Market Structure simulation

Essay by gemini76University, Bachelor'sA, September 2008

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East-West Transportation is in the freight transportation industry. The main method of transportation for East-West is by road and railroad. East-West’s railroad division has over 25,000 route miles across numerous states and also operates in 3 Canadian provinces. There are 4 major transportation divisions for East-West, they consist of Consumer Goods, Chemicals, Coal, and Forest products. Recently each of the divisions, which operate in different market structures, have experienced some losses and others have experienced profits within the same period of time.

The Consumer Goods division operates within a Perfect Competition market structure. The division has recently experienced some losses in profit. The issue is that there are far too many competitors offering the same service, and there is no control over prices. A decision had to be made in order to reduce the amount of profits being lost; the plant would either shut down or continue to operate.

The decision was made to continue operations but reduce the output to 6.75 million units. By reducing the output, it reduces the amount of profit lost to $150 million. Operating in a market where there are too many competitors offering the same service, produces an environment of over supply. The surplus is very limited to a company in general and even more so when the company’s profits are in jeopardy.

The Coal division of East-West operates in a monopolistic environment. East-West must determine on a price and output that will maximize profits. One would think that in a monopolistic environment that any price can be set, on the contrary, when prices are set too high the company may run the risk of incurring a huge loss. In a monopoly the demand curve is downward sloping so the company must operate at an output where the marginal revenue equals marginal cost.