Application Exercise 4h:
1) This completed table provides a guide only. It is not expected that students will arrive at neither precisely the same numbers nor the exact same conclusions.
Questions 1-4 are answered within the label below:
Questions 1-4 are answered within the label below:
| Banana Market | Airline Market | Explanations |
|---|---|---|
| 4 | 1 | There are numerous sellers of bananas at the Victoria market. In contrast, there are only few firms offering domestic air travel services in Australia. |
| 4 | 3 | Compared to domestic airfares, there are more buyers of bananas given its relatively cheap price and its status as an important source of energy. Essentially, bananas are more of a necessity in comparison to domestic airline tickets, which are really a luxury item for most consumers. |
| 4 | 3 | There are enough varieties of bananas to prevent them being considered homogenous products and therefore scoring a rating of 5. Domestic air travel on the other hand is slightly more differentiated given the many more variables that go into producing the total service. |
| 4 | 1 | At the Victoria market, there are some council regulations that make it difficult, to a limited extent, for operators to establish a business. However, these impediments are trivial compared to those restrictions in place within the airline industry. |
| 4 | 1 | If a fruit and vey seller al the market is unprofilable, it is relatively easy to exit the market and set up business elsewhere. The costs of dismantling the stall are not large. In contrast, the airline will incur significant costs of loading expensive assets (e.g. airplanes, computer equipment, etc). |
| 4 | 2 | The extent of hidden information in relation to bananas is largely isolated to the condition of the banana beneath the skin. While this is usually observable from the condition of the skin, it will always be the case. In contrast, airline travel services involve a range of activities that make up the entire service which means that there is more information about the actual service that might be hidden from the consumer (e.g. does the price paid include a luggage allowance, on flight meals, entertainment....is the terminal a long way from other facilities). |
| 24 | 11 | Based on the scores, it is evident that the banana market is much more likely to be considered perfectly competitive whereas the domestic airline market is more likely to be considered oligopolistic. |
- Businesses operating in the market for bananas are less likely to be making super-normal profits because the relatively high number of competitors will always be exerting downward pressure on prices and therefore profits. In addition, new entrants are likely to enter the market in the event that high profits appeared to be made by existing operators. This will once again exert downward pressure on prices and profits. In contrast, the companies operating in the domestic airline market are more likely to be making super-normal profits because there are few competitors that can more easily collude and the relatively high barriers to entry make it more difficult for new entrants to enter the market for a slice of the super-normal profits that might be made.
- The government could decide to make it more difficult for two or more companies to merge as one entity. In addition, the government increase the fines payable by those companies found to be engaging in anti competitive behavior (such as price fixing or predatory pricing).
- Depends on research conducted by the student.
- Depends on research conducted by the student.