4. You are the manager of a firm that competes against four other firms by biddi

Question

4. You are the manager of a firm that competes against four other firms by bidding for government contracts. While you believe your product is better than the competition, the government purchasing agent views the products as identical and purchases from the firm offering the best price. Total government demand is Q = 2,000 ? 20P, and all five firms produce at a constant marginal cost of $80. For security reasons, the government has imposed restrictions that permit a maximum of five firms to compete in this market; thus entry by new firms is prohibited. A member of Congress is concerned because no restrictions have been placed on the price that the government pays for this product. In response, she has proposed legislation that would award each existing firm 20 percent of a contract for 200 units at a contracted price of $90 per unit. Would you support or oppose this legislation? Explain. 4. You are the manager of a firm that competes against four other firms by bidding for government contracts. While you believe your product is better than the competition, the government purchasing agent views the products as identical and purchases from the firm offering the best price. Total government demand is Q = 2,000 ? 20P, and all five firms produce at a constant marginal cost of $80. For security reasons, the government has imposed restrictions that permit a maximum of five firms to compete in this market; thus entry by new firms is prohibited. A member of Congress is concerned because no restrictions have been placed on the price that the government pays for this product. In response, she has proposed legislation that would award each existing firm 20 percent of a contract for 200 units at a contracted price of $90 per unit. Would you support or oppose this legislation? Explain.

Explanation / Answer

Serving the govt. as its customer is the thing that every firm would love to do because that definitely increase the reputation as well as the brand image of the manufacturer. But now a days govt contracts are not easy to obtain as they totally depend on the bid of the customers, inspite of considering the quality along with the price, only the bid is considered to decide which firm will be given the contract. Hence in such a situation the firms which are providing good quality products find it difficult to get the contracts as they cannot reduce the prices of their products below cost and the competitors get the contracts depsite of the low quality. In the present situation also the firm's product is better than the competition, but the government purchasing agent views the products as identical and purchases from the firm offering the best price ignoring the quality. The current legislation which is proposed defines that each existing firm would get 20 percent of a contract for 200 units at a contracted price of $90 per unit. I would support this legislation as it would help all the manufacturers a chance to serve the govt and that would also help the govt to analyse the quality of the products manufactured by each firm. Further it would result in better selection of products in future and would maintain a control over the prices.

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