Answer to Question #194631 in Macroeconomics for Etsub

Question

Assess the existing state of the competition for one of certain market in Ethiopia such as

the market for coffee and based on the information collected answer the following questions (5 marks)

a) Characterize the structure of the market in terms of number of sellers, type of the

product, information, barriers to entry, power to affect price, profit potential and

non-price competition.

b) To which market structure does the given market fits/resembles? Why?

c) How does the government policy on the sector affected competition? Is there price

fixing and quota system? Describe.

d) What anti-competitive practice has been observed in the sector?

e) Assuming you are managing one of the firm in the market, how do you maximize

profit given the nature of the market?

Answer 1

Solution:

a.). The coffee market in Ethiopia has an oligopoly market structure. It has the following features:

·        The market structure is dominated by a small number of large firms.

·        Firms sell either identical or differentiated products.

·        There is the existence of imperfect information in the market.

·        Barriers to entry in the market exist since the firms attain and retain market control through exclusive resource ownership, government restrictions, high start-up costs, and copyrights.

·        The firms exert some control over price, and a single seller can control prices.

·        No single firm enjoys a large amount of market; therefore, all firms would need to collaborate to raise prices and realize a higher economic profit.

·        Non-price competition is the most dominant factor dominating the market through tactics such as advertising, sales promotions, selling staff, market research, and new product development.

b.). The coffee market resembles an oligopoly market. This is because of the many characteristics that fit the market, such as domination by a small number of large firms, sale of identical or differentiated products, barriers to entry, interdependence, lack of perfect competition, and non-price competition prevalence advertisements.

 

c.). Many government regulations in the market discourage new entrants to the market due to the restrictions imposed. Yes, there is a price-fixing and quota system in the coffee market. The firms collude to set prices and output levels to increase and maximize their profit margins. One firm can act as the price leader and fix the product's price while other firms can enter into a market sharing agreement based on the quota system.

 

d.). There are multiple anti-competitive practices in the coffee market, which include price-fixing and discrimination, supply manipulation, and exclusive dealing arrangements.

 

e.). Since the coffee market is oligopolistic, you can maximize profits by equating marginal revenue and marginal cost, which results in an equilibrium output (Q) and an equilibrium price (P). At that point, firms in the coffee market will be able to maximize their profits.