Proposal to Build a Pipeline

Hello Angela Below you will find comments for your Deliverable 7 submission. I have included a diagram below showing what was included and correct (YES), what needs editing (Yes – but requires editing) and what was not included (NO) Please let me know if you have any additional questions. Marlo Chavarria

Proposal to Build A Pipeline

Angela Petersen

Rasmussen College

Author Note

This paper is being submitted on February 8, 2019, for Audra Sherwood’s, Managerial Economics course.

Proposal to Build a Pipeline: Oil Company X

Introduction

Every company endeavours to capture a bigger market share. In most cases, companies will resort to expansion through investing on more projects. This is what Oil Company X is doing. On the same note, such an expansion will have an impact on the demand and supply in the market. This paper discusses the company’s extension of its oil pipeline, the effect of economic shocks on its demand and supply, cost analysis regarding to its new investment, its alternative investment as well as their expected returns.

Discussion

Building a new oil pipeline by Oil Company X is a good strategy for meeting the high oil demand in the market. This is because with such an extension, the company will be in a positon to increase the supply of oil to areas which it could not reached earlier. In a situation of economic shocks, the demand and supply of oil as a source of energy will be adversely affected. The company will too be affected as the supplier of oil. For example in the case of natural disasters, the supply of oil and even other alternative sources of energy is generally impeded. Suppliers including Oil Company X will be cut short by such natural disasters from reaching the market. With shortage of supply, therefore, the demand will increase which will consequently lead to increase in prices of oil and other sources of energy. Generally, natural disasters will negatively impact on the profitability of the company since its supplies are disturbed. This applies to the case of recession as well. This is because during recession the general economy is performing poorly. The demand is low. For the case of substitute products, the demand for oil from Oil Company X will fall. This is because consumers will opt for alternative sources of energy which can be trading relatively cheaper compared to oil in the market.

The extensive trade restrictions that the government will put in place upon the completion of the extension will give the firm an added advantage over its competitors in the market. In fact the restrictions will give monopoly powers to the company since the restrictions will have prevented other firms from trading in the market. Therefore, the company will be in a monopoly market. The firm will have to adopt the following new strategies as a measure towards maximizing its profits in the monopoly market:

i. Boxing Day sales- the firm ought to take opportunity of peak seasons for example during Christmas time since this is the time when products are on high demand.

ii. Coupons- the firm should use this pricing technique whereby it segments its customers in terms of sensitive ones and the less sensitive. This means it will be able to reap from sales from various kinds of customers (Hunt, 2018).

iii. Pricing complements- the firm ensures that their products can be accompanied by certain complements especially to loyal customers. For example rewarding customers who spend more on their oil products to a specified limit. This will attract new customers and motivate existing customers to spend more.

iv. Unadvertised prices- the company can provide discount only when they ask for. This pricing technique will boost the morale of a customer to engage more with the firm (Spulber, 1991; Yu, 2013).

Figure 1:

Figure 2:

From Figure 2, the new expected profit-maximizing quantity and price is obtained where marginal cost is equal to marginal cost, MR=MC. The profit-maximizing price and quantity, therefore, is $32.12 million. The corresponding average variable cost (AVC) is $30.31 million.

The expected total profit is given by;

($32.12-$30.31) million*15 years= $27.15 million

Expected return= 90% ($320-$27.15) = $292.85 million

Alternative investment:

The expected returns of the alternative investment is given by 80% (1.6)+20%(1.15)= $1.51 billion.

Conclusion

Based on the expected returns, Oil Company X should invest on the alternative investment since it has higher returns.

References

Hunt, J. (2018). Pricing strategy: Pricing Strategies in Monopolies. Retrieved from: https://smallbusiness.chron.com/pricing-strategies-monopolies-15298.html

R.A. (February26, 2012). Oil: When the supply shocks are demand shocks and the demand shocks are supply shocks

Spulber, D.F. (1991). "Monopoly Pricing Strategies," Discussion Papers 936, Northwestern University, Center for Mathematical Studies in Economics and Management Science.

Yu, K. (2013). Monopoly Power and Pricing Strategies: Business 5017 Managerial Economics.

MR, MC and AVC ($, 'Millions')

MR 0 82.7 70.100000000000009 57.499999999999972 44.900000000000006 32.300000000000011 19.700000000000045 7.0999999999999659 -5.5 -18.099999999999966 -30.700000000000045 MC 0 27.467000000000002 29.921000000000003 30.655000000000001 31.388999999999996 32.123000000000005 32.856999999999999 33.591000000000008 34.324999999999989 35.058999999999969 35.793000000000006 AVC 0 27.467000000000002 28.694000000000003 29.347666666666669 29.858000000000001 30.311 30.735333333333333 31.143285714285717 31.541 31.931888888888881 32.317999999999998

TR, TC and AVC ($, 'Millions')

TR 0 82.7 152.80000000000001 210.3 255.2 287.5 307.2 314.3 308.8 290.7 260 TC 1.72 29.19 59.11 89.76 121.15 153.28 186.13 219.72 254.05 289.11 324.89999999999998 AVC 0 27.467000000000002 28.694000000000003 29.347666666666669 29.858000000000001 30.311 30.735333333333333 31.143285714285717 31.541 31.931888888888881 32.317999999999998