Microeconomics Assignment- (BM63019)
Submitted by:
Deepshikha 22BM63043
Himanshu Das 22BM63053
Jigyans Kranti Mohapatra 22BM63055
Karthik Sampath Kumar 22BM63059
K Murugappan 22BM63063
Vinod Gupta School of Management
Indian Institute of Technology Kharagpur
Autumn Semester, 2022-23
November 2022
Part A
Q1. If Luxottica has to compete with new eyeglass companies, what would be likely to happen to
consumer surplus in the eyeglass market?
A1. As the competition in the market increases, the supply curve shifts to the right and the price of
the goods sold will decrease for the same quantity of goods bought.
Consumer Surplus = Value to buyers - Amount Paid by the buyers
The Value to buyers in the short run remains the same and the amount paid by the buyers for
the same product is reduced, consumer surplus increases
The above picture depicts how the consumer surplus changes with the competition. (The
producer surplus is not depicted).
Q2. Why is the market power concentrated in the eyeglass industry according to the article?
A2. The following are the reasons for power concentration in the eyeglass market
80% of the glasses and sunglasses market is controlled by Luxottica
Luxottica also owns both the luxury brands and economic brands giving them a virtual
monopoly over the market in the two major segments of the market.
Acquisition of major sunglass brand Ray-ban also gave them a great market in the
sunglass market
Luxottica owns multiple brands which sell eyeglasses and almost 70% of the products of
the different brands come from the same production centre. Owning almost all the
eyeglass brands leads to a choice illusion for the buyers. Which further increases the
market power in a hidden manner.
Luxottica also owns major glass stores.
Those Brands which they don’t own also had to price and sell within the range fixed by
Luxottica if not their products will not be sold by stores owned by Luxottica.
Luxottica also owns the second-largest eye insurance company in America. This leads to
almost complete control of the eye care industry from start to end.
Q3. If more competitors enter the eyeglass market, what could happen to the price elasticity of
demand for the dominant company’s eyeglasses?
A3. When the number of competitors increases in the market, the number of substitutes in the
market for the dominant company’s product increases. This leads to the following sequence
The buyers will have more options at a lower price (substitutes)
The dominant company will be forced to reduce the price of its products
Thus, the price elasticity of demand for its product will increase.
Price Elasticity of Demand for the dominant company’s eyeglasses increases
with an increase in competition
Q4. Do you think a monopoly is appropriate for the eyeglass industry? Why or why not? Be sure
to discuss the impact on both producers and consumers.
A4: Statistically, out of every 10 people 6 need to wear corrective eyeglasses in the world. It is a
medical necessity and not a luxury. Hence, monopoly is not appropriate for the eyeglass
industry.
For Consumers:
The monopolist will act as the price maker
It will charge the maximum amount that the consumer is willing to pay for the
product, having a minimum consumer surplus
Also, as in the case of Luxottica the consumers are not provided with actual options,
they are being manipulated to believe that they have options
Innovations are not made as the consumer is paying for the current product
For Producers:
The monopolist becomes the price maker and eliminates any competition
Monopolist gets the power to control the whole market
Need for innovation is compromised
Q5. The Lerner Index describes a firm’s market power and is given by the formula:
P−MC 1
L= =
P ¿ E∨¿ ¿
Where P is price, MC is marginal cost, and E is the absolute value of the elasticity of demand
for firm maximizing profits.
a) If a firm is in a perfectly competitive industry, estimate the Lerner Index for
the firm given the formula.
b) Given the information in the article, what would be your estimate of the Lerner
Index in this market.
A5: a) For a perfectly competitive market, P=MC
So,
L= (P-MC)/P = 0
Hence, in a perfectly competitive industry, the Lerner Index will be zero. It signifies that no
individual in perfect competition has any market power.
b) According to the information in the article, Luxottica is not a pure monopoly but given its
market share in the industry, it can be considered a monopolist. As Lerner’s Index indicates
the firm’s market power, Luxottica may have an L value approaching 1, as L=1 is a pure
monopoly.
Part B
Q1. What are the two characteristics of the Tesla Model 3 that the article cites as the reason why
Tesla is “sitting in the sweet spot of the US auto market?”
A1: The two characteristics that lead to Tesla’s enviable market position are:
Battery Range of the EV
The cardinal parameter when it comes to EVs is the range provided by the battery.
The customer’s requirement is a vehicle that comes with a greater range. The more the
better. Other firms in the EV industry are still behind the 280 miles mark except
Porsche and Audi. The Tesla Model 3 is currently providing 310 miles, which gives it
a formidable competitive edge over other players in the market.
Highly competitive Pricing
The secondary parameter is price. The optimum choice for the customers would be a
car with a good range, which is priced low. The Tesla Model 3 is available in the
range of $45k-$60k, which is the lowest for any car providing a 300+ miles range. In
addition, the price point is comparable to the price points of other players who are still
stuck behind the 280 miles mark.
The combination of these two factors places Tesla Model 3 in a very sweet spot in the EV
market. They can cater to both the requirements of the customer, therefore providing the
maximum utility.
