BUSS1040 Essay Assignment This assignment requires you to explore a ‘real-world’

| November 24, 2016

BUSS1040 Essay Assignment

This assignment requires you to explore a ‘real-world’ application of a firm’s pricing
strategy.

Your answer must be no more than 600 words in length. The written assignment is due at
11.30am Friday 16 October. Assignments must be submitted electronically via Blackboard.
A hard copy of the assignment must be handed in to the designated assignment drop box in
the Merewether Building. Submission is not valid unless both copies are identical and both
are received by the due date. Should submission problems occur, students should contact
the unit coordinator as soon as is possible.

The question:

This question was ‘inspired’ by recent comments by Twiggy Forrest regarding iron ore
production (see for example http://www.abc.net.au/news/2015-03-25/andrew-forrestcalls-for-an-iron-ore-production-cap/6345798 ).

a. Consider the iron ore production industry, and assume that there are just two producers,
FM and BHP. Initially assume that both firms are identical in terms of their production costs.
If the two firms can cooperate, what should they do in order to maximise industry profits?
How does your answer change if: (i) price discrimination is feasible; or (ii) the two firms have
different costs of production? If you are working as a consultant for the ACCC, how would
you view cooperation between the two iron ore producers?
b. Now assume that each firm is free to set its production level, but each firm can
communicate (via the business press) what they plan to do first. Using an economic model,
show that it might be difficult to sustain a cooperative (high-profit) outcome. Given this,
how credible do you view any statement on capacity by Twiggy? What do you anticipate
would be the impact of the entry of another producer (who we can call RT)?
c. Thinking more broadly than iron ore, how can two oligopolists try to avoid being caught in
a competitive outcome? Are any of these relevant for the iron ore industry?

School of Economics

BUSS1040 Essay

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Please note:
1. This essay is 600 words long, not including references, appendices and diagrams. Any
essays longer than 600 words will only be read and graded up for the first 600 words.
2. Please submit an identical copy in the BUSS1040 drop box in the Merewether Building
and online on Blackboard.
3. Apply the relevant theories from the unit of study when analysing the problem.
4. You may need to undertake some research to complete this assignment. Make sure
you reference your essay completely, consistently and accurately.
5. In this assignment, you will also be rewarded for the depth of your analysis using the
tools that you will have been taught in the unit.
6. You must back up with evidence or logical reasoning all statements that you make.
Your claims should be, where appropriate, supported by references to the existing
work (detailed in the bibliography).

DUE DATE: 11.30am Friday 16 October

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School of Economics

BUSS1040 Essay

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