How to Find, Capture, and Control the Most Lucrative Markets in Any Business - Assignment Example

Every business unit offering goods or services to has the long-run objective to gain the larger market share compared to competitors. In order to compete effectively, the business unit needs to adopt the strategy which motivates the customers to buy the product and use the service of this business unit. For example, the product line can be very differentiated or innovative, the appealing marketing campaigns, the exclusivity of the service, and, of course, the price should be maintained lower than competitors. Nevertheless, the lowering of price does not guarantee the success on the market. The monopolistic or perfectly competitive firms do not have to consider the price setting of the rivals but the oligopolistic or the monopolistically competitive firms do. If the company is producing the unique good and no substitutes exist, and the other firms are prevented from participation in production by some barriers, such as patent rights, the market for this good becomes monopolistic. Perfectly competitive firm has the influence over the market price by deciding how much the good should cost – the producer does not have to adjust the price of the good to the market price. Monopolistic firms are price seekers, not price takers (Lele 2005). Therefore, monopoly grants the right to control the market, even though the firms still have to find the optimum price for their product – the buyers can refuse to buy at the price they consider too high for the value they get. The monopolistic business unit has the strategy of finding the level of output that maximizes the profits and minimizes the losses – the same for perfectly competitive firms. The most profitable level of production in monopoly is when marginal cost equals marginal revenue – in the case with perfectly competitive firms the marginal cost should equal the average revenue (price). Monopolistic firms are profitable, but unlike the competitive firms, the new firms are not attracted into the industry. If the market is competitive, the new entrants ensure the increase in output and, as the result, the fall in price. Monopolistic market structure blocks such entries and therefore the price remains at the most suitable for the firm level (Kreps 1990). Perfectly competitive firms are not able to influence the price and therefore, they cannot apply any type of pricing strategy. However, under the imperfect competition the price can be influenced by output level and the pricing strategy become the element of being competitive (Gabszewicz 1999). The concept of consumer surplus is important for monopolistic firms – normally there is one price for a product and if the market price is lower than the consumer would be willing to pay, the consumers might experience the benefits. In monopolistic market, the producer is able to find the way to charge different prices for different units of the same good. For example, discriminatory pricing for airline passengers is the example of how the monopolistic firms can influence the pricing. Example – the pricing of the seat on the flight from Paris to New York First of all, all seats cost the airline company the same, however, the price for the ticket is highly discriminative. If the executive of some firm must get to New York as soon as possible, his demand is inelastic and the airline is able to charge the higher price. If the retired school teacher is just interested in seeing New York, his demand is elastic for any flight and he is offered the lower price compared to the executive. Competition in the real world very seldom conforms to the perfect competition and full monopoly. It is difficult to find many firms with no influence over the price as well as one single firm with the influence over the whole industry. Typically, there is the large number of firms with some of them having more power over the market. Managers of these firms are highly dependent on the price of their competitors. This is the imperfect competition or so called monopolistic competition. In this situation, the number of firms offer the products that are a little different from the products of rivals. For example, many people have the favorite brand of the shampoo or the toothpaste. Each firm with product differentiated wants to be monopolistic in that particular product version – being independent in output and pricing strategies (Miller 1995). Unlike monopolistic business units, firms in imperfect competition are vulnerable to the entry of new competitors and have to adjust their price to the market price of the similar products. It means that in the long run, the price will decrease to the point when it equals to the average costs . Small firms offering similar products are interdependent and the decision of each firm influences the other firms. Differentiation exists when goods of one seller are different from the goods of another seller. From the first sight, this difference can be insignificant for the sellers, however, the it is important for buyers who develop the preference to one good over another (Fudenberg 1991). Under monopolistic industry structure, the producer has the power over the output and the price which can be set higher than in perfectly competitive industries. In addition, the buyer is getting additional value in return for the higher price. Under oligopoly, when the market is dominated by few firms, such as automobile industry in United States, the firms are highly interdependent. Each business unit is forced to make the pricing decision based on the reaction of other firms. If one of the firms increases the price, the other firms might need to increase the price as well. On the other side, they might not increase the price in the hope to gain the larger market share. Monopolistic industry example - OPEC OPEC, the Organization Of Petroleum Exporting Countries, was established in the 1960s and ever since, Saudi Arabia gained a reputation of being the major power of the organization. Saudi Arabia has the biggest oil reserves in the world and production costs lower than any country. This means that it is a natural monopoly and economies of scale arises; when the long run average total cost falls as the quantity of output increases. OPECs ability to influence the market price is the key of its power. Compared to a competitive firm, the demand curve for a monopoly is a horizontal one as it can set any quantity it wants for a given price. The demand curve slopes downwards because if the quantity of output is decreased, the price of its output increases. OPECs long running strong foundation in the petroleum industry is tough to break especially when Saudi Arabia makes most of the decisions. Almost effortlessly, they can increase or reduce the petroleum output in the market to suit their needs and bully smaller members to meet their quotas. The question is, can they every be regulated? Most of the smaller countries are doing nothing when OPEC makes a decision, so a controversial argument about the superpower; The USs decision to occupy Iraqs might answer this. OPECs monopoly of the petroleum industry has been a strong one since the 1960s since its members enjoy economies of scale. Its decisions concerning the output of petrol have always been strong affecting the rest of the world. This monopoly is socially inefficient due to the output and the deadweight loss that results. Oligopolistic industry example – Airline industry When only a few sellers offer a product with little regard to competition it is called an oligopoly. It is different from a monopoly because multiple corporations are involved, but the effects on the consumer are the same - bad. Although competition is usually in the best interest of the consumer, it is not always in the best interest of the corporation. If to examine the two leading soft drink producers, Coca-cola and Pepsi-cola, we see a prime example of an oligopoly (Zachary 1999). As things are presently, each of these soft drink companies has about half of the soft drink market, and examined from a worldwide perspective that is a large market. Either one of them, Coke or Pespi, could conceivably lower their prices in the hopes of gaining a greater market share, but doing so would cut into profits considerably, and with no real hope of driving the other Corporation out of business, this strategy doesnt seem to make much sense. Coke and Pepsi have a competitive alliance, charging about the same prices and maintaining healthy profits, while fostering the illusion of competition through their creative advertising. Under regulation, this is essentially the same relationship that the airlines have with each other. Airlines do not compete, they co-exist. When profits are low for the airline industry, prices are going up across the board. The only difference between regulation and an oligopoly is under regulation the airlines do not choose to not compete, it is simply not permitted. Regulation is a government mandated oligopoly and most of the airlines do not want it any other way. It should be of little surprise then that ever since the airline industry is deregulated in 1978 there has been a steady move toward oligopoly (Kane 2003). The airlines must be "regulated" in order to protect the consumer from the airlines. Although confusing, a small amount of regulation will hopefully prevent the airline industry from re-regulating itself. In conclusion, oligopolistic industries are impacted by the price strategies of the competitors because these few firms are interdependent and the change of price by one firm leads to the reaction of another. Monopolistic industries, on the other hand, do not have the competitors and the products or services they offer do not have substitutes. As the result, the monopolistic firms do not have to adjust the price to the market average because the customers will buy the product despite of the price they pay for it. Airline industry, as the example of oligopolistic market, is price sensitive and even insignificant changes in price of the competitors may lead to the bankruptcy of the firm. Petