfect competitive
company as
the less-reliable watch company does not have any product differentiation (not
in
reliability). In the reliable watch’s company, to compete with other firms and
even further
differentiate their products, they are more likely to take non-price factors.
For example:
the reliability of the customers on their products could be the non-price
factor to
differentiate. Therefore, their customers are more willing to pay to their
differentiation
(reliability) in products as they do not resemble their rivals like the less-
reliable watch’s
company does.

• In long-term, due to low barriers of entry, both perfect competition and

monopolistic
‘profits will break-even (Lumen Learning 2019). However, if a monopolistic firm
can
remain their product differentiation without other firms duplicate its
differentiated
features, like if the watch company can remain its reliability without other
firms receive
the same level of reliability from customers, the reliable watch company can
still receive
economic profits in the long term. Whereas, the less-reliable watch company
doesn’t
have any differentiation in the long term so it cannot compete with other firms
and its
economic profit become zero. Additionally, a less-reliable firm would be more
likely to
face zero economic profit in long run, this is due to the product
differentiation of both
firms’ products.
Question 4: Oligopoly game theory: 7 marks (max 300 words)

• If Big Brew sets a high price, it will receive a minimum profit of $3

million whereas if
Big Brew sets a low price, it will receive a minimum profit of $ 1 million,
not
considering whether Little Kona enter or not. Therefore, due to a higher
minimum profit
in setting high price than setting low price ($3 million compared to $1
million), Big Brew
should choose to setting high price strategy as it could maximize the
minimum profit.
• If Little Kona enters the market, it will lose $1 million whereas if it does
not enter the
market, it would make zero. Compared the two minimums, if Little Kona don’t
enter the
market, they will receive less losses (losing $1 million with losing
nothing). Therefore, it
would be better for Little Kona to choose not entering the market when using
the
maximin strategy.
• Based on your answer to part (a), the Nash equilibrium of the game is where
Big Brew
setting high price and Little Kona not entering the market and makes zero as
this is where
the two companies’ strategies intercept.
• “Collusion” is when firms reach to form a secret or open agreement in fixed
price, shared
market rather than compete to remove uncertainty, price war and increased
profits
(Sample J 2019, Oligopoly). In the case of Little Kona and Big Brew, they
would not
 have the incentive to collude. As when they collude, they must both receive
benefits,
such as both set at high price, so Little Kona makes $2 million profit and
Big Brew
makes $3 million profit. However, Big Brew is not reaching their maximum
profit when
colluding compared to when Little Kona not entering with $7 million profit.
Therefore,
Big Brew may cheat to reach their maximum profit and Little Kona will
suffer.

Question 5: Market failures & government policy: 5 marks (max 200 words)

• Externalities are effects on bystanders created by individuals where they

neither pay nor
receive compensation from those effects (Gans, J, King, S & Mankiw, N.G
2014,
Externalities). These are one of the market failure’s sources. (Beveridge
2013)
• An example of externalities could be sugary drinks in beverages industry,
and this is a
negative externality in consumption. This is illustrated in the graph below,
as this is in
consumption. The supply (private cost) stays the same as private cost equals
social cost,
but there would be differences in social and private benefits. World Health
Organization
(Taxes on sugary drinks: Why do it, 2017) stated that sugary drinks is a
major contribute
to obesity and diabetes. Therefore, the consumption sugary drinks are
costing society
while benefitting the sugary drinks’ producers. Therefore, in the graph, the
social value is
less than private value due to external costs as the marginal social benefit
is less than the
marginal private benefit. As a result, a correct public policy should be
made to benefit
society by lowing the market quantity to the quantity optima, to ensure that
society are
consuming less negative externality. This could be providing taxation to the
consumption
of sugary drinks. This taxation will make buyers to pay more (P buyers pay)
and sellers
to receive less (P sellers receive).
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