Suppose that you own a 25 year old movie theater in Micropolis. It has 6 screens

Question

Suppose that you own a 25 year old movie theater in Micropolis. It has 6 screens and a concession stand. Across town there is a 7 year old movie theater with 4 IMAX screens and 20 more regular screens. Your competitor’s movie theater also has stadium seating for all screens and two concessions stands. Remember this is a small to mid-sized city with a small to moderate sized customer base.

1. For each of the characteristics listed below, evaluate the market for movies in Micropolis.You should clearly state your answer and provide a shortstatement to support your answer.

A. Number of firms

B. Product

C. Barriers to entry

2. Now that you have looked at these characteristics in question 1, which market structure do you think best fits this example? Remember, none of the market structures will fit perfectly in this example.Which characteristics from your answer in #1 fit this market structure well?Which characteristics do not fit this market structure well?

3. Briefly describe the pricing strategies that perfectly competitive firms and monopolies use.What are the profit expectations for perfectly competitive and monopoly firms in the short-run and the long-run.

4. Do you think that your firm (the small theater) will have substantial pricing power based on the market structure selected in #2 and the characteristics that you described in #1?What are your short-run and long-run profit expectations based on your answer in #1 and #2?

5. Define price discrimination. Describe a price discrimination strategy that you could use at your movie theater (you must come up with a real-world strategy for this answer). How can you possibly earn extra profits by charging some customers a lower price instead of charging all customers a high price? Why not charge all customers the low price?

6. Define product differentiation. Explain how firms use brand management and advertising to differentiate their product. Describe an advertising strategy that you could use to differentiate your movie theater (you must come up with a real-world strategy for this answer). What is the benefit for firms with differentiated products?

7. What are some potential barriers to entry for another movie theater to entering this market? Do you think that they are sufficiently high to keep a third firm from entering this market?

Explanation / Answer

Answer to Q.No.1:

A. No. of firms:

Well, it is clear from the given information that there are only 2 firms in the market Micropolis. One is your firm having 6 screens and One is your competitor which is operating on a large scale. Thus no. of firms is simply 2.

B. Product

What do you think? It is surely a service you are providing, entertainment service. And your product is simply movie and cinema service. It is movie and entertainment service and not the screens.

C. Barriers to entry

With even so much limited information, you can think of no. of barriers in the market. Barriers to entry to mean that all the factors which are restricting any new firms to enter in the market, be it any reason.

One of the barriers as we can see is competition. There are already two giants operating in the market, one is 25 years old meaning it must be having a good market reputation, on the other hand, one is operating on a large scale. Any new firm thinking of operating in the market, will have evaluate its opportunities and threats of competing with these 2 giants.

Another barrier could be population. Well, city is not very large. Its just a mid-sized population, two firms are already operating, thus it won't be much profitable for the new firms to enter. Had the population been significantly large, then new firms might enter to take out some proportion of the market and earn profits. Thus population of the city serves as a barrier to entry.

I hope you got the concept. Please feel free to ask any doubts you have regarding the answer provided. Please rate the answer as per your understanding.

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