Oligopoly Paradox

After the Economics Lecture (and Jiaguang's amazing drawing) we have learnt what is a kinked demand curve and its use in oligopoly.

I have a paradox concerning this fact.

Imagine that there are (only) two companies monopolizing an (imaginary) product for a market, say, kalodite. Therefore, since rival fails to match price increases but always match price decreases in the market, we can safely assume that the demand curve is considered as being 'kinked' to both firms.

However, there is a more complicated fact: Company A purifies (then sells) the kalodite by a cheap method, while (due to lack of information), company B purifies it by an expensive method. Although both have very high market share and sell at the same price (price stickiness), it is undeniable that Company A and company B have cost differentials, and therefore MC & AC of Company B is higher than that of A.

Assume one day that the price of the material that is VERY essential for the purification of the kaladoite, (known here as garatheum), suddenly shoots up to the moon (and being a mineral, the price of garatheum fluctuates very wildly (and extremely)) and the cost of production of the product of kalodite shoots up as fast as a rocket, and the MC & AC curve shoots up like crazy, such that both Company A & B have no choice but to increase the price.

However, Company B purifies kaladoite with an expensive method, and hence the AVC curve rises above the demand curve, and hence the company earns subnormal and quits the market. (However, being a conglomerate, it can return to the market when the cost of production falls suitably and it can earn some profit).

As a result, the kinked demand curve of company A shows three straight-line sections, with an (relatively) inelastic demand curve at low price, elastic curve at the middle price section, and an inelastic demand curve at a higher price (because it becomes a monopoly and demand is now inelastic.)

We then plot the MR of the doubly-kinked demand curve. As one may draw, the MR falls steeply, rises (vertically) by a dotted line, and then falls gently (corresponding to the elastic section of the AR), drops vertically and then decreases steeply (inelastic section of curve).

[Well, you could try it out!]

As a matter of fact, there is a problem with our assumption now! Our MC curve [if you draw it] CUTS THROUGH 3 POINTS OF THE MR CURVE when MC is rising (once through the large-gradient MR section, through the vertically-rising section, and through the gently-falling section), and so the Company A can produce at three different prices for maximum profit!

What is the problem of this paradox then?

Things to take note in diagram drawing

Due to popular demand from 6K, this comes here... hope it won't fail to make you happy...

The reason why diagrams should be drawn ONLY in pencil


Jia Guang

merger between Delta and NorthWest

Shizhi

Microsoft Bids $44.6 Billion for Yahoo

Microsoft Bids $44.6 Billion for Yahoo

By MIGUEL HELFT and ANDREW ROSS SORKIN

Published: February 1, 2008, in New York Times

SAN FRANCISCO — In a bold move to counter Google’s online pre-eminence, Microsoft said Friday that it had made an unsolicited offer to buy Yahoo for about $44.6 billion in a mix of cash and stock.

If consummated, the deal would redraw the competitive landscape in Internet consumer services, where both Microsoft and Yahoo have both struggled to compete with Google.

The offer of $31 a share represents a 62 percent premium over Yahoo’s closing stock price of $19.18 on Thursday. It would be Microsoft’s largest acquisition ever.

Microsoft said the combination of the two companies would create efficiencies that would save approximately $1 billion annually.(Comment: There are substantial economies of scale to enjoy as scale of production increases. For example, duplicate research in two companies on online research can be combined to one. As more resources are devoted to developing online search, it is likely to be of better quality and can compete with Google better.) The software giant also said that it had an integration plan to include employees of both companies and intends to offer incentives to retain Yahoo employees.

Steven A. Ballmer, the Microsoft chief executive, said that he called his Yahoo counterpart, Jerry Yang, on Thursday night to tell him that Microsoft intended to bid on the company, and that they had a substantive discussion. “I wouldn’t call it a courtesy call,” he said in an interview.

Mr. Ballmer said he had decided to pursue a takeover because friendly deal negotiations would most likely be protracted and would probably become public.

“These things are hard to keep quiet in the best of times,” he said. He said his conversation with Mr. Yang was constructive, but suggested that a deal may not come easily.

Yahoo said in a news release Friday that its board would evaluate Microsoft’s bid “carefully and promptly in the context of Yahoo’s strategic plans.”

