1. What model of oligopoly behavior were the DRAM producers discussed in the Case in Point following? How might the DRAM producers have achieved their goal and still stayed within the law?
2. Explain why a price increase for foreigners would increase Costa Ricas total revenue and profits from operating its national park system.
3. Restaurants typically charge much higher prices for dinner than for lunch, despite the fact that the cost of serving these meals is about the same. Why do you think this is the case? (Hint: Think about the primary consumers of these meals and their respective elasticities.)
1. Oligopoly is characterized by relatively few firms producing either standardized or differentiated products. There may be substantial barriers to entry and exit. An industry dominated by a few firms is an oligopoly. Each oligopolist is aware of its interdependence with other firms in the industry and is constantly aware of the behavior of its rivals. Oligopolists engage in strategic decision making in order to determine their best output and pricing strategies as well as the best forms of nonprice competition. DRAM is the most common semi-conductor main memory format for storage and retrieval of information that is used in personal computers, mobile phones, digital cameras, MP3 music players, and other electronics products. At those meetings, as well as through emails and telephone conferences, the main manufacturers of DRAM decided not only what prices to charge and how much to make available, but also exchanged information on DRAM sales for the purpose of monitoring and enforcing adherence to the agreed prices. The collusion lasted for three yearsfrom 1999 to 2002. In December 2001, DRAM prices were less than $1.00. By May of 2002, price had risen to the $4 to $5 range. 2. Presumably, foreign visitors have a relatively less elastic demand for visiting the parks than do local citizens. Local citizens have better knowledge of substitutes for the parksnamely other areas in Costa Rica. And, of course, once foreign travelers are in the country, they have already…
committed the expense of getting there, and are less likely to be willing to pass up a visit to national parks based on pricing considerations. Costa Rica already discriminates to a large degree. Foreigners are charged $7 per day to visit the parks; locals are charged $2. Professor Alpizar proposes increasing the degree of discrimination. He estimates that the price elasticity of foreign demand for visits to Costa Ricas national parks is 0.68. That, of course, suggests inelastic demand. Costa Rica could increase its revenue from foreign visitors by increasing the fee. Professor Alpizar proposes increasing the fee for foreigners to $10. He proposes that the price charged to Costa Ricans remain at $2a price that he calculates equals the marginal cost of an additional visit. Professor Alpizar calculates a fee of $10 per visit by a foreigner would more than pay the countrys fixed cost of maintaining its extensive park system, which utilizes 24% of the countrys land. The higher price would thus allow the government to meet the major costs of operating the national parks. Charging a $2 fee to locals would satisfy the efficiency requirement that price equal marginal cost for local visitors; the $10 fee to foreigners would permit the country to exploit its monopoly power in permitting people to visit the parks. The Costa Rican government has asked Professor Alpizar to design three pilot projects aimed at incorporating his proposal to raise park fees to foreign visitors. 3. From an independent restaurateur’s point of view, pricing is a matter of custom, meeting customer expectations, and what the market will bear. Another way of thinking about it is that you make your money at dinnertime so that’s what supports your fixed costs – rent, insurance, cleaning, prep cook, inventory, etc. Once you pass the hurdle of opening the doors for the day you have to squeeze every last dollar out of the operation, and if that means serving lunch at a lower price to increase volume, might as well. The first meal of the night is very expensivebecause it has to put a lot of things in place even to serve a single person – prep cooks, cooks, dishwashers, servers, and some managers. If it knew revenues would be less than that, it wouldn’t pay to open the doors for the night. That’s above and beyond the fixed and sunk costs in rent, insurance, and all that, which the restaurant cannot control. However, after the first few meals the marginal cost is flat, as the restaurant has a low, predictable cost for each additional dinner served – mostly the ingredients, and a little bit of additional labor. And then there’s an inflection point on the far right where the restaurant is full and there’s no more room to seat people. Things get very real very fast there, but I’ll ignore that because most restaurants are not full most of the time. Two things are different at lunch. First, the demand curve is lower. People just won’t pay as much for a lunch as a dinner, or looking at it another way, if you charge the same thing at lunch, fewer people will come. Whatever the reason, demand is simply higher for dinner.Between the lower demand curve, and the lower marginal costs for the first few meals, the price point that optimizes operating profits for lunch is usually a lot lower than the price point for dinner. Take out the graph and it’s a simple thought. If you charged the same at lunch as at dinner nobody would come, and you wouldn’t make any money.