## Oligopoly Market

Price War in Oligopoly Market

Oligopoly is an imperfectly competitive market form, where there are few sellers and a large number of buyers, and the product may be homogeneous or differentiated. Since there are few sellers, so there arises Conscious Rivalry among the firms. That is, if a firm takes any action or strategy, then it influences the act or strategy of its rival firm. This mutual interdependence leads to strategic interactions between the firms.

When the firm’s strategies on their own without cooperating with its rival firms, or without any explicit or implicit agreement, then this leads to non-collusive oligopoly, producing ‘price wars’ among each other.

Case I: When the conjectural variation is zero, i.e., when a firm changes its price, it considers the price of the rival firm remains unchanged. Here, the firms’ objective is to maximize profit. The profit functions can be written in a duopoly case as,

Π1 = Π1(P1,P2)  and Π2 = Π2(P1,P2

Suppose the first firm assumes P2 as constant and selects P1 in such a manner that its profit maximizes. In this way, we get different combinations of P1 and P2, which gives the price reaction curves of the firms R1 and R2.

If the first seller’s price is P1, then firm two assumes that firm one will maintain P1 price, and so to maximize its profit, he chooses P2. Again, corresponding to P2, the first seller fixes his price level at P1‘, to maximize his profit. In response to this, the second seller fixes his price at P2‘ and thus, we see that with the advent of time, the price level approaches the equilibrium value E at P1* and P2*.

Case II: When conjectural variation is non zero, there arises the problem of price leadership. Naturally, the leader gets some advantage, as it sophisticatedly incorporates its rival’s reaction function and accordingly maximizes his profit. In this process of becoming price leaders, both the firms end up earning lesser profit. Because each of them is stuck to the assumption that other’s behavior is governed by his reaction function, but in fact, neither of the reaction function is obeyed. As a result, both the sellers lose in this non-cooperative strategy, and a price war is inevitable.

The fact that the leader gains and the follower lose has the possibility that both the sellers will aspire to be leaders. If this happens, we get disequilibrium where both the sellers land into much worse positions. Considering the following pay-off matrix, the strategy ‘Leader’ is the dominant strategy for both the sellers, but as a result, they are worse off than the (Follower, Follower) strategy.

This act of price leadership, leading to a price war, ends when one of the firms surrenders and agrees to act as a follower, or a collusive agreement is reached with both the firms.

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ECON 8820: Advanced Studies in Econometrics

You may work in groups on the assignment, but you must write up your own answers in your own words.
See the course profile for information on the due date of this assignment and penalties for late submission.

1. Suppose that U is uniformly distributed on [0, 1] and X is continuously distributed as some distribution
FX(·). Show that Y := F
−1
X (U) is also distributed as FX(·). (Or, X ∼ Y , i.e., X and Y are

distributionally equivalent.)
(Answer) You may start from the definition of the CDF. Here is an alternative method that uses the
change of variables. Let g(U) := F
−1
X (U). Then, g
−1
(Y ) = FX(Y ) and ∂g−1
(y)
∂y = fX(y). So,

fY (y) = 1(FX(y) ∈ [0, 1]) · fX(y)

on y ∈ Y, which is the support of X

1. The dataset D in the matlab data file dataHW2.mat contains information on T = 50 markets, each with
J = 5 differentiated products. The first column indicates each market t = 1, . . . , T, the second column
indicates each product j = 1, . . . , J. The third column shows market share Sjt for all (j, t). The fourth
to seventh columns are observed characteristics xj = [1, xj1, xj2, xj3], which vary across products but
not across markets. The eighth is the price pjt. The other columns, say zjt, collect all the variables,
including xj , that are correlated with the price but not correlated with unobserved characteristics ξjt.
1

Consumer i’s utility of purchasing product j in market t is represented as

uijt = x
0
jβit + αitpjt + ξjt + εijt

and we assume that consumer i chooses one (and only one) product (including the outside option that
gives utility ui0t = εi0t) that gives the largest utility in market t. Assume that {εijt} are i.i.d with the
type I extreme value distribution so that the probability of consumer i of choosing j is