In a letter to Yahoo’s board, Mr. Ballmer wrote that the two companies discussed a possible merger, as well as other ways to work together, in late 2006 and 2007. Mr. Ballmer said that in February 2007, Yahoo decided to end the merger discussions because its board was confident in the company’s “potential upside.”

“A year has gone by, and the competitive situation has not improved,” Mr. Ballmer wrote.

As a result, he said, “while a commercial partnership may have made sense at one time, Microsoft believes that the only alternative now is the combination of Microsoft and Yahoo that we are proposing.”

Mr. Ballmer met several times in late 2006 and 2007 with Terry S. Semel, then Yahoo’s chief executive, people involved in the talks said. While the talks — originally focused on the prospect of a merger or a joint venture — were initially constructive and appeared to move forward, they quickly broke down, these people said.

After a series of secret meetings between both sides in hotels around California and elsewhere, Mr. Semel and Yahoo’s board decided against progressing with the talks, betting that its stock would turn around as it introduced a new advertising system called Panama, these people said. Mr. Yang, in particular, was adamantly against selling the company to Microsoft and championed the view of remaining independent, they added.

Mr. Ballmer constantly consulted with Bill Gates, the Microsoft chairman, about the progress of the negotiations, people close to the company said, and when the talks collapsed, he decided to wait to see the fate of Yahoo’s stock price. As the stock continued to fall, they said, Microsoft’s management became emboldened and began internal meeting in late 2007 about the prospect of making a hostile bid.

Despite their heavy investments in online services, both Yahoo and Microsoft have watched Google extend its dominance over Internet search and the lucrative online advertising business that goes along with it.

“No one can compete with Google on their own any more,” said Jon Miller, the former chairman and chief executive of AOL. “There has to be consolidation among the major players. It has been a long time coming, and now it is here.”(comments: Big firms are more able to engage themselves in various non-price competition in their bid to secure a greater market share. The merger between Yahoo and Microsoft will enable them to increase their market power and give them some advantage in competition against Google. For example, joint advertisement by two companies will be cost-saving.)

In recent months, Yahoo has struggled to develop a plan to turn around the company under Mr. Yang, its co-founder, who was appointed chief executive amid growing shareholder dissatisfaction last June.

Yahoo investors, however, remain skeptical. The company’s shares have slumped, and the closing price on Thursday was 44 percent below its 52-week high.

Yahoo’s shares closed Friday up 48 percent, to $28.38. Microsoft’s shares were down nearly 7 percent, and Google’s shares declined nearly 9 percent.

Microsoft, like Yahoo, has faced an uphill battle against Google. The company invested heavily to build its own search engine and advertising technology. Last year, it spent $6 billion to acquire the online advertising specialist aQuantive. Microsoft’s online services unit has been growing, but remains unprofitable.

Meanwhile, Google’s share of the search market and of the overall online advertising business has continued to grow.

Announcing its quarterly earnings earlier this week, Yahoo said it would cut 1,000 jobs in an effort to refocus the company and reduce spending, and issued an outlook for 2008 that disappointed investors.

The timing of Microsoft’s bid could allow the company to mount a proxy contest for control of Yahoo’s board should it try to dismiss the offer. Microsoft has discussed the prospect of mounting such a campaign, people close to the company said, and has until March 13 to propose a slate.

In his letter to Yahoo’s board, Mr. Ballmer wrote, “Depending on the nature of your response, Microsoft reserves the right to pursue all necessary steps to ensure that Yahoo’s shareholders are provided with the opportunity to realize the value inherent in our proposal.”

On Thursday night, Yahoo announced that Mr. Semel, its nonexecutive chairman and former chief executive, was leaving the board. Under Mr. Semel, a long-time Hollywood studio executive who ran Yahoo from 2001 to 2007, the company became more focused on its advertising and media businesses, but was unable to keep up with Google’s challenge in Web search and advertising and with the rise of social networking sites such as MySpace and Facebook.

A longtime board member, Roy J. Bostock, has been named nonexecutive chairman, Yahoo said.

Microsoft said it believes the Yahoo transaction could receive the necessary regulatory approvals in time to close by the second half of this year.

