Foldvary, Econ 12

 

Bubble Gum

 

 

 

A long time ago, when the dinosaurs roamed the Earth, the two coolest brontosaurusí on the block were Skippy and Jif, the only ones who could reach the coveted cotton candy bubble gum found only on the tallest branch of the bubble gum tree. Since Skippy and Jif are the only ones who have access to these precious pieces of gum, they are the only was with the luxury to sell these pieces of gum to the town of Bedrock.

The cotton candy bubble gum is a good in high demand because itís a sign of luxury and high class. All the dinosaurs in Bedrock want to strut their stuff while showing off and popping their cotton candy bubble gum bubbles. Since the demand for this gum is so high and only two dinosaurs sell it, all the other dinosaurs in town are willing to pay higher prices to get this product.

Skippy and Jif are in an oligopoly, which is a market structure in which only a few sellers offer similar or identical products. In the case of Bedrock, their businesses form a duopoly since there are only two of them. Now Skippy and Jif are pretty smart dudes, so they know that it is best off if they cooperate and act like a monopolist, where they produce a small quantity of their products and charge a price above the marginal cost of production. The cost of production for Skippy and Jif is 30 dino-dollars each month for watering and nutrients for the bubble gum tree. Because Skippy and Jif are in competition with each other, they basically need to sell their gum at the same prices or else all the dinosaurs in Bedrock will buy their gum from the brontosaurus with the cheapest price.

So late one night Skippy and Jif sat down in there dinosaur mansions and thought about possible solutions to their respective business problems. They both decided that the best solution would be to form a prehistoric cartel. Once Skippy and Jif started working together they were able to figure out the amount of production and the price that would generate the most profits. Skippy and Jif were now beginning to live the life of luxury. They would stroll through town with their bling bling and super fly dinosaur outfits. They were maximizing their profits and had the full demand of all the consumers because they were a new monopoly in Bedrock.

All these luxuryís and special privileges started getting to Jif, and greed took over. He was no longer satisfied with his rusted bling and out of date clothes so Jif decided that he would produce ten more units of cotton candy bubble gum packages and didnít tell Skippy. Even though Jif total revenue increased because of the increase in production, Skippy was now losing profits because the market price decreased. Skippy was so outraged that he immediately started producing 10 more units than Jif. What Skippy didnít realize though is that producing more and more units drives the market price down and in turn decreases revenue. Skippy and Jif were so oblivious to this that this trend continued until market price was less than the cost of production and both were forced to give up the cotton candy bubble gum industry.

Because Skippy and Jif were no longer making any profits, all their belongings were seized at sold at the local auction in Bedrock. They were forced to now work at the local McDonalds and make minimum wage.

The lesson that Skippy and Jif should learn from this experience is that in a cartel its better to choose their best strategy given the strategies of the other. In this case, it would have been best to respect the collusion between the two.††††††