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CHAPTER 1 – ASSIGNMENT 1

An article in The Wall Street Journal reported that large hotel chains, such as Marriott,
are tending to reduce the number of hotels that they franchise to outside owners and
increase the number the chain owns and manages itself. Some chains are requiring
private owners or franchisees to make upgrades in their hotels, but they are having a
difficult time enforcing the policy. Marriott says this upgrading is important because
“we’ve built our name on quality.”

Answer:
a. Explain the nature of the agency problem facing Marriott.
Beginning of analysis this matter we overview the history of Marriott and understand who is
Marriott and what they do to find out these standards on Marriott Franchise Policy.
Marriott is a worldwide operator, franchisor, and licensor of hotel, residential, and timeshare
properties under numerous brand names at different price and service points. Consistent with
their focus on management, franchising, and licensing, Marriott owns very few of our lodging
properties. They were organized as a corporation in Delaware in 1997 and became a public
company in 1998 when they were “spun off” as a separate entity by the company formerly
named “Marriott International, Inc.”
They believe that their portfolio of brands, shown in the following table, is the largest and
most compelling range of brands and properties of any lodging company in the world.

On the Marriott’s core value, they always raise to provide the best products possible. Marriott
said that: “Our customers will pay for quality, I believe. I don't mean luxury quality but good
quality”. They mean that they always praise highly quality on each their products and bring to
customer the best value on their service. Therefore they surely require these puritanic
standards with their franchise’s agency. Such as Marriott requires private owners or
franchisees upgrade their hotel. The nature of the agency problems facing Marriott is Principal
Agent Problem. Taking an example of J.W.Marriott Phu Quoc at Phu Quoc Island, Vietnam.
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We can search on website about this hotel and see that it is a beautiful resort on the world.
Even if it rank on the top 50 of the best resort on the world. However to get the beautiful
resort look like it, the owner spend a lot of initial cost on building. This is a difficult point on
business when they must release so much initial cost. Meanwhile the manager always want
their product to be the best products for customers.

b. Why would Marriott worry about the quality of the hotels it doesn’t own but
franchises?
When a franchisee signs on with a hotel franchise, the franchisee hopes to reap the benefits of
an established brand. When the reputation of that brand suffers, the reputations of all the
associated franchise hotels suffer as well. If one franchise hotel gains a poor reputation for
cleanliness, guest services or amenities, other franchisees can suffer from that poor reputation.
According to the Cornell University School of Hotel Administration, many hotel franchise
contracts can run as long as 20 years, so the franchisee can suffer an extended dry spell if the
brand takes a significant hit.
Marriott have a reasonable concerning about their brand name. Many organizations receive
franchise from some famous brand name but they don't do it right. Some franchisees only
want to take a famous brand name and do everything requirement from franchisor on few first
year of contract. After they reach break-point what they spend a lot of money on building,
they quickly do wrong what they already committed with franchisor. Even if franchisee don’t
take care quality or upgrading hotel each year. It will be affect to customer service. At that
time brand name of franchisor will influence by what franchisee did. That reason why
Marriott always concerns about their brand name and on Marriott’s requirement. They also
want to their franchisee who must put the quality on top for keeping Marriott’s image on
customer’s mind.

c. Why would a chain such as Marriott tend to own its hotels in resort areas, such
as national parks, where there is little repeat business, and franchise hotels in

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 downtown areas, where there is a lot of repeat business? Think of the reputation
effect and the incentive of franchises to maintain quality.

With regard to quality, the franchisee, as the residual claimant of the business, would be
expected to provide higher quality than a salaried employee if the higher costs of quality (both
personal effort and other inputs) were exceeded by gains in unit profits deriving from a higher
sales price or greater quantity sold due to high quality. The presence of an externality such as
a trademark’s reputation for quality complicates the analysis. In the franchise chain, all units
operate under a shared trademark, so individual effort to raise quality creates an externality
problem, as customers transfer the goodwill that they associate with the quality of one outlet
to others operating under the same trademark. Therefore, franchisees do not fully appropriate
the gains from their investment in quality. This externality creates incentives for free-riding
that are exacerbated by the residual claimant status of the franchisee.