Pijt =

exp(x
0
jβit + αitpjt + ξjt)
1 + PJ
̃j=1 exp(x
0
̃j
βit + αitp ̃jt + ξ ̃jt)

where pjt and ξjt are potentially correlated, but the dataset does not have ξjt. Assume that

βit
αit
iid∼ N (μ, Σ)

across all i and t where μ is a 5 dimensional vector and Σ is a 5 ×5 symmetric positive definite matrix.
Using the BLP method, estimate the structural parameter θ := {μ, Σ}.
For this exercise:
• Report optimal GMM estimates for every element in μ and Σ.
• You do not need to report standard errors, but discuss in detail how you would compute them.
• Use a tight tolerance, e.g., 1e-13, for the inner loop (fixed point), and use a sufficiently large
number of iterations for the outer loop (evaluation of the GMM objective function)
• Employ 1,000 draws for the simulation of the random coefficients (β
0

it, αit), using the same ran-
domness for every iteration of the outer loop.

• Comment your codes in detail.

## Brookings Institute

### Assignment 4 – Brookings Institute

You are an analyst at the Brookings Institution, a non-profit, non-partisan think tank that conducts public policy research and provides policy recommendations to governments. The Institution has several divisions, each focusing on different areas of economic and social policy, and each division produces a series of policy briefs (one per quarter) https://wagner.nyu.edu/files/faculty/publications/lightRumsfeldsRevolution.pdf. You are part of the division that focuses on (choose from list topic areas, below) and your boss has asked each member of your team to suggest one topic for next quarter’s policy brief. You will have two minutes to present your idea at a staff meeting [note that for most people, it would take about two minutes to read aloud 400 words]. Your assignment is only to suggest a general topic, not to write the full brief. That is, the primary objective of your presentation is to give the rest of the staff an idea of why this topic warrants further research for the full brief. It is typical to have at least one chart, diagram or graph on the front page of each policy brief so to help explain your topic, you should collect the relevant data and create a graphic that can be presented at the meeting.

Additional instructions: Go to the website for the Statistical Abstract of the United States to find your data (http://www.census.gov/library/publications/2011/compendia/statab/131ed.html). Use the raw data to prepare a graph or chart (not a table). Your chart should be labeled and titled appropriately; that is, identify variables, units of measurement or time, etc. The chart should be integrated into your presentation (i.e., incorporate discussion of the data with reference to the chart, don’t just tack on the chart at the end); however, graphics should always be able to stand alone as well so be sure that you have a title that is sufficiently descriptive. Although this is an oral presentation, you will need to submit the written text of your presentation (along with the graphic). The text should address the Who-What-Where-When-Why-How issues.

If the Statistical Abstract does not provide data appropriate for your topic, you may need to choose a different topic. You must submit your basic topic for approval prior to writing the brief.

Topic areas:

Education

Environment

Health

Income and poverty

Foreign commerce

Labor force

Law and security

Population/Demography

Social insurance and health services

Evaluation criteria

I will focus on the following specific areas when grading:

1. Argument. Have you clearly and objectively made a good case for further investigation of this topic?
2. Graphic. Is the graphic clear, appropriate and self-sufficient? Is it well-integrated with the text?
3. Voice. Is the tone and style appropriate for this audience? Is jargon appropriate and explained as necessary?
4. Overall clarity. Are ideas clearly expressed? Any problems with basic writing (spelling, grammar, punctuation) should be fixed before grading (more than two or three typos and your paper will be returned without a grade). I will be evaluating the readability, clarity, and style of the paper overall.

## Economics

To submit,

1. A copy (file or picture) of the original essay your picked from publications.

The grading will be based upon both numerical analysis and explanation.

Guide for research

Below are some suggested candidates for research topics.

1. Planning for retirement savings
2. How much should you earn to justify the cost of your college education?
3. How much is the value of attending the graduate school?
4. Project planning

Please note that these are open questions. You need to determine your financial needs, the time line, the financial parameters, and how you can achieve your financial goal.