Miguel Helft reported from San Francisco, and Andrew Ross Sorkin from New York.

Oil and Candy

hello,

here are 2 article reviews plus some articles that might interest you. Enjoy!

Article 1

The article talks about the rising oil prices, zooming in on Russia as a major oil producer. Through demand and supply analyses, the writer identifies a decreasing supply of oil from Russia as a major factor for the increase in prices (As when SS decreases, P increases.) From the third paragraph, “The.. fall in Russian oil output… is adding impetus to the surge in the price of oil”.

The article goes on to explain that Russia is a key oil producer in the world, producing “almost 25 per cent of this amount[non-Opec countries’ oil production of oil]”, and thus a decrease in its supply of oil will have a significant impact on world oil prices. Also, besides Russia, other non-Opec countries are also supplying less oil.

Meanwhile, demand for oil continues to rise, and the increase in demand coupled with the decrease in supply raises oil prices tremendously. Many countries, including China and Japan, are worried that the existing supply is not enough to meet their demand for oil.

Article 2




















Article 3










Article 4




















regards,
hui min

video on The Economics of Walmart

http://www.youtube.com/watch?v=yRLH9utwb3wv

Wal mart is successful mainly because of its low price and orders of sale remain large. Wal mart is trying to lower production cost by providing their employees with little benefits, eg,health care with many workers are paided at minium wage. Compare to other companies with comparatively size, Wal-Mart has a more flexible business model that is able to adapt to market conditions quickly.

However, early this year, number of consumers of Wal-mart drops as quality of products sold in Wal-mart is questioned. The change in consumer's atitude as they would rather buy products somewhere else, which may be a little bit more expensive, but the quality is much better.

Xinyi

The silent tsunami

Apr 17th 2008
From The Economist print edition

Food prices are causing misery and strife around the world. Radical solutions are needed

PICTURES of hunger usually show passive eyes and swollen bellies. The harvest fails because of war or strife; the onset of crisis is sudden and localised. Its burden falls on those already at the margin.

Today's pictures are different. “This is a silent tsunami,” says Josette Sheeran of the World Food Programme, a United Nations agency. A wave of food-price inflation is moving through the world, leaving riots and shaken governments in its wake. For the first time in 30 years, food protests are erupting in many places at once. Bangladesh is in turmoil; even China is worried. Elsewhere, the food crisis of 2008 will test the assertion of Amartya Sen, an Indian economist, that famines do not happen in democracies.

Famine traditionally means mass starvation. The measures of today's crisis are misery and malnutrition. The middle classes in poor countries are giving up health care and cutting out meat so they can eat three meals a day. (comment: Concept of price elasticity of demand can be applied here. Meat are more price elastic than basic meal -- staple food such as rice. This is because: firstly, due to nature of good, staple food such as rice is indispensable as its carbohydrates provide people with energy. Secondly, there exists substitutes for meat as a protein source, such as legumes. Thirdly, Health care and meat are normally more expensive than meals -- mainly staple food like rice, thus takes a higher proportion of income. These three factors together contribute to a lower price elasticity of demand for staple food than for meat. Assuming prices for these two food types rise by the same degree, we would expect a less decrease in quantity demanded of staple food than the one of meat. The theory here goes in accordance with the reality where the people cut on the consumption of meat rather than staple food.) The middling poor, those on $2 a day, are pulling children from school and cutting back on vegetables so they can still afford rice. Those on $1 a day are cutting back on meat, vegetables and one or two meals, so they can afford one bowl. The desperate—those on 50 cents a day—face disaster.

Roughly a billion people live on $1 a day. If, on a conservative estimate, the cost of their food rises 20% (and in some places, it has risen a lot more), 100m people could be forced back to this level, the common measure of absolute poverty. In some countries, that would undo all the gains in poverty reduction they have made during the past decade of growth. Because food markets are in turmoil, civil strife is growing; and because trade and openness itself could be undermined, the food crisis of 2008 may become a challenge to globalisation.

First find $700m

Rich countries need to take the food problems as seriously as they take the credit crunch. Already bigwigs at the World Bank and the United Nations are calling for a “new deal” for food. Their clamour is justified. But getting the right kind of help is not so easy, partly because food is not a one-solution-fits-all problem and partly because some of the help needed now risks making matters worse in the long run.