CHAPTER 2 – ASSIGNMENT 4

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Bloomberg Businessweek recently declared, “We have entered the Age of the Internet,”
and observed that when markets for goods or services gain access to the Internet, more
consumers and more businesses participate in the market. Use supply and demand
analysis to predict the effect of e-commerce on equilibrium output and equilibrium price
of products gaining a presence on the Internet.

Answer:
In order to answer this question we look back to theory about market equilibrium.
Supply and demand analysis is one of the most powerful tools of economics for analyzing the
way market forces determine prices and output levels in competitive markets. Demand and
supply provide an analytical framework for the analysis of the behavior of buyers and sellers
in markets. Demand shows how buyers respond to changes in price and other variables that
determine quantities buyers are willing and able to purchase. Supply shows how sellers
respond to changes in price and other variables that determine quantities offered for sale. The
interaction of buyers and sellers in the marketplace leads to market equilibrium.
In its simplest form, the continuous interaction between buyers and sellers allows for
many prices to appear over time. It is often difficult to evaluate the price process because the
retail price of most manufactured items is set by the seller. The buyer accepts the price. or not
purchase.
The equilibrium price is also called the market clearing price because at this price, the
exact amount that the manufacturer delivers to the market will be bought by the consumer and
there will be nothing left. This is effective because there are not too many supplies and
wasteful output, as well as a shortage - the market will have a clear effect. This is a major
feature of the pricing mechanism, and one of its significant benefits.
In an electronic commerce setting, many suppliers and consumers transact with each
other on an online and real time basis. The ease of access to vast information on products,
suppliers, and prices in electronic commerce will empower the consumer with powerful
bargaining power. Sophisticated search engines and intelligent agents available on the Internet
make the process of product search and price comparison increasingly easier. The electronic
commerce will fundamentally change customers’ expectations about convenience, speed,
comparability, price, and service. In electronic commerce, consumers are not passively being
conditioned by the limited and censored information that suppliers give them on mass media

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such as television, \radio, and/or newspapers. They actively seek for information on the
Internet about the product that they are in need. They do it with all the freedom, and control.
In business to business transaction, procurement processing costs can be lowered by
consolidating purchases, developing relationships with key suppliers, negotiating volume
discounts, and greater integration of the manufacturing process. Reduction of inventories and
associated costs in storage, handling, insurance, and administrative costs can be achieved by
sharing updated production plans and inventory projection between firm buyer and suppliers
so that both parties can coordinate their productions and delivery schedules.
While an individual consumer in a mall can not bargain for prices and they believe
they can not afford to affect prices. However, if all potential buyers are overwhelmed, and no
one accepts the price set, then the seller will quickly discount. In this way, the buyer has an
influence on the market price.
Consumers in this market know the nature of the product being sold and the price
charged by each firm. All discrepancies in prices quoted by the suppliers will be known
immediately, and consumers will buy at the lowest price.
The impact of any buyer or seller’s decision on the price of the product is
insignificant. The output that each firm can provide is small relative to total output of the
industry such that the firm is a price taker and the change in their output does not has
significant effect on the market price of the product. Similarly there is no individual buyer
whose purchase is large enough to effect on the market price. Prices can move freely to reflect
the changing conditions of supply and demand. There is no constraint on the demand for and
supply of goods and services.
There is a freedom to enter and exit the industry. Consequently, there is mobility of
goods and services, and of resources in the economy. New entrants are free to enter any
desired industry, and resources are free to move among alternative uses. Goods and services
can be sold whenever they have the highest price. Resources will move to the employment
where they are highest paid.
Internet is not just another marketing channel, another advertising medium, and a
means to speed up business transactions. In creating electronic commerce, it also creates the
foundation for a new industrial order. Electronic commerce is not only a technology to
facilitate efficiently business but an effective way to conduct business that has potential
impact on the firm’s value chain. However, if electronic commerce is not implemented

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properly and aligned with the overall business strategy of the firm, it is likely to fail. New
business models are needed to integrate electronic commerce with overall business goal. Then
electronic commerce will benefit to suppliers as well as consumers in maximizing the firms’
revenue and consumers’ utility. Consequently, the convergence of supply and demand at the
optimal level will assure an efficient allocation of economic resources.