I have included some useful financial sources.

## International Economics

QUESTION 1
(a) Suppose for health reasons a tax is placed on cigarette consumption with the sole objective of
reducing the demand for cigarettes.
The tobacco industry objects to the tax and argues that, since the price elasticity of demand for
cigarettes is very low, the only impact of the tax will be an increase in government revenue.
Using demand and supply diagrams, present the tobacco industry’s argument and suggest other
measures the government could use to achieve its objective.

(15 marks)
(b) Imagine you are the new owner of a bus company that is struggling to survive. You have access
to the following information about the elasticities of demand for bus travel:

Income elasticity = -0.4
Own-price elasticity = -1.2
Cross-price elasticity with respect to rail fares = +2.1

Briefly explain the meaning of each of these terms and discuss how this information could

(10 marks)
Total (25 marks)

QUESTION 2
(a) Why is it necessary to have competition legislation?

(15 marks)
(b) Discuss the main factors which prevent market forces from eroding the market power of
monopolies and oligopolies.

(10 marks)
Total (25 marks)

QUESTION 3
What is meant by the term ‘The gig economy’?
Analyse the main advantages and disadvantages to firms and workers of the gig economy.

(25 marks)

QUESTION 4
Monetary and fiscal policies are often used by governments to achieve their objectives. Drawing on your
knowledge of these policies, evaluate their effectiveness in achieving economic growth.

(25 marks)

Page 3 of 3

QUESTION 5
Critically evaluate Ireland’s membership of the European Union under each of the following headings:
(a) Foreign direct investment
(c) Growth and immigration

## Managerial Economics

QUESTION 1
Critically discuss four assumptions that underlie the Theory of Perfect Competition.

(25 marks)

QUESTION 2
Companies that operate in competitive markets typically invest in advertising and/or celebrity
endorsement to secure or grow sales and market share.
Describe the economic rationale for investing in this way. Include in your answer a description of what
impact advertising or celebrity endorsement can have on the demand curve for a given product,
referencing factors of demand, price elasticity and total revenue.

(25 marks)

QUESTION 3
Brexit is likely to have an economic impact on the United Kingdom and on the European Union,
including Ireland.
Evaluate how Brexit is likely to impact on the following different sectors and suggest how they might
respond to offset the risk:
(i) The UK financial services industry.
(ii) The Irish financial services industry.
(ii) Non-financial services sectors of the Irish economy, including agriculture and food production.
(25 marks)

QUESTION 4
Fiscal policy is one of a small number of ways in which Governments can help to shape the economy
and effect economic growth.
(a) Analyse the differences between expansionary fiscal policy and contractionary fiscal policy.
(10 marks)
(b) Identify how government may use these policies and describe potential negative effects.
(15 marks)
Total (25 marks)

QUESTION 5
Define “cartel” and assess any four problems inherent in forming and maintaining a cartel.

QUESTION 1
The nature of competition and the behavior of firms differs depending on the structure of the market
within which firms operate.
Evaluate the difference between the Monopolistic Competition and Oligopoly market structures and
describe the defining features of each.

(25 marks)

QUESTION 2
The Irish economy is small, open and highly globalized.
Outline the economic advantages for Ireland of membership in the European Union and the opportunities
and challenges of globalization. In particular, explain the impact of immigration on the supply and
demand for labour, on wages and on economic growth.

(25 marks)

QUESTION 3
Monetary policy is one of a small number of ways in which Governments and/or Central Banks can help
to shape the economy and effect economic growth.
Explain clearly the differences between expansionary monetary policy and contractionary monetary
policy and suggest why a government might use these policies.
(25 marks)

QUESTION 4
(a) Identify and discuss the main options available to a corporation when it needs to raise money so
that it can invest in a new product or a new manufacturing technique.

(10 marks)
(b) Explain the difference between a corporate bond and a government bond, including the level of
risk and interest rate.

