There are estimates that as many as 4,000 pizzerias open every year in the U.S. and just as many close. Why does this continue to happen? 2. The manufacturers of R.C. Cola, with 2.1% market share in the soft drink industry, recently launched a new advertising campaign describing their brand as a “hip alternative” to “corporate colas” like Coke and Pepsi. Why don’t they simply try and gain market share by cutting price? What property of oligopoly markets explains this type of behavior?

There are estimates that as many as 4,000 pizzerias open every year in the U.S. and just as many close. Why does this continue to happen?

2. The manufacturers of R.C. Cola, with 2.1% market share in the soft drink industry, recently launched a new advertising campaign describing their brand as a “hip alternative” to “corporate colas” like Coke and Pepsi. Why don’t they simply try and gain market share by cutting price? What property of oligopoly markets explains this type of behavior?

 

 

Answer:

This situation will continue to happen due to the law of demand and supply and force of competition. As it is presented that every year almost 4000 pizzerias open and same numbers are closed so market is in equilibrium state which states that the demand of the market is being fulfilled. Since competition is relative constant and price wars are unlikely, since profits need to be made we see a trade-off between openings and closings. The existing number of pizzerias are able to fulfill the market demand and if any new store opens, it will create competition for others and then there will be a loss of profit which will result the closing of similar number of stores. Basically, there is only one pizza pie and that pie cannot feed more mouths then it is intended to.

Answer:- Organizations cannot simply gain market share by reducing their prices like R.C. Cola with 2.1% market share in oligopoly markets due to ‘strategic dependence’ which as stated in the textbook is, “A situation in which one firm’s actions with respect to price, quality, advertising, and related changes may be strategically countered by the reactions of one or more other firms in the industry” unlike the perfect competition where organizations can gain market share by dropping prices. Furthermore, in an oligopoly market, competitors will drop their prices when one company decreases its price owing to the economics of scale, barriers to entry as well as there being a small number of organizations that are interdependent. A kinked demand curve (oligopoly) versus an inverse demand curve (pure competition) if one might add. That being said, by R.C. Cola positioning its brand as a “hip alternative” appose to “corporate colas” is a technique that will enable them to gain market share because they can now cut prices in order to do so.

Asked on February 14, 2018 in economics.
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