Q2. According to the article, why does Tesla want to “slot its Model 3 Standard Battery version at
$35,000?”
A2: Tesla has decided to slot its Model 3 Standard Battery at $35k because:
The average selling price of new vehicles in the United States was $34,670
the price point is where the trade-off between volume and price balances out,
The standard battery car offers a lower range (220 miles) compared to its previous
models such as AWD, and RWD and therefore is priced lower.
The $35k is the price point at which Tesla can enter the sub-$45000 market, and compete
with the firms already present. Quoting a higher price within this range will lead to an
immediate contraction of demand for Model 3, as the competition can provide more levels of
utility to the customer.
Q3. Why would the Audi eTron, Mercedes EQC, and Jaguar I-Pace not be a competitor to the
Tesla Model 3?
A3: The reasons why the following cars will not be a competitor to Tesla Model 3 are as follows:
Audi eTron: In the case that Audi can reach the 300-mile mark, the car will fall under the
luxury segment and will compete with Tesla Model S and Model X. The pricing for the
model starts at €80k in Germany and after adding transportation costs across the Atlantic,
the price will reach $100k. The Tesla Model 3 is priced in the range of $45k-$60k and
offers 300 miles.
Mercedes EQC: The car is expected to provide a range of 280 miles, which is again
lesser than the 300-mile mark offered by Tesla. In addition to that, it will be priced at
$69500, which makes it a competitor of Tesla Model S/X which is priced in the range
($78k-$82k) and offers a coverage range of fewer than 300 miles.
Jaguar I-Pace: The model will be priced similarly to the Mercedes EQC at $69500,
which removes it as a competitive candidate for Model 3. The car also offers a range of
only 240 miles, which is 22% lower than the Model 3.
Since, we know that the customer always tries to maximize his satisfaction and at the lowest
possible price, all three options fail in comparison to the Tesla Model 3 which offers the best
of both pricing and coverage range.
Q4. What can you say about the market structure of EVs?
A4: The electric car industry is one of the fastest-growing segments in the automotive world
today. Market structure refers to the characteristics of a specific industry as it behaves within
the economy. The four types of market structure are perfect competition, monopolistic
competition, oligopoly, and monopoly.
The electric car market has an oligopoly market structure.
Tesla motors has positioned itself in the market as the features that they offer are not
available entirely in any of the large luxury automobile companies, however, a few numbers
of famous automobile companies entered the market recently. The electric vehicles industry
(EV) competition is intensive, and increasing regulatory standards, pressure manufacturers to
reduce vehicle emissions.
Reasons that the EV industry exists as an oligopoly include:
High demand from buyers to purchase from existing companies
High barriers to entry that require large amounts of capital
High product price.
The other prerequisite is when companies on the market do not cooperate to increase
competition and reduce profits. The market of EV became highly competitive in the last
couple of years, but Tesla is still leading the way as they got a higher market share than other
firms. Competition is a business strategy focused on the mutual synthesis of collaboration and
rivalry, which enables all competing firms to benefit, depending on their individual interests
and goals, in terms of larger market shares, higher profits and technological progress.
Competition is a kind of positive-sum game in which each player's final gains are better than
what every player originally carries into the match. In addition, the game in which the winner
takes every victory and the loser gets no defeat.
Q6. If other car manufacturers are able to create EVs with the same price, battery range, and
reliability as Tesla, what is another way Tesla could try to differentiate their product to create
profits in the short run?
A6: There are different ways that a firm can differentiate its product given that the products it and
its competitors sell have the same price, battery range, and reliability:
Target Audience: Tesla can target a different audience. For example, in a market full
of sedans, Tesla can launch an SUV that will appeal to a different set of people. Since
the SUV is a car type that a lot of people are shifting over to in recent times, it’ll be an
ideal variant to produce in the short run.
Cosmetic Difference: Tesla can opt to differentiate by going for premium looks.
Given that the functional parameters of the vehicles are the same, another way to lure
in customers is the looks and feel of the car. Designing an appealing car would
certainly help boost sales in the short run.
Service: Tesla can promise to provide a higher level of service to customers. This
may be in the form of excellent customer service from pre-sales to after-sales. For
example, the customers are assigned a dedicated salesperson who takes care of all
their needs and provides all related information before purchase, assists with the
financing for the car and he/she makes sure that the car is delivered in the best
condition to the customer. Once the car is sold, the customer is satisfied by quickly
responding to service requests. Just signalling this quality too will work in the short
run.
Assisting with Financing Options: Tesla can make it easier for customers to buy a
car from them by offering them an option where tesla helps them finance the car they
want by helping them get loans.
Additional Goodies: Tesla can make their cars look cheaper by giving away goodies
or accessories like speakers with their cars.
Run a marketing campaign: Tesla can opt to market their cars thereby making
customers aware that Tesla is offering such a car. This can prove to be a competitive
advantage for Tesla if Tesla’s competitors do not advertise and customers are not
aware of the presence of alternate products.