(15 marks)
Total (25 marks)

QUESTION 5
Define price discrimination. Describe in detail three conditions must exist before a firm can use it
successfully?

## Development Economics

a) Provide practical examples of how long-term planning, specifically in health and
education facilities, could support governments’ objective for better quality labour
force. [K&U 4.1: 5 marks]

b) Examine and apply two economic theories related to development (based on the
ones discussed during the course) to the performance experienced by a least
developed country (or countries) of your choice over the years. [A&A 1.4: 7 marks]

c) Identify and explain five challenges encountered by Least Developed Countries
(LDC) that hinder their progress to become developed nations. You are required

d) Develop a community-based-project that could be carried out by the government
of Nigeria in order to improve the standard of living among locals in a particular
community. You are requested to include practical examples as well as potential
sources to finance such project. [A&A 4.2: 7 marks]

e) Propose solutions and actions that can be implemented by a country of your choice
in specific areas to help the country pursue its development process.

[S&E 4.3: 10 marks]

f) Compile a list of resources (human and physical) that the country requires in order
for the proposals mentioned in question (m) to be implemented. In your answer,
you are expected to individually explain the role of each resource to facilitate the
country to reach its overall economic development objectives.

## Assignment help for Economics

Question:

Analyze the GDP growth of India in the last five financial years (2012-2017) and discuss how variation in growth had impacted your company’s business with reason and details.

In 2011-12 fiscal year India’s economic growth was at 6.2 per. It had grown by 5.4%, 5.2%, 4.7% and 4.8% in the first, second, third and fourth quarter, respectively, of 2012-2013, according to data released by the central statistical organization. That makes it 5 percent for the entire 2012-2013 fiscal, after the revision of base year it fall to 4.5%. Major sectors affected were the manufacturing sector showing growth of 2.6% only, mining and quarrying by 3.1% farm sector output expanded by just 1.4% and farm sector also grew at a slower rate of just 1.9%.

The figure below shows the GDP for the year 2010-2013 along with the revised base year.

There are two contradictory influences operating in the economy this year. The investment was picking up, whereas consumption was decelerating. Unless investment grows at such a rate that is more than for falling consumption demand to make up for it, the net impact will be negative. The slowdown was mainly because of the laggard industry; weakness in the services sector was also evident. The Reserve Bank of India had to cut policy interest rates at all three policy reviews by 25 basis points. The absence of ease of trading in terms of securing government approval along with high borrowing cost has stalled corporate investment. At the same time, high inflation and slower hiring have shaken consumer confidence and forced households to cut spending. The decrease in the rates of savings of the household sector in physical assets from 15.8% to 14.8% and private corporate sector from 7.3% to 7.1% have attributed to a decrease in the rate of GDP in the current year compared to the previous year.

In 2013-14, smart farm sector growth contributed to India’s economy to grow 4.7 percent, according to the gross domestic product (GDP) provisional estimates which were 1.4% last year. The GDP growth rate of 4.5% in the previous was lowest in the last 10 years. This is the second back to back when the economy’s growth remained below 5 percent. The last time the economic growth rate had been below the 5-per cent mark was in 1984-85 to 1987-88.

Good harvests in both the seasons of 2013-2014 lifted farm sector growth to 4.7%. It had grown 1.4 percent in the previous fiscal. For January-March, the farm sector grew 6.3 percent against 1.6 percent growth in the same quarter of 2012-13 but because of low movement in infrastructure and high-interest rates kept investments or capital formation low.

The below fissure shows GDP at market price and GVA at a basic price for the year 2014-2015

In 2014-15 the economy grew at 7.3 percent. The country outpaced China’s GDP of 7 percent in January—March quarter and posted a 7.5 percent growth in that quarter. Indian economy in 2014-2015 has emerged as one of the largest economies with strong economic outlook supported by controlled inflation, a rise in domestic demand, an increase in investment, a decline in oil prices and reforms among others.

