Assignment

This assignment has three one page case studies with a question(s).on the type of firms we have learned about in Unit 4 and 5.

Please prepare assignment using one or two pages. 

1. Auction Markets

Flower markets are global. About three quarters of flowers purchased in the United States are imported. More

than half the world?s cut flowers move through the auction system in the Holland. Five days a week, in a huge

building 10 miles outside Amsterdam, some 2,500 buyers gather to participate in Flower Auction Aalsmeer, the

largest auction of its kind in the world. Over 20 million flowers and 2 million potted plants from 8,000 growers

around the globe are auctioned off each day in the world?s largest roofed building, spread across the equivalent

of 100 football fields. Flowers are grouped and auctioned off by type?long-stemmed roses, tulips, and so on.

Hundreds of buyers sit in theater settings with their fingers on buttons. Once the flowers are presented, a clocklike instrument starts ticking off descending prices until a buyer pushes a button. The winning bidder gets to

choose how many and which items to take. The clock starts again until another buyer stops it, and so on, until

all flowers are sold. Buyers can also bid online from remote locations. Auctions occur rapidly?on average a

transaction takes place every 4 seconds.

This is an example of a Dutch auction, which starts at a high price and works down. Dutch auctions are

more common when selling multiple lots of similar, though not identical, items, such as flowers in Amsterdam,

tobacco in Canada, and fish in seaports around the world. Because there is some difference among the products

for sale in a given market?for example, some flower lots are in better condition than others?this is not quite

perfect competition because perfectly competitive markets sell identical products.

More common than the Dutch auction is the English open outcry auction, where bidding starts at a low

price and moves up until only one buyer remains. Products sold this way include stocks, bonds, wine, art (think

Sotheby?s and Christie?s), antiques, and livestock. On markets, such as the Chicago Board of Trade, prices for

commodities such as wheat, gold, and coffee beans are continuously determined in the trading pits using

variations of an open outcry auction.

The birth of the Internet has breathed new life into auctions. Web sites such as eBay, uBid, Yahoo!, and

hundreds more hold online auctions for old maps, used computers, wine, airline tickets, antiques, military

memorabilia, comic books, paperweights?you name it. The largest online site, eBay, offers over 2,000

categories in a forum that mimics a live auction. Internet auctions allow specialized sellers to reach a world of

customers. A listing on eBay, for example, could reach millions of people in more than one hundred countries.

Computers are taking over markets in other ways. In New York, Chicago, Philadelphia, London, and

Frankfurt, hand-waving traders in what seem like mosh pits are being replaced by electronic trading. The

Nasdaq is the world?s first virtual stock market. There is no Nasdaq trading floor as with the New York Stock

Exchange. On the French futures exchange, after electronic trading was added as an option to the open-outcry

system, electronic trading dominated within a matter of months. Computers reduce the transaction costs of

market exchange.

SOURCES: Constance Cacey, ?Petal Pushers,? New York Times, 25 February 2007; Keith Bradsher, ?Bouquet of

Flowers May Have Note: ?Made In China,?? 25 September 2009; and Lynette Evans, ?Following the Flowers,? San

Francisco Chronicle, 3 March 2007. The site for eBay is http://www.ebay.com/; and Nasdaq?s is http://nasdaq.com/ 1.Which of the characteristics of the perfectly competitive market structure are found in the Flower Auction

Aalsmeer? The Mail Monopoly

The U.S. Post Office was granted a monopoly in 1775 and has operated under federal protection ever since. In

1971, Congress converted the Post Office Department into a semi-independent agency called the U.S. Postal

Service, or USPS, which had total revenue of about $70 billion in 2006. More than 700,000 employees at

37,000 post offices deliver an average of 600 million pieces of mail a day to 144 million home and businesses

addresses. This amounts to 46 percent of the world?s total mail delivery. USPS pays no taxes and is exempt

from local zoning laws. It has a legal monopoly in delivering regular, first-class letters and has the exclusive

right to use the space inside your mailbox. Other delivery services such as FedEx or UPS cannot use mail

boxes or post office boxes.

