Lorna Ltd is a monopolist in the local automobile market It has won the recognition of

the local consumers by providing reliable and inexpensive products. Its products are

also very rich in variety comprising of different types of cars, sport-utility vehicles

and multi-purpose vehicles.

In recent years, due to rapid economic development, local automobile consumption

is also growing rapidly. In order to stimulate automobile consumption and promote

economic growth, the local government plans to allow more automobile

manufacturers entering the market to strengthen market competition. AD Ltd

is another famous car manufacturer which is entering the local market by building

its factory in the local city. Facing competition from the new competitor, the

management of Lorna Ltd is considering the following two competition proposals.

i. Some managers in Lorna Ltd believed that the company can obtain more

economies of scale by expanding its production so that they can gain more

market share by lowering its prices. At the same time, they also considered that

the company can strengthen its market competitiveness by reducing the product

range and providing more differentiated car products in attracting consumers.

ii. Some managers considered that the company should strengthen the

management of its supply chain in order to better control the quality of its

products. They proposed to merge with some automobile spare parts

suppliers which will be beneficial in improving the overall quality level as well as

reducing procurement cost, and at the same time to improve the overall level of

after-sales service. They insisted that non-price competition strategy

is more suitable for the company in competing with AD Ltd.

Required

1.Define 'market barriers' and state five other barriers (except the one mentioned in

the first proposal).

2.State the change in market structure after AD Ltd has entered the local automobile

market and explain the potential effects of price cutting on Lorna Ltd by using the

kinked demand curve model.

3.Define the type of integration mentioned in the second proposal and state its main

advantages and disadvantages and suggest a suitable proposal for Lorna Ltd according

your analysis.