Assignment 3: E-Portfolios

Click on the links below to view E-Portfolios

Best Buy

Molson Breweries

Suncor Energy Inc.

The Little Potato Company

Correctional Service of Canada

Unit 9: Exercise 9-2 Comparing Market Structures

Unit 8: Exercise 8-1 - Defining Oligopoly and Game Theory

Considering the information in the video and Chapter 11 (pages 387-394), write a few study notes to answer the following questions:

·         What are the main ideas behind game theory?

·         How did it develop?

·         Is there evidence of game theory in the current economy? Explain.

·         How does the payoff matrix work?

·         Describe the principles behind collusive and cartel actions.

Game Theory is a mathematical algorithm used by players to analyze strategic situations, interactions and behaviours. Based on a player’s analysis of a situation he hopes to enhance success of his/her choices based on the strategic choices made by his opponent(s). In other words, the outcome is dependent on your actions as well as the action of others. What does this mean in economics? Well, in a competitive environment firms are constantly analyzing each other to gain corporate intelligence and strategize what the market player’s next move will be. A firm or an individual is always concerned about their own self interest.

There are many people in history that have been involved in some form of development or study of the game theory. In the ECON-250 10 minute video on game theory at http://www.youtube.com/watch?v=54Dk3x4osik John Nash’s contributions are primarily cited. However, another major contributor in the study of this theory is John von Neumann, amongst others. A chronology of Game Theory, for those interested, can be found at http://www.econ.canterbury.ac.nz/personal_pages/paul_walker/gt/hist.htm#nobel2 .

If we look at the various types of markets I believe game theory does not play a significant role in perfect competition, monopolistic or monopoly environments. The reason being one group is price takers (perfect competition, monopolistic) and the other is price is set by market demand (monopoly). Game theory would have benefit in an oligopoly environment where decision making and market share are based more on strategic thinking such as automobile or petroleum gas competitors.

The payoff matrix is a grid showing the best, mediocre and worst outcomes to profit, price or what ever other value one is trying to determine when employing game theory. Below is an example of a payoff matrix showing profits based on a dollar value against a quantity sold. If both firms are in equilibrium the profits earned are the same (top left). When one or the other firm gets hungry for business we see a shift in balance of fairness for one or the other (top right and bottom left). If both firms get extremely competitive against each other, such as a price war, then both will suffer (bottom right).

Collusion: an agreement among suppliers to set the price of a product or the quantities each will produce.

Cartel: an association of sellers acting in unison.

The definitions of collusive and cartel are noted above from Sayre/Morris 6e, Microeconomics. Both of these types of agreements if actioned in a legal manner provide benefit to both the firm and consumer. Both of these methodologies have a tendency to breakdown when illegal activity such as price fixing becomes involved with illegal collusion where firms attempt to control supply. The detriment of cartels is enforcement of production levels or again price fixing.

Unit 7: Exercise 7-1 Defining Monopolistic Competition

Unit 6 Exercise 6-2 Competing as Starbucks

In order for a market to be perfectly competitive the buyer and seller characteristics is such that there is no direct influence on the market supply/demand and price. Four conditions are cited by Sayre/Morris, Principles of Microeconomics 6e, page 261, in order for a perfectly competitive environment to exist. These conditions are:

1. Many small buyers and sellers all of whom are price takers;
2. No preference shown;
3. Easy entry and exit by both buyers and sellers; and
4. The same market information available to all.

Reflecting on the world market for coffee and the monopolistic competition created by the coffee houses Starbucks is in fact part of the perfect competition market. However, one may challenge point number four with respect to market information depending on how one construes the meaning. Internal market information such as trade secrets regarding blends and roasting methodologies particular to a certain supplier may be of competitive advantage, however, in my opinion it is not the driving force that the industry is seeking. One of the true governing sources of information available to all players is made available by the International Coffee Organization (ICO) whose mission is to “tackle the challenges facing the world coffee sector through international cooperation.”[1]

The demise of Starbuck resulting in six hundred store closures over the 2008-2009 time frame are noted in “Starbucks Gossip: Starbucks chairman warns of the commoditization of the Starbucks experience”.  The memo from Starbucks chairman Howard Schultz to CEO Jim Donald in February 2007 refer to automated machines, lack of passion and sterile, cookie cutter atmospheres as directly impacting the bottom line. While this may all be very well and true it comes down to an aggressive expansion strategy plan that was implemented to improve efficiencies and increase profits while sacrificing Starbucks history and traditions on which it was founded in 1971. Not to mention the economic recession that also played a role in the downturn of their profits and return on investment, however, the recession is not the pitfall and it was the internal management expansion strategy that caused the original impact.

