1.What is the type of market for selling bottled water, Tap water and Coca-cola?

Bottled water companies

Bottled water is a booming and very competitive market involving numerous companies: in
1992 in the United States, there were 700 brands of bottled water produced by 430 bottling
facilities (Olson, 1999). Although bottled water is a world market, with companies present
world-wide, 75% of it is still controlled by local actors. Three major types of bottled water
companies compete on this market:
1. Companies that were created to run and market one specific brand of bottled water, for
instance Perrier or Evian. Some of them are century-old and family-owned, but most of
themhave grouped or are now under control of major multinational food companies, in particular
Nestlé and Danone.
Danone and Nestlé have a long tradition in selling natural mineral waters. Nestlé is number 1
on the world market of bottled water with a turnover of about US$ 3.5 billion in 1999 
representing 15.3% of the world market share and 67 bottling factories employing over
18'000 people in the world10. Nestlé/Perrier-Vittel SA11 owns well-known brands in 17
countries, like Perrier, Contrex or Vittel (France), Arrowhead, Poland Spring, Calistoga
(United States), Buxton (UK), Fürst Bismarck Quelle, Rietenauer (Germany) or San
Pellegrino (Italy). Danone, holding 9% of the world market share with a turnover of about
US$ 1.5 billion, challenges Nestlé. Danone comes first in some regions: Latin America and
Asia-Pacific. Its best-known brands are Evian (see box 2), Volvic (n°3 in the world with 937
millions litres sold in 1999) and Badoit. Danone and Nestlé only recently started to consider
marketing purified water (see § 4.2).

2. Sodas or soft drinks companies now turn to the very profitable bottled water market. Coca-
Cola and PepsiCo, for example, take advantage of their large world-wide network of bottlers
which provides them with immediate access to the markets. To purified and aerated water
used to make sodas is added a concentrated solution of minerals and sold as purified, enriched
water, on the same principle as Coca-Cola and Pepsi. Like for colas, benefits for the company
come from the sale of mineral concentrates to local bottlers. Coca-Cola markets BonAquA
and Dasani: launched in 1999 in the USA, it is now in the 9th place for bottled water in this
country. PepsiCo’s Aquafina was launched in 1995 in the USA where it has a turnover of US$
600million (Belot 2000). According to Olson (1999), Aquafina “has taken Pepsi into the top 10
sellers of bottled water in the United States, with sales jumping 126 percent in one year to
more than US$52 million in 1997”. Although Aquafina labels “picture beautiful stylized
mountains”, the water is actually “derived from municipal tap water. The water reportedly is
treated tap water taken from 11 different city and town water supplies” across the USA.
PepsiCo targets the world market and launched Aquafina in India in 1999

3. Companies providing tap water, with extensive know-how in water purification and pipe
distribution now turn to a more lucrative way of distributing water.
Suez-Lyonnaise des Eaux and Vivendi, for instance, are specialists for public water treatment
and distribution. They now develop water services, such as home and office deliveries of
water carboys. Vivendi recently bought USFilter, producer of Culligan, a purified water soldin
carboys. Roche Claire, a subsidiary company of Suez-Lyonnaise des Eaux, is specialised in
carboy water. Water production, treatment and services can now be covered by the same
company. Suez and Vivendi own the techniques, the equipment and the know-how to treat
water. They don’t want to lose ground on Coca-Cola, PepsiCo, Danone and Nestlé on the
purified water market, particularly since they provide the water to sodas and soft drinks
companies (Belot, 2000). However, Suez and Vivendi are facing a dilemma: how to sell water in
carboy and at the same time distribute water through public municipal distribution networks,
without giving more way to the idea that tap water is of bad quality? Moreover, water in carboy
is much more expensive than tap water. Suez-Lyonnaise des Eaux intends to distribute only
spring water through carboys in Europe. Vivendi Water concentrates on the market of purified
water with Culligan. Vivendi wonders how to apply marketing techniques for carboy water to tap
water, in order to sell water filters or water refrigerators.
Even municipalities turn to the bottled water market. In United States, “some cities recently
have announced that they plan to enter the bottled water market by selling their water
untreated in bottles. Houston, for instance, has announced that it will sell its self-proclaimed
"Superior Water" city water taken straight from the tap and pumped into bottles. Other
cities including Kansas City and North Miami Beach are said to be evaluating plans to sell
their water in bottles” (Olson, 1999).

2. Policymakers can introduce a policy to reduce the inefficiencies caused by monopolies?

What are the two pricing policies implemented by the government to regulate the market?

