New Flyer Industries: Innovation in Transit

Part 1

  1. Industry structure

NFI operates in an oligopoly market. The market is characterized by few large companies dominating the entire market. This is evident with the fact that NFI has a market share of 43% in Canada and the United States combined in terms of transit and deliveries. The manufacturing and automotive industry which NFI belongs to is characterized by few players producing slightly differentiated automobile products. The industry has significant barriers especially on capital required and safety regulations.

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Perfect Competition

Canadian Fruit & Produce Company Ltd is operating in a perfect competitive market. This market structure has many small firms competing against each another. The firm has no market power, thus cannot influence the market price. The industry produces at socially optimal output level. Fruits re generally homogeneous, all firms maximize profit, there are no preferences of the consumers, and the market has no restrictions for entry and exit. However, the assumptions suggest that there will hardly be a perfect competition in reality.

Monopolistic Competition

McDonald is operating in a monopolistic competition in Canada. Like the perfect competition, it is a market structure with many small firms competing against one another. The fast food market players slightly differentiate their products. The difference makes the firms have some sought of market power, making it possible for the firms to charge higher prices within certain ranges. McDonald sell differentiated goods, all competitors maximize profit, there is customer preference, and the market has free entry and exit. The assumptions here are somehow closer to reality compared to those of perfect competition. The firms here can influence market prices and have more power; thus, the market structure cannot lead to a socially optimal output level.

Monopoly

Postal service in Canada is a clear monopolist. The government owned firm controlling the whole market. It has high market power, and consumers have no alternatives. The assumption in monopolies includes: monopolist maximizes profits, presence of high barriers in this case government regulations for entering and existing the market, the Postal service sets the mail delivery price, and dominates the whole market.  

  1. Spreadsheet analysis

Given the following Revenue and Cost Functions

TR=215Q -3Q2; MR=215 -6Q

TC=35Q+1.5Q2; MC=35+3Q

Using the Spreadsheet

Optimum Price is given by MR = MC = 95  

Using a Straight Forward Method

Consider MR = MC

MR=215 -6Q

MC=35+3Q

Therefore,  215 -6Q= 35+3Q

180= 9Q

Q=20

Optimum Buses Supply is 20

Consider MR = P

Therefore, Optimum Price is given by;

P=215 -6(20)

P=95

Profit maximizing Price is 95

Based on the results of the spreadsheet and direct method, the company will require 20 buses and charge a price of 95. 

Part 2:

Section A

From the data provided, the general demand function is:

Qd=85.44 -0.54TP-0.05I+0.65PH+ 0.65P

         (0.86)       (0.00)        (0.00)    (0.00)       (0.02)

Adjusted R2 = 0.95

Where Qd is quantity of buses demanded

TP   –   Ticket Price

I     – Income 

PH   – Parking rate

P    – Population

The regression equation has an R2 = 0.95 implying that 95% of the changes in demand is explained by the variables included in the equation. All the independent valuables have a P value less than 0.5 which implies that they are all statistically significant. 

  • The P value for Ticket Price (0.00) indicates that Ticket Price is statistically significant and a change of Ticket Price by one unit will result to a decline in demand by 0.54 units.  
  • The P value for Income (0.00) indicates that income is statistically significant and a change of income by one unit will result to a decline in demand by 0.05 units.
  • The P value for Parking Hours (0.00) indicates that Parking Hours is statistically significant and a change of Parking Hours by one unit will result to a decline in demand by 0.65 units.
  • The P value for Population (0.02) indicates that Population is statistically significant and a change of Population by one unit will result to a decline in demand by 0.65 units.

Elasticity of demand using average values

  1. Elasticity of demand wrt Ticket Price 

Edt=dQddTP1601026

Edt=-0.54×0.16

Edt=-0.08

Given that Ed<1, then demand is inelastic wrt Ticket Price

  1. Elasticity of demand wrt Income 

EI=dQddI55321026

EI=-0.5×5.39

EI=-2.7

Given that Ed<1, then demand is elastic wrt Income

  1. Elasticity of demand wrt Parking Hours 

EPH=dQddPH3211026

EPH=0.65×0.31

EPH=0.2

Given that Ed<1, then demand is inelastic wrt Parking Hours

  1. Elasticity of demand wrt Population 

EPH=dQddPH16801026

EPH=0.65×1.64

EPH=1.06

Given that Ed<1, then demand is unitary  wrt Population

The elasticity of demand with respect to Packing Ticket and Parking Hours are 0.08 and 0.2 respectively. This means that demand is inelastic with respect to the two independent variables. In regard to income, the demand is negatively elastic, implying that New Flyers is an inferior good in the market. This means that the company is not attractive to high income passengers and if there is an increase in income of the target consumer market, the demand will fall by 2.7 times. In regard to population, it has an elasticity of 1; this indicates that demand increase is proportionate to population. In summary, to increase revenue, New Flyers should consider moving their services to areas with high population and moderate income. The company should also charge optimum price.

Part B

The Main aspect of the result worth recommending to the entrepreneurs is the inelasticity of demand to ticket price. The elasticity of 0.08 implies that demand is inelastic to price and the company can maximize profit by charging optimum price. It is also important that further research be done to ascertain other factors other than those considered in this analysis that have significant effect on demand. These may include customer experience, contingency of the clients to terminals, accessibility of the terminals and a clear competition analysis. In addition, it is worth noting that New Fliers is an inferior good where an increase in income reduces the demand. The company should consider reorganizing the business from inferior good to a normal good or a luxury in order to use both income and price strategy.

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