As part of their restructuring plan short-run items for Starbucks scrutiny may be capital equipment, leases, wages or benefit packages. In the long-run global coffee sourcing ought to be reviewed and perhaps a marginal shift from fair-trade coffee sourcing should be added to their mix in order to reduce coffee costs.


I perceived Starbucks pricing structure to be higher than their competitors. How Starbucks can conceivably charge customer’s higher prices for burnt coffee is beyond me. Nonetheless, their burnt smelling and tasting coffee has filled a niche in this caffeine addiction market that satisfies their die hard customers. Should they choose to reduce their pricing structure through cost saving measures Starbucks ought to operate at a marginal loss which in the short run may benefit the company as opposed to store closures. Eventually they will see a resumption of demand for their product by gained customer base and would be in a position to slowly increase pricing again to reach the breakeven or profit making point.

[1] Cited from International Coffee Organization web page  http://www.ico.org/mission.asp?section=About_Us

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Unit 5B: Exercise 5-5 Long Run Costs and Economies of Scale

The business I would create would be an ice cream shop that provides fresh onsite gourmet ice cream following strict standards to produce the best and most high quality product for our customers. The name of the ice cream parlor would be Udderly Ice Cream. The plan will be to establish future franchises however, the first location will be a location established in the lower mainland of British Columbia. Research will be conducted to determine the best high traffic area for the first location (i.e. Schools, parks or shopping malls) in order to capitalize on market share. The competitors we would be targeting to steal market share from would be Ben & Jerry’s, Baskin Robbins.

The business size will be a small take out style venue and will have a small amount of stools along the front window area with a narrow table top for some patrons to sit and enjoy (no more than 10-15). The balance of the store will be dedicated to ice cream production in the back and space for the customers in the front to view the products in the freezer area. The back production are need not be to large as all of the product will be manufactured from one standard base product and all of the flavor varieties (from traditional to wacky like jalapeno-bacon, anything with bacon is good).

The short run costs would be labour, rent/lease, utilities, ice-cream making equipment and raw products. The long run cost would be very similar in that the initial concept is to keep the same store size and quantity of labour at future franchise locations. However, the best long run opportunity may be the sourcing of raw products for production.

An example of a local Edmonton based business with a similar model would be the Marble Slab Creamery: Web Page http://marbleslab.ca/index.php/creamery

Marble Slab Creamery Strengths:   1). Unique frozen slab technique of preparation

                                                      2). Uses the freshest and highest quality ingredients

                                                      3). A unique experience as soon as you enter the store

                                                      4). Offers portable slab catering service

Marble Slab Creamery Weaknesses:   1). Product line is very similar to competition

Unit 5A: Exercise 5-3 Law of Diminishing Returns

The Diminishing Returns to Tobacco Legislation
·         Decide which points in the debate have merit.

o   The numerous and visible warnings tend to be discounted or ignored over time.

o   Burdensome taxes and regulations  will increase smuggling activity.

o   There seems to be a correlation between taxation increases and decreases in cigarette consumption.

·         Decide which points lessen the debate.

o   The fact that Quebec entrepreneurs do not abide by the Canadian warning legislation and provide neutral drawings on their packages.

·         In words, estimate the point of diminishing returns for the government.

o   Government warnings and regulations have been in place on Canadian cigarettes for at least ten years. The effect of these campaigns have reached their point of diminishing returns as those who have had the desire to quit already have; those who have not may have curbed consumption due to taxes.

·         What are some other solutions that would increase the government’s production (success) compared to their costs, thus lessening their diminishing returns?

o   Mild forms of prohibition – what these could be other than an out right ban, who knows as a majority of Federal, Provincial and Municipalities have already adopted prohibitive measures such as smoking indoors, some public places and as of late in vehicles with children on board.

o   Dismantling of the private, for-profit, tobacco industry, and its replacement with a sort of public utility that would sell cigarettes in plain wrappers at cost as proposed by the US Food & Drug Administration.

o   Increased taxation on manufacturers of tobacco products.

·         What implications are there in this article for the supply and demand of tobacco (Chapter 2 and 3)?

o   The conclusion I draw from this article is that cigarette smoking tends to be an inelastic product do to the fact that regardless of the price increasing do to taxation a majority of smokers continue with their habit due to the lack of substitutes (supply would marginally decrease however overall demand would not be significantly impacted).

·         Explain the debate in terms of sin taxes (Chapter 4).

o   Sin taxes are levied against products that tend to have public disapproval such as cigarettes and alcohol. The article outlines how the government implementation of taxation plays a direct role in the diminishing rate of return.

Article Link: http://www.pierrelemieux.org/artdiminish.html