Yes. The 4 way by which the policy makers can effectively respond to the inefficiencies
caused by monopolies are as follows: first is introducing more competition in monopolized
industries. Second is by controlling the abusive activity of the monopolies, third is by
converting private monopolies into public enterprise and fourth is adopting laissez-faire
policy. Anti-trust laws proscribe the mergers of large companies which risk the market to
become more inefficient and less competitive. Price controls are government-mandated
legal minimum or maximum prices set for specified goods. They are usually implemented
as a means of direct economic intervention to manage the affordability of certain goods.
Governments most commonly implement price controls on staples—essential items, such
as food or energy products. Price controls that set maximum prices are price ceilings, while
price controls that set minimum prices are price floors. Over the long term, price controls
inevitably lead to problems such as shortages, rationing, deterioration of product quality,
and black markets that arise to supply the price-controlled goods through unofficial
channels.

3. What is the monopolist’s strategy of price discrimination? Give an example

Price discrimination is a selling strategy that charges customers different prices for the same
product or service based on what the seller thinks they can get the customer to agree to. In pure
price discrimination, the seller charges each customer the maximum price he or she will pay. In
more common forms of price discrimination, the seller places customers in groups based on
certain attributes and charges each group a different price. Price discrimination is practiced based
on the seller's belief that customers in certain groups can be asked to pay more or less based on
certain demographics or on how they value the product or service in question.

Price discrimination is most valuable when the profit that is earned as a result of separating the
markets is greater than the profit that is earned as a result of keeping the markets combined.
Whether price discrimination works and for how long the various groups are willing to pay
different prices for the same product depends on the relative elasticities of demand in the sub-
markets. Consumers in a relatively inelastic submarket pay a higher price, while those in a
relatively elastic sub-market pay a lower price.

Examples of Price Discrimination

Many industries, such as the airline industry, the arts and entertainment industry, and the
pharmaceutical industry, use price discrimination strategies. Examples of price discrimination
include issuing coupons, applying specific discounts (e.g., age discounts), and creating loyalty
programs. One example of price discrimination can be seen in the airline industry. Consumers
buying airline tickets several months in advance typically pay less than consumers purchasing at
the last minute. When demand for a particular flight is high, airlines raise ticket prices in
response.

By contrast, when tickets for a flight are not selling well, the airline reduces the cost of
available tickets to try to generate sales. Because many passengers prefer flying home late on
Sunday, those flights tend to be more expensive than flights leaving early Sunday morning.
Airline passengers typically pay more for additional legroom too.

4. What is externalities and market failure?

Externalities and Market Failure

Externalities lead to market failure because a product or service's price equilibrium does not
accurately reflect the true costs and benefits of that product or service. Equilibrium, which
represents the ideal balance between buyers' benefits and producers' costs, is supposed to result
in the optimal level of production. However, the equilibrium level is flawed when there are
significant externalities, creating incentives that drive individual actors to make decisions which
end up making the group worse off. This is known as a market failure.

Negative Externalities

When negative externalities are present, it means the producer does not bear all costs, which
results in excess production. With positive externalities, the buyer does not get all the benefits of
the good, resulting in decreased production. Let's look at a negative externality example of a
factory that produces widgets. Remember, it pollutes the environment during the production
process. The cost of the pollution is not borne by the factory, but instead shared by society.

If the negative externality is taken into account, then the cost of the widget would be higher. This
would result in decreased production and a more efficient equilibrium. In this case, the market
failure would be too much production and a price that didn't match the true cost of production, as
well as high levels of pollution.

Positive externalities are benefits that are infeasible to charge to provide; negative externalities
are costs that are infeasible to charge to not provide. Ordinarily, as Adam Smith explained,
selfishness leads markets to produce whatever people want; to get rich, you have to sell what the
public is eager to buy. Externalities undermine the social benefits of individual selfishness. If
selfish consumers do not have to pay producers for benefits, they will not pay; and if selfish
producers are not paid, they will not produce. A valuable product fails to appear. The problem, as
David Friedman aptly explains, “is not that one person pays for what someone else gets but that
nobody pays and nobody gets, even though the good is worth more than it would cost to
produce.”…

Research and development is a standard example of a positive externality, air pollution of a

negative externality….

Market failure is the economic situation defined by an inefficient distribution of goods and
services in the free market. Furthermore, the individual incentives for rational behavior do not
lead to rational outcomes for the group. Put another way, each individual makes the correct
decision for him/herself, but those prove to be the wrong decisions for the group. In traditional
microeconomics, this is shown as a steady state disequilibrium in which the quantity supplied
does not equal the quantity demanded.

5. What is the difference between free-market equilibrium and social equilibrium

level in the market? Explain with a diagram.

Economic theory suggests that, in a free market there will be a single price which brings
demand and supply into balance, called equilibrium price. Both parties require the scarce
resource that the other has and hence there is a considerable incentive to engage in an
exchange while Social equilibrium, a theoretical state of balance in a social system referring
both to an internal balance between interrelated social phenomena and to the external
relationship the system maintains with its environment. Diagram xde