CHAPTER 11 – ASSIGNMENT 13

If all the assumptions of perfect competition hold, why would firms in such an industry
have little incentive to carry out technological change or much research and
development? What conditions would encourage research and development in
competitive industries?

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Answer:
Perfectly competitive enterprise is a business that accepts prices. It must sell the goods that it
produces at the correct market price. If it sets a price higher than the market price, it loses
customers and will not sell a unit. Consumers will switch to buying goods from other
businesses. For the purpose of maximizing profits, it also does not sell its goods at prices
below market prices. Here the market price is formed as a general result, created by the
interaction between countless sellers and buyers. How this price is formed is beyond the
ability of each enterprise to determine.Once it exists, the business must accept it as an
available variable.

When businesses increase or decrease production, the price level remains unchanged. In the
opposite case, for example, if the demand curve is a downward slope, by reducing the volume
of sales, the firm can increase the price of the commodity. That is contrary to the definition:
perfect competition is a business that accepts the price.

As a price taker, the demand curve that a business competes perfectly is a horizontal demand
curve. As usual, we represent the price of goods on the vertical axis and the output of the
enterprise on the horizontal axis as shown in picture on below. Enterprises can only sell each
of their products at market equilibrium prices. This price is independent, regardless of the
output of the business.

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\

For a perfectly competitive business, the marginal revenue it gains by selling one unit of
output is always equal to the price: MR = P.
This is related to the fact that an enterprise can sell any output q that it can produce at the
same price P is formed on the market. When producing and selling an additional unit of
output, since the price does not change, the firm gains an additional revenue equal to the price
P. In other words, marginal revenue always equals the price at every production level.
quantity.

For example, agricultural markets are examples of nearly perfect competition as well. Imagine
shopping at your local farmers' market: there are numerous farmers, selling the same fruits,
vegetables and herbs. You can easily find out the prices for the goods, but they are usually all
about the same.
The reason, why the firm in such an industry have little incentive to carry out technological
change or much research and development, that is:
- The number of enterprisers entering the market and the number of clients are large
enough that none of them are likely to impact the market. Therefore, the market share
of enterprises and customer consumption capacity is not large. Therefore the firm
don’t have incentive to improve their products.
- Freedom to enter and leave the market. This feature means that there are no barriers or
obstacles to the market entry of new businesses or the self-exclusion of existing firms
in the market.
- The product participants market which is always uniformity. Hence it is not change on
products on market.

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 - The perfect information: the information is considered perfect when the buyers and
sellers in the market have all the necessary information related to the market. These
are price information, goods (features, effects, quality, usage ...)
- The inputs of the production process are freely circulated and businesses have the
same opportunity to gain access to these factors. Input factors such as raw materials,
labor, etc., are likely to affect business performance and determine a part of the market
position of a trader, as if one is able to dominate. The input material in a
manufacturing sector will inevitably control the movement of production relations in
that market. Thus, the balance of input factors ensures that businesses have equal
standing and equal opportunity in implementing business strategies.
The conditions which encourage the firm to research and develop their products is that:
- Reducing the firm whose do the same market. It means that they have to look for new
market to develop instead of steping into the same market look like another firm.
Moreover firms must do new different product which response customer’s demand
more than producing the uniformity product.
- Looking for new input source to make an advantage competition.
- Government authorities who have to issue many new advantage policies to encourage
the firm researching and development new products. Beside these authorities must
update new technological information to catch up modern for encourage the firm
produce by that technology.

THE END

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