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Economics assignment

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Introduction

Phone City Phone City is a franchise, which deals primarily with a sale of mobile phones, and accessorises. As franchise, it allows anyone to buy a shop to sell products under it's name. It is the responsibility of the owner of the shop to pay for renting out the shop, products and staff. Each franchise agreement works under different terms and conditions, therefore this work will only identify the terms and conditions of the Phone City franchise in Golders Green (North London). The Phone City franchise allowed the shop to work using its name on a condition that any contracts that are sold would go under the name "Phone City" to the network provider. Therefore, once the commission for the sale is paid, it goes to Phone City, which then in turn passes parts of it to the shop. One of the main benefits that the shop owner gets from joining a franchise is a market recognised name. The firm faces different costs. Fixed costs include: fixture and fitting, electronic systems and cost of ownership. Current costs include: rent, wages, stock, admin costs and advertisement. A large proportion of the costs will be current costs. The sunk costs are very low for this business as most of the assets, both fixed and current, can be sold on to the next owner. ...read more.

Middle

Moreover, the shop can also maximise it's returns by selling accessories and PayAsYouGo sim cards and phones. In the long run, since the firm does not bid down the market price with an increase in output, the marginal revenue from an additional unit sold will be equal to price received (MR=P). In the sort run, if the price at which the goods are sold does not cover average costs, the firm will shut down. In the long run the firm will be faced with a flatter marginal cost curve as it will be able to adjust all production factors. (Fig 2). Fig 2 As can be seen from Fig 2, the firm will only stay in business if the price exceeds P2, as otherwise it will be making a loss. Therefore, as long as the commission paid for each contract is higher then P2, Phone City will stay in business. However, the firm can also be forced out of business if it's average costs will increased. Although the market is close to being perfect, the costs faced by each firm is different (due to location). Those costs are not reflected in commission paid, but rather it is assumed that those firms that pay higher rent will also have higher demand for the products (e.g. ...read more.

Conclusion

Although it can be argued that there is asymmetric information within the market, that will allow the firm to charge higher prices and therefore increase its profits, the availability of information has improved significantly over the last few years, as more and more people use internet. Shopping for a mobile phone is extremely easy today, as price comparisons are available at very little cost to each individual. The commission that is paid to the mobile phone dealers is fixed for each contract, and varies only according to different contracts sold. All of those factors make it difficult for dealer to effect market price or gain abnormal profits. The only way that Phone City can differentiate itself from its competitors is via better service. However, it has been highlighted that as the technology improves with time, the service may no longer be required. Therefore the shop can only distinguish itself from other shops, in the long run, by providing other services such as internet, repairs, photocopying etc. Provision of those services will allow the shop to attract potential customers that will buy mobile phones. Phone City can make abnormal profits only when the supply curve is inelastic in the short run i.e. a new model of mobile phone comes out. Therefore by agreeing on certain terms and conditions with the provider, the shop may get the new models quicker then other shops and make abnormal profits. Moreover, promotion of certain networks may allow the dealer to charge higher commission for contracts sold. ...read more.

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