Demand-side showing significant growth of final consumption which increased to 7.6% in 2014-2015 form 6.5% in 2013-2014, even the gross fixed capital formation increased from 3.0% in 2013-2014 to 4.1% in 2014-2015. Exports in 2014-2015 showed a growth of just 0.9% as compared to 7.3% in 2013-2014. Whereas, Imports, on the other hand, increased from -8.4% to -0.5%, due to a sharp decline in international oil prices bringing down the current year oil import bill.

Robust manufacturing growth in the year 2015-2016 makes India the fastest-growing major economy with a five-year high growth rate of 7.6 percent for the full fiscal.  The farm sector also showed growth as against a contraction in the previous year, though the rate of expansion was low at 1.2 percent in 2015-16.

According to the data released by the Central Statistics Office (CSO), the growth in manufacturing and farm sectors during the January-march quarter went up to 9.3% and 2.3%, respectively. The trade, hotels, transport, and communication at 9.9%, the construction sector grew at 4.5%, financial, public administration, defense and other services at 6.4% and real estate and professional services at 9.1% in the fourth quarter of 2015-16.  The manufacturing sector spurred to 9.3 percent, up from 5.5% in the last fiscal.

The growth rate of Indian Gross Domestic Product (GDP) increased from 6.6 percent in 2013-14 to 7.2 percent in 2014-15 and further to 7.6 percent in 2015-16, witnessing improvement in growth rate in the last three years. The implementation of strategic policy and systematic focus of the Government of India on economic growth and macroeconomic stability made India one of the fastest-growing major economies in the world. The Government has taken various initiatives and policy that strengthen the economy which include; reforms and liberalization of foreign direct investment in major sectors, fillip to manufacturing and infrastructure through fiscal incentives and concrete measures for transport, power, and other urban and rural infrastructure; measures to debottleneck the supply of key raw materials, etc.

The GDP grew 7.1% in the fiscal year 2016-17 because of economic growth slowed to 6.1% in the fourth quarter ending March 2017, compared with 7.1% in the previous quarter, as the government’s demonetization decision slowed activity in cash-dependent sectors.

In FY 17, the government’s final consumption expenditure was the major driver of GDP growth with an increase of over 23% as against 2.2 percent in FY 2016. The gross capital formation at GDP at constant prices, an indicator investment across the country, declined by 0.2% in FY17, continuing the downward trend since 2011. In FY 16, the export of goods and services witnessed a growth of 2,2% against y-o-y decline of 5.2% in FY15, owing to a partial recovery in commodity prices. The import witnessed a yo-y decline of 3.8% due to lower gold and other bullion imports.

The figure below shows the last three-year excerpt from Profit and loss statement of Aricent.

The above-presented profit and loss statement of Aricent is not very rosy. Thought the top line seems to be increasing from 2016 to 2017 but the company bottom line is showing huge loss in the company books of accounts. The GDP and other economical statistic show robust growth in these years but the financial statement of Aricent is not reflecting the same.

A major part of Aricent’s revenue is still formed communication and network equipment service providers despite buying out SmartPlay, a 1200-persons chip design services outfit from Bangalore, in 2015. Aricent was an engineering services company, which was sharply focused on telecom—with its ups and downs. Moreover, growing a company with a lot of debt, then even when the business generates cash, a part of it has to be deployed to repay debt.

From the above analysis of GDP growth from 2015 to 2017 have been contributed to different factors. For instance, in 2015 the reason for higher growth is high agricultural produce rather than high growth in the manufacturing or service sector. In 2016 the major reason for the increase in growth rate was huge government spending and not the service sector. The service sector have shown moderate growth during this period and has failed to be resilient to slow down in service and exports. In 2017, there is a slowdown in growth rate which is primarily because of demonetization. The service and manufacturing sector, private investment and demand are not gearing up, though the government has come up with many policies to promote India on the international front. Government initiatives like Make in India, skill development programs are not enough to bring India to a growth trajectory.

Question:

To what extent India’s GDP growth in alignment with the top line and bottom line of your company?