The USPS monopoly has suffered in recent years because of rising costs and growing competition from new

technologies. The price of a first-class stamp climbed from 6 cents in 1970 to 41 cents by 2007?a growth rate

double that of inflation. Long-distance phone service, one possible substitute for first-class mail, is much

cheaper today than in 1970. New technologies such as email, ecards, online bill-payment, text messaging, and

fax machines also displace USPS delivery services (email messages now greatly outnumber first-class letters).

Because its monopoly applies only to regular first-class mail, USPS has lost chunks of other business to private

firms offering lower rates and better service. The United Parcel Service (UPS), for example, is more

mechanized and more containerized than the USPS and thus has lower costs and less breakage. The USPS has

tried to emulate UPS but with only limited success. After Hurricane Katrina, it took seven months to reopen

the USPS processing and distribution center in New Orleans. Rivals UPS, FedEx, and DHL all restored

service in just three weeks.

When the Postal Service raised third-class (?junk? mail) rates, businesses substituted other forms of

advertising, including cable TV, telemarketing, and the Internet. UPS and other rivals now account for most

ground-shipped packages. Even USPS?s first-class monopoly is being threatened, because FedEx and others

have captured 90 percent of the overnight mail business. Thus, USPS is losing business because of competition

from overnight mail and from new technologies.

USPS has been fighting back, trying to leverage its monopoly power while increasing efficiency. On the

electronic front, USPS tried to offer online postage purchases, online bill-paying service, and secure online

document transmission service. But these new products were scrapped as failures. In more successful efforts,

USPS has partnered with eBay to confirm delivery of auctioned items and expedite payments. And Netflix, the

online DVD rental service, relies exclusively on the Postal service to deliver 1.5 million movies a day. USPS

also provides some local delivery services?the so-called ?last mile??for several major shippers including

DHL, Emery, and FedEx. Changing technology and competition have been eroding USPS?s governmentgranted monopoly in first class mail, but online purchases have increased USPS?s package delivery business.

In the most recent year, USPS revenue from first class mail decreased 1 percent but revenue from package

delivery increased 3 percent

Q. Can the U.S. Postal Service be considered a monopoly in first-class mail? Why or why not? What

has happened to the price elasticity of demand for first-class mail in recent years? Timely Fashions Boost Profit for Zara One way a firm can increase market power is to offer a differentiated product. Zara, the largest fashion

retailer in Europe, has been described as ?possibly the most innovative and devastating retailer in the world.?

The company makes nearly all its clothing in its own workshops and factories, including designing, fabric

dyeing, tailoring, and ironing. Just about all the clothing is produced in Arteixo, Spain, where Zara operates 14

factories connected by tunnels to a giant distribution center. In a matter of hours, that center fills up with

clothing.

Zara?s retail shops and clothing factories communicate through a sophisticated feedback mechanism for

gathering market intelligence and putting it to work. Sales associates carry personal digital assistants to relay

information on fashion trends and customer demand back to the company?s team of 200 designers in Spain.

Real-time sales data allow the factory to increase production of items that are selling and to bring out similar

designs. By doing everything in-house, Zara avoids the delay involved with manufacturing in a low cost

country such as China. Direct shipments from factory to shops also eliminate the need for costly warehouses.

Zara takes as little as two weeks to develop a new item and deliver it to one of its more than 1,000 retail

stores. The industry average is nine months. The company launches about 10,000 new designs a year, making

new items in small batches at first; so, if something doesn?t sell, there is not much left over. But if something

catches on, stores can restock in a few days, so Zara doesn?t miss out on a fashion wave. Thus, shops never

have to wait long for fresh stock or to get an order filled. Whereas traditional stores such as the Gap may get

new fashions twice a season, Zara distributes them twice a week. And in perhaps its most unusual of strategies,

the company advertises little, relying instead on prime store location and word of mouth.

In short, Zara believes that making its own apparel rather than outsourcing production to a lower cost country

reduces delays, exploits customer feedback, maintains flexibility, and ensures quality. This ready supply of

new clothing lines and continuous supply of popular items help Zara differentiate its products. Amancio

Ortega, Zara?s founder, opened his first store in 1975. His wealth in 2007 reached an estimated $24 billion,

ranking him the 8th richest person on the planet. The market rewards successful innovation Q Firms earn economic profit by offering a differentiated product. How does Zara differentiate its

clothing?

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