Sony,the Japanese company, is involved in insurance and on-line banking as well as computers, electronics and computer games. a) Explain why a company might wish to produce a diverse range of products rather than specialise.

For example, computers and games console as well as games are getting innovated at a great pace. The computer, games console could be replaced once a more advanced, convenient and powerful device is built. Graphics and dimensions in the games are being developed fiercely to give greater entertainment and therefore the market for computer games is volatile as it can experience demand or supply shocks once here is a breakthrough in technology. Therefore Sony needs to gain its position in new emerging markets such as on-line banking so that the decline in its computer games, console or computer industry does not affect the company greatly.

It is also that insurance and banking services and the electronic goods are traded in the international market. Hence Sony will be faced by international competitors. Plus it has an opportunity to gain shares in the global market. Diversification could be a means to gain market shares in different countries by selling products which are relatively more in demand by the country.

For example, Saudi Arabian market demand for consumer durables such as computers, electronics and games is very high. Sony thus would view the country as a potential market to sell its products into. Another country such as Dubai could be more in need of financial services such as banking and insurance for its various long-term project schemes. Sony can thus attempt to provide its services to this country. In the process, Sony can increase its overall level of production and profits by catering different countries with its diversified goods rather than specialize in one good that would only allow the country to sell to relatively limited number of countries.

Specialization may well help produce standardized goods and help firms develop products faster and more efficiently. However the risks involved are great.

Diversification also helps to create brand image as people become more aware of the company and its product.

Consumers may even attain a sense of loyalty towards the brand name and hence Sony will be able to increase its profits and gin market share.

Therefore diversification helps to reduce risks of decline in the company the result of which could be serious once unemployment, trade deficit and reduction in incomes occur. Diversification helps in promoting brand name, increase profits and market share.

b) Sony is a large company that can influence the price of its products. Discuss whether imperfect market structures which allow such companies are beneficial.

A. Sony is operating in an imperfect market structure as the company is a price-taker. Since the company also differentiates its products, promotes its products through advertising, has a large number of competitors; it is likely that Sony is operating under monopolistic competition.

Fig. 1

The diagram figure 1 shows the costs and revenues of a firm under monopolistic market structure. Firms under this imperfect market structure produce output level where MC=MR

i.e. marginal cost equals marginal revenue; but fixed price on the demand curve which is equivalent to the average revenue curve.

As a result, the company is able to increase revenue if it had priced where MC=MR. Due to this consumer surplus i.e. the difference between what price consumers are read to pay and what they actually pay; reduces. Assuming also that MC=MSC i.e. marginal social cost and AR=MSB i.e. marginal social benefit, it could also be seen that production of output level Q shows a deviation from the allocative efficiency level of output of QE where resources are allocated effectively between competing market wants an needs. Therefore imperfect markets can be allocatively inefficient.

Fig. 1 shows long-run equilibrium for the monopolistically competitive firm. This is why average cost curve is tangential to average revenue curve and the firm is producing at the point of least average cost. Hence in this case, the firm is productively efficient but in the short run it will not be so.

The price the company charges is higher than the actual value consumers may place on it as price is much higher than the marginal cost of producing it. Also there is under production at Q in Fig. 1 because allocativelly efficient production would have been at QE.

However the judgment of whether imperfect market structure are allocatively and productively efficient or no depend also on factors such as innovation, advertising and externalities.

Sony is a company that produces computers and electronics which need investment into research and development programmers so that the product is made better and the firm can introduce varieties to the consumer. Since only large firms are able to make such large investments, they in the process do become allocatively efficient because they are to provide greater consumer satisfaction. Consumer's value variety and uniqueness and the satisfaction is often worth the extra price consumers pay.

Being in a market where Sony must face fierce competition by other brands producing electronics and/or banking services; Sony must spend on advertising.

Advertising gives rise to increasing costs. From a productive efficiency viewpoint, advertising results in inefficiency if consumers do not benefit because they get information about the recent devices available, about the latest features, designs available. Therefore productive efficency is reached.

However, adverts even hold the power to distort consumers' perceptions of products. This is true for persuasive advertising where persuasions take over the consumer's ability to allocate their scarce spending power in a rational way. Brand image is normally created by persuasion too. Due to persuasive advertising and brand imaging Sony will be able the shift its demand curve to the right and make demand more price inelastic. Hence it can increase price and abnormal profits by creating greater difference between price and marginal cost. Therefore there will be an increase in allocative efficiency.

Negative externalities such as pollution and disposal of wastes decrease social welfare. However, being a large company and an exclusive brand like Sony is firms will attempt to gain consumer confidence by promoting their products as 'environmental friendly.' This means that the company adopting production methods that has reduced wastes and pollution. It has an effect 'internalized' the externality. This result into net social welfare and allocative efficiency because resources are allocated in ways society will benefit due to an improved environment.

Imperfect markets therefore are beneficial to the producers from some perspectives and is also beneficial to the consumer from some perspectives. It is beneficial to producers because they are able to earn abnormal profits by being able to set prices and gain market shares by non-price competition. However, producers who want to set up their own firm may lose out because the find it impossible to cross the natural barriers or even artificial barriers to entry to be able to gain a share in the abnormal profits being made in the industry.

Consumers gain because of greater varieties of products brought about by research and development by firms.

Consumers too get better information about products and be able to enjoy sovereignty and variety. They can be suffering though due to high prices of products that may not fully reflect the value they place on the product. Firms may also practice anti-competitive practices such as force potential entrants out of the market of the market or collude with other firms to exploit market and earn high profits at the consumer's expense.

Whether imperfect markets are beneficial or not depends on the firms' activities and consumer sovereignty and the economic efficiency attained.