Assignment 3 ECON1194 2019 A Thu s3741119 PDF

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PRICES AND MARKETS ECON1194

STRUCTURE – CONDUCT – PERFORMANCE ANALYSIS Lecturer: Jain Upasana Student name: Le Thi Hong Thu Student id: s3741119 Word count: 1384.

Question 1: Coffee is one of the main agricultural products in Vietnam. In recent years, coffee products have played an important role in promoting GDP development. With increasing coffee consumption, Vietnam enterprises in the coffee industry develop by new ways to meet not only domestic demand but also export to many foreign countries. This is reflected in the competition of buying coffee beans of FDI enterprises and the competition of market share of big three coffee firms including Nestle, Trung Nguyen, Vinacafe and other new high-end coffee shops in Vietnam. Vietnam is considered to be the second largest producing coffee in the world because Vietnam has a large coffee growing area and demand of consumers is more and more increased (Chi Nam 2018). Although this leads to many new brands want to enter Vietnam coffee market, this industry recently has to face many challenges such as climate change, irrigation water source, large investment requirements and competition from other high-value crops (Chi Nam 2018). Moreover, in 2017 (VN Economic Times 2018), three big players almost dominate this market including that Nestle sells instant coffee with market share at 44.2%, Masan and Trung Nguyen have a market share of 30.7% and 7.9% respectively. This shows that the coffee market has been shaped very well, it is difficult to have opportunities for new players. These means that it restricts new players entering the market.

Figure 1: Reproduced from: VN Economic Times 2018 According to BMI Research (Thi Ha 2018), consumption grew significantly from 0.43kg to 1.38 kg per person (2005 to 2015). Moreover, one of the reasons that lead to the increase in demand is due to the habit of consumers change into using instant coffee which makes this market is more exciting. Although many big brands produce and sell coffee, every player has differentiated products, for example, Nestle has Nescafe 3 in 1 and 2 in 1, Masan has Vinacafe and Trung Nguyen has G7 (‘Vietnam coffee market’ 2018). Although most brands focus on producing and selling instant coffee because the demand of using it tends to increase thanks to its convenience, each brand has a unique entity with its own products that have different flavors and packaging which can help customers to distinguish them from other rivals. Furthermore, advertisement is an effective way, that most brands use to compete, is non-price competition. According to a survey (Nam Mai 2018), Vietnamnet shows that the popularity of Nescafe, G7, Vinacafe is 39.2%, 22.2% and 16.7% respectively. According to the information above, Vietnam coffee market can have a summary of information like the below table:

Vietnamese coffee market Number of firms

Medium

Number of buyers

Many

Barriers to entry

High

Concentration level

High

Product differentiation Similar but slight differences Vietnam coffee market is not a monopoly because there are many firms produce and sell instant coffee while the characteristic of a monopoly is a single firm that has the power to control all in that market. It just has few firms that are able to enter this market because there are many large challenges and new firms have to compete strongly with three old players. Therefore, barriers to entry are not low which leads to it is not a perfect competition and monopolistic. The Vietnam instant coffee market is an oligopoly.

Question 2: In Vietnam, there are many distributors of pure coffee beans but the instant coffee products of each brand have a difference because of there taste, quality and production technology. For example, Vinacafe has a new taste which is a combination of coffee and soybean (Nam 2016). Trung Nguyen has G7 black which has ingredient including only coffee and it makes a difference with other rivals (lenscoffee n.d.). Nestle has Nescafe Gold Blend with a new attractive packaging and a distinctive taste because this product combines Arabica and Robusta coffee beans (Nescafe). Therefore, their products have differentiation so they can base on the price and quality of coffee beans and production expense to charge price. Besides that, they are three brands that hold large market share so they have the power to set price. However, competition in Vietnam instant coffee market continues to heat up with participants of new enterprises coming from abroad like Starbuck and Highland when they use quality ingredients that import from other countries.

In order to produce instant coffee with its original flavor, it requires to have a chain of the production line with advanced technology so manufacturers need to have a large amount of capital to buy coffee beans and invest for technology. The three big companies mentioned above all have their own instant coffee factory. They become major suppliers of many big supermarkets like Lotte, Big C, Coopmart, etc, and there are many different prices from manufacturers. Besides that, demand more and more increases because instant coffee users are not only adults but also young people. This leads to the demand for the instant coffee market is elastic so manufacturers can actively set price. Moreover, the weather is one of the factors that affect the productivity of coffee beans so they can base on this to set price higher. However, they cannot charge price independently because the competition of the coffee market is currently very hot. Therefore, when one firm set the price lower, others will follow to compete (Tejvan n.d.). In conclusion, the manufacturers of Vietnam instant coffee market are price makers because of the elasticity of demand and difficulties in producing coffee beans. However, they are interdependent when they set price because of competitive price in this market.

