In economics, organizations that operate in oligopolies markets compete by trying to steal market shares from one another. Therefore, instead of competing by lowering prices, the kinked demand curve points to an understanding that the strategy does not work since every organization reduces costs. Companies utilizing this strategy often compete using a factor directly affecting profit and hence the quantity being sold. The Cournot’s model finds application when organizations produce standardized or identical products and, thus, do not collude. Duopolies, on the other hand, operate by the understanding that companies compete by the produced quantity. The assumption by the Cournot’s duopoly model is that two organizations move simultaneously, having similar market demand perspectives and having good knowledge of the cost functions of each rival. With this, firms choose how to maximize profit through their output based on the belief that rival organizations make similar choices. For the U.S., the decision Continue reading
International Economics
Mercantilism Theory of International Trade
The mercantilists proposed Mercantilism theory of international trade. They were a group of economists who preceded Adam Smith. The foundations of economic thought between 1500 and 1800 were based on mercantilism. Mercantilists believed that the world had a finite store of wealth; therefore, when one country got more, other countries had less. Mercantilists restricted imports and encouraged or subsidized exports as a conscious policy to make their citizens better off. Mercantilists judged the success of trade by the size of the trade balance. Mercantilism was a sixteenth-century economic philosophy that maintained that a country’s wealth was measured by its holdings of gold and silver. This required that the countries to maximize exports and minimize imports. The logic was transparent to sixteenth-century policy makers that if foreigners bought more goods from us than we bought from them, then the foreigners had to pay us the difference in gold and silver, enabling Continue reading
The SCP Framework – Structure Conduct Performance Framework
The origin of the SCP (Structure-Conduct-Performance) paradigm can be traced to the work of the Harvard economist Edward Mason in the 1930s. It was popularized during 1930-60 with its empirical work involving the identification of correlations between industry structure and performance. This is a paradigm that is foundational to industrial organization economics, consistent with the positional view of strategy, as opposed to the resource-based view of strategy. There are two competing hypotheses in the SCP paradigm: the traditional “structure performance hypothesis” and “efficient structure hypothesis”. The structure performance hypothesis states that the degree of market concentration is inversely related to the degree of competition. This is because market concentration encourages firms to collude. The efficiency structure hypothesis states that performance of the firm is positively related to its efficiency. This is because market concentration emerges from competition where firms with low cost structure increase profits by reducing prices and expanding Continue reading
Competitive Advantages of International Business
Competition has always been central to the agenda of firms. It has become one of the enduring themes of our times and the rising intensity of competition has continued until this day thereby spreading to more and more countries. As a result of globalization, most industries with the topics of international business and competitive advantage have received much attention from business executives, public policy makers and scholars in recent years. This; in conjunction with the rise of global competitors has helped to explain why a country’s competitive advantage can be determined by the strength of its business firms. This has resulted in numerous rankings, where industries and firms are compared on a global scale to see which are the most competitive. Most firms prefer to compete in the business environment so that it will help determine the competitive advantage of the country in which they operate. A firm’s ability to Continue reading
Foreign Capital
Foreign capital or investment has become significant part of sources of funding for various projects in every country. This source of funding has received the attention of both the government as well as the corporate sector that there has been increasing reliance on this source for planning and execution of projects by the government as well as the corporate sector. Foreign capital can come into a country in different forms. Let us first understand these forms of foreign capital before discussing the need for foreign capital. Forms of Foreign Capital Direct Entrepreneurial Investment: In this form of foreign capital, the foreign investors can start a company abroad mainly for the purpose of establishing its branches and subsidiaries in other countries. For instance an American business group may invest in a new project in India directly and start its own affiliate or branch or even a subsidiary. Sometimes, the investors abroad Continue reading
European Economic and Monetary Union (EMU)
The basis of the European Economic and Monetary Union (EMU) was the American desire to see a united Western Europe after the World War II. This desire started taking shape when the Europeans created the European Coal and Steel Community, with a view to freeing trade in these two sectors. The pricing policies and commercial practices of the member nations of this community were regulated by a supranational agency. In 1957, the Treaty of Rome was signed by Belgium, France, Germany, Italy, Luxembourg and the Netherlands to form the European Economic Community (EEC), whereby they agreed to make Europe a common market. While they agreed to lift restrictions on movements of all factors of production and to harmonize domestic policies (economic, social and other policies which were likely to have an effect on the said integration), the ultimate aim was economic integration. The European countries desired to make their firms Continue reading