East-West Transportation, Inc. Case Study

Market Structures

East-West Transportation, Inc. primarily operates in the eastern regions of the United States. The four core divisions of East-West Transportation are Consumer Goods Division, Coal Division, Chemicals Division, and the Forest Products Division. With the help of the consulting firm of Brighton, Young and Roy, Inc. (BYR) and Peter Schultz, Senior Vice President, Strategic Planning, of East West Transportation the various divisions and market situations will undergo review enabling the formation of future business strategies (University of Phoenix, 2003).

Perfect Competition

The Consumer Goods Division of East-West Transportation operates in a perfectly competitive market. “Perfect competition is characterized by many buyers and sellers, many products that are similar in nature and, as a result, many substitutes” (Investopedia, 2007). The dilemma facing the Consumer Goods Division is the increasing and continuing losses for this division. The decision under consideration for this division is whether to shut down or allow continuance by reducing or minimizing losses.

In a perfectly competitive market, businesses freely enter and exit the industry with no restrictions or government regulations. As the number of sellers and buyers are large, none can individually effect or set the market price. The demand curve for a perfectly competitive enterprise is horizontal or a perfectly elastic demand curve. The price is unrelated to the quantity of output produced or the quantity sold resulting in the price being equal to the marginal cost and marginal revenue (AmosWeb Encyclonomic, 2007). In order to maximize profit an entity produces the quantity of output that generates marginal costs being equal to marginal revenue. When marginal revenue is greater than marginal costs a company can increase profit by increasing output; when marginal revenue is less than marginal costs a company should decrease the output (Colander, 2004, 248).

The Consumer Goods Division incurs losses at every level of output; the possibility of recovering variable costs exists with the continuation of the operation of the division. Should operations cease, losses would incur equal to the fixed costs, which are greater than continuing operation. Adjusting output will minimize losses if production is at a level where price equals marginal revenue equals marginal costs (University of Phoenix, 2003).

Monopoly

With Fast Forward Transport closing operations, it gives East-West Transportation a regional monopoly in the coal transportation industry. A monopoly is “a market structure characterized by a single seller of a unique product with no close substitutes” (AmosWeb Encyclonomic, 2007). Now that East-West Transportation has the coal monopoly for the region, prices for services require determination along with analyzing the need to increase or decrease services to meet the market demand.