2. Read the Express (UK) article “Price war after Co-op cuts the cost of funeral

Question

2. Read the Express (UK) article “Price war after Co-op cuts the cost of funerals” found at https://www.express.co.uk/news/uk/1015267/price-war-Co-op-cuts-cost-of-funeralsundercut-its-rivals. A PDF is also available on Blackboard.

a. What type of oligopolistic competition – Cournot or Bertrand - is being described in this article? What would be the theoretical outcome of this type of competition?  

b. “Funerals are becoming increasingly price sensitive…” What economic concept does this quote refer to? Why might this change put stronger pressure on price competition?

c. We discussed two key conditions that may prevent the theoretical outcome that you should have identified in part a. Do you think that either of those conditions applies to the market being described in this article? State each condition and explain why or why not.

d. “The price drop includes a guarantee to beat other providers’ funeral prices on a like-for-like basis.” What do you think is meant by “like-for-like” basis? Which condition from part c does this relate to? Why is it important for the funeral provider to have this qualification?

Explanation / Answer

Cournot Model

It is assumed that an oligopolist thinks that his rival will keep their output fixed. This means that in oligopoly, firms believe that regardless of the actions and their effect upon the market price of the product, the rival firm will keep its output constant.

Bertrand Model

There is no limit to the fall in price since each producer can always lower the price by undercutting the other and increasing his supply of output until the price becomes equal to his unit cost of production.

a) Bertrand model of oligopolistic competition has been described in the article. Based on this model, the theoretical outcome would possibly be that Co-op Funeralcare will increase the supply (service of funerals) based on the demand at the price set by the company. Co-op Funeralcare can decrease the price to a point where unit cost of production (cost of providing funeral service) is equal to the price.

b) Price elasticity of demand is the economic concept.

It indicates the degree of responsiveness of quantity demanded of a good or a service to the change in its price, other factors remaining constant.

Since the funerals have become more price sensitive and the average cost of a funeral has risen by over 33%, more people are looking for an affordable funeral service. As a result of this, the funeral service providers may see an opportunity to reduce prices for the services provided to capture the market, thereby putting a stronger pressure on price competition.

Related Questions

Navigate

• Browse (All)
• Browse 2
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.