Question

Over the past ten years you have been the manager of a medium-sized enterprise operating in a highly competitive software industry. Using the principles learnt from managerial economics what critical decisions you were faced with and what informed your ultimate decisions to achieve your fundamental objective. The industry subsequently became oligopolistic. What considerations, on the principles of managerial economics, you now have to consider as a medium-sized enterprise operating in this distinctly new market structure.

Answer 1

Critical decisions to be faced, were as follows:

1. What kind of software are in demand and what is preferred by the consumers as target audience.

2. The level of operation in the business so that profitability is maximized.

3. Marginal cost and marginal revenue of the business being done.

4. Bargaining power between the buyers and seller company and how to differentiate and earn more profit or charge higher price

In the light of above decisions, I came to know that marginal revenue should be equal to marginal cost at the level of operation, so that profit is maximized. Long run economic profit is zero for each product segment, so it is important to innovate and remain in short run all the time. Further, firms are price takers, so it is important to identify the price level, where the firm can shutdown and exit from the market.

While the industry being oligopolistic, It is clear that there are entry barriers and there will be few large firms. Hence, I have the alternative to organize capital and become big as others, or get merged with other big organizations. Further, there will be little difference between the products and services on offer. So, firms can collude each other even if they don't trust each other. The industry also faces kinked demand curve, so it makes my firm to be skeptical about rise in the price.