The starting-point should be that rising food prices bear more heavily on some places than others. Food exporters, and countries where farmers are self-sufficient, or net sellers, benefit. Some countries—those in West Africa which import their staples, or Bangladesh, with its huge numbers of landless labourers—risk ruin and civil strife. Because of the severity there, the first step must be to mend the holes in the world's safety net. That means financing the World Food Programme properly. The WFP is the world's largest distributor of food aid and its most important barrier between hungry people and starvation. Like a $1-a-day family in a developing country, its purchasing power has been slashed by the rising cost of grain. Merely to distribute the same amount of food as last year, the WFP needs—and should get—an extra $700m.

And because the problems in many places are not like those of a traditional famine, the WFP should be allowed to broaden what it does. At the moment, it mostly buys grain and doles it out in areas where there is little or no food. That is necessary in famine-ravaged places, but it damages local markets. In most places there are no absolute shortages and the task is to lower domestic prices without doing too much harm to farmers. That is best done by distributing cash, not food—by supporting (sometimes inventing) social-protection programmes and food-for-work schemes for the poor. (Comment: If free food is to be distributed, supply increases and price drops, which harms the farmers by reducing their revenue and profit.) The agency can help here, though the main burden—tens of billions of dollars' worth—will be borne by developing-country governments and lending institutions in the West.

Such actions are palliatives. But the food crisis of 2008 has revealed market failures at every link of the food chain. Any “new deal” ought to try to address the long-term problems that are holding poor farmers back.

Then stop the distortions

In general, governments ought to liberalise markets, not intervene in them further. Food is riddled with state intervention at every turn, from subsidies to millers for cheap bread to bribes for farmers to leave land fallow. The upshot of such quotas, subsidies and controls is to dump all the imbalances that in another business might be smoothed out through small adjustments onto the one unregulated part of the food chain: the international market.

For decades, this produced low world prices and disincentives to poor farmers. Now, the opposite is happening. As a result of yet another government distortion—this time subsidies to biofuels in the rich world—prices have gone through the roof. Governments have further exaggerated the problem by imposing export quotas and trade restrictions, raising prices again. (comment: Supply and demand analysis can be used to explain the rising price of food. Subsidies to biofuels shift the supply curve of biofuel downward and as a result more biofuels are sold -- which means more food such as corn and grain is used to make the biofuels. Assuming that the total amount of food produced remains constant, less food is available to be sold for people to eat -- the supply curve of food for eating shift upward. Export quotas and trade restrictions imposed by the government further shift the supply curve upward. Given the price inelastic nature of demand curve for food for eating, this shift in supply curve will result in a big increase in food price.) In the past, the main argument for liberalising farming was that it would raise food prices and boost returns to farmers. (Comment: Some governments may impose a price ceiling as a part of their regulation of for a stable and affordable food price. If farming is liberalized and these price ceilings removed, the equilibrium price will be reached, based on demand and supply, which may be higher than the price given by the price ceiling.) Now that prices have massively overshot, the argument stands for the opposite reason: liberalisation would reduce prices, while leaving farmers with a decent living. (comments: deregulation of food price will allow more farmers switch to produce food due to profitability. As food supply increases, its price will fall, cat eris paribus.)

There is an occasional exception to the rule that governments should keep out of agriculture. They can provide basic technology: executing capital-intensive irrigation projects too large for poor individual farmers to undertake, or paying for basic science that helps produce higher-yielding seeds. (comment: this results in an outward shift of PPC as the quality of resources increases. This is desirable, at least in the short term, as people's desires are temporarily satisfied.) But be careful. Too often—as in Europe, where superstitious distrust of genetic modification is slowing take-up of the technology—governments hinder rather than help such advances. Since the way to feed the world is not to bring more land under cultivation, but to increase yields, science is crucial.

Agriculture is now in limbo. The world of cheap food has gone. With luck and good policy, there will be a new equilibrium. The transition from one to the other is proving more costly and painful than anyone had expected. But the change is desirable, and governments should be seeking to ease the pain of transition, not to stop the process itself.

Shizhi