Calculating the Industry Output and Market Share  

 

Output	MC ($)
Q	Abba	Babba	Cabba
1,000	2,500	2,600	2,700
2,000	2,400	2,300	2,500
3,000	2,200	2,100	2,300
4,000	2,000	2,000	2,100
5,000	2,100	2,200	2,200
6,000	2,200	2,500	2,300

1. Calculate the industry output and market share at the current price of $2,200, assuming the prices are stable and unlikely to change.
2. Assume the current prices in the market are challenged by the regulatory agency, resulting in a new maximum price of $2,000. How will this change the industry output and market share for each company?
3. Is there any incentive for any company to cheat under either of the conditions in tasks a and b? Why or why not?

Introduction In the industry, three firms Abba, Babba and Cabba decide to form a cartel and divide the market shares such that each company will provide services that will maximize its profits. The licensing restrictions allow each company to sell as much as it wants at a price ceiling of $2,200. This paper discusses the calculation related to industry output and market shares of each company, when the price is $2,200 and $2,000 and about incentives to cheat.

Industry Output and Market Share at the Current Price of $2,200 The cartel allocates production across its members to equalize marginal costs across firms. It is the reason that the profit-maximizing point for each member is the point, where marginal revenue will be equal to each firm’s marginal cost (Besanko, Braeutigam & Gibbs, 2010). Abba can produce both 3,000 and 6,000 units because for these units marginal revenue will be equal to marginal cost but it will produce 6,000 units it order to maximize its profits. Similarly, Babba and Cabba will produce 5,000 units because for these units marginal revenue will be equal to marginal cost. Below table shows the output of each company and industry:

Abba	Babba	Cabba	Industry Output
6000	5000	5000	16000

Industry output is the total of the outputs of three companies. Market share for each company can be calculated with the help of following formula: Formula: Individual output/industry output (Besanko, Braeutigam & Gibbs, 2010). Abba Market Share = (6000/16000)*100 = 37.5% Babba Market Share = (5000/16000)*100 = 31.25% Cabba Market Share = (5000/16000)*100 = 31.25% Below graph shows the market share of each company in the industry:    If the new maximum price is $2,000, it will change the industry output and market share of each company in the following manner: Now, in order to maximize the profit, Abba will produce 4,000 units because for these output level marginal cost will be equal to marginal revenue. Babba will also produce the same quantity because for this level marginal cost and marginal revenue will be the same. On the other side, Cabba will not produce any quantity for this price because for each output level marginal cost will be higher than marginal revenue. Thus, the industry output will be the sum of output of Abba and Babba. Below table summarizes individual companies output and industry output:

Abba	Babba	Cabba	Industry Output
4000	4000	0	8000

On the basis of above output table, market share for each company is as below: Abba Market Share = (4000/8000)*100 = 50% Babba Market Share = (4000/8000)*100 = 50% Following graph shows the market share of each company in the industry:  Thus, the above calculation shows that if the price decrease to $2,000 from $2,200, it will enhance the market shares of Abba and Babba to 50% each and reduce the market shares of Cabba to 0% from 31.25%.

Incentive to Cheat There is an incentive for any company to cheat under either of the conditions in tasks A and B. The incentive is that any of the firm can produce more quantity in comparison of the agreed output and can cheat on the cartel agreement. The reason behind this is that as only one of a number of companies cheat, it cannot affect the whole price by changing output (Arnold, 2010). Therefore, company can produce or sell additional units without lowering the price and can increase its profit from smaller amount to the larger amount. If all members start cheated, the cartel would be discontinued to earn monopoly profits as there would no longer be any incentive for member firms to be a part of cartel.

Conclusion On the basis of above discussion by assignment help experts, it can be stated that each company in the industry will produce the quantity that will maximize their profit or where the marginal revenue will be equal to marginal cost. References Arnold, R. A. (2010). Microeconomics. USA: Cengage Learning. Besanko, D., Braeutigam, R.R. & Gibbs, M. (2010). Microeconomics. USA: John Wiley & Sons.

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