Question 3: a. Players:New City and Times Good. Each firm has two strategies: add or not add new designs. Four possible outcomes: 

Both add



NC add but TG does not.



TG add but NC does not.



Both no add.

If one brand adds new designs, other brand will loss of $2,000 a year which means it has a profit of $13,000.

b. If each brand makes decision independently, it will follow Dominant strategy. 

If NC adds, TG should not add ($13,000>$10,000)



If NC does not add, TG should add ($20,000>$15,000) => It has different strategies so no dominant strategy for TG.



If TG add, NC should not add ($13,000>$10,000)



If TG does not add, NC should add ($20,000>$15,000) => It has different strategies so no dominant strategy for NC

Therefore, there is no dominant equilibrium. c. Outcome=(Add,Add) 

Is Add best for NC given TG Add?-No



Is Add best for TG given NC Add?-No

Outcome=(No Add,Add) 

Is No Add best for NC given TG Add?-Yes



Is No Add best for TG given NC Add?-Yes

Outcome=(Add, No Add) 

Is Add best for NC given TG No Add?-Yes



Is Add best for TG given NC No Add?-Yes

Outcome=(No Add, No Add) 

Is No Add best for NC given TG No Add?-No



Is No Add best for NC given TG No Add?-No

Nash Equilibria include 

NC chooses ‘No add’ and TG chooses ‘Add’ ($13,000;$20,000)



NC chooses ‘Add’’ and TG chooses ‘No Add’ ($20,000;$13,000)

d. If they corporate together to get mutual interest and avoid the largest losses, they follow Maximin Strategy.

+ NC  If Add, worst payoff=$10,000  If No Add, worst payoff=$13,000 => NC’s Maximin Strategy is No Add ($13,000>$10,000) + TG  If Add, worst payoff=$10,000  If No Add, worst payoff=$13,000 => TG’s Maximin Strategy is No Add ($13,000>$10,000) The Pareto Optimum, which both brands have a high payoffs, is ($15,000;$15,000).

Question 4: 

This is negative externalities in production because the production of transport services and construction of housing development projects cause air pollution and indirectly impact on the health of residents who are the third parties affected by other activities.



Their activities impact negatively on the society so MPC is larger than MSC. Therefore, a policy-maker suggests the government charge emission tax to both firms to tight control their service. This leads to the supply curve shift to the left. Moreover, because of the government intervention, these firms are subject to external cost and then it decreases the amount that sellers can receive while the demand of customers does not change so sellers have to bear tax more than buyers. Therefore this makes the output decrease. The triangle ABC is the

deadweight loss which is not good because it does not make revenue increase but it causes the disadvantage of customers and sellers.

Reference list Chi Nam 2018, ‘Vietnam’s coffee industry at risk as trees age’, Vietnamnet 23 Dec, viewed 6 May 2019,

Chi Nam 2018, ‘Who rules Vietnam’s coffee market?’, Vietnamnet 14 April, viewed 6 May 2019,

lens coffee n.d., G7 Black gourmet instant coffee,

Nam Mai 2018, ‘powerful newcomers stir up instant coffee market’, 26 Dec, viewed 5 May 2019,

Nescafe n.d., Nescafe Gold Blend,

Tejvan n.d., ‘How firms oligopoly complete’, economicshelp,

Thi Ha 2018, ‘Which are Vietnam’ most successfull coffee chains?’, VnExpress 7 Nov, viewed 6 May 2019,

‘Vietnam coffee market, whose opportunity?’ 2018, Vietnam Business Forum, 19 Sep

‘Vietnam coffee market, whose opportunity?’ 2018, Vietnam Business Forum, 19 Sep, viewed 5 May 2019,

VN Economic Times 2018, ‘Instant coffee market share, Vietnam’, Vietnamnet, 23 Oct,

VN Economic Times 2018, ‘Vietnam coffee producers mixing it up’, Vietnamnet, 23 Oct, viewed 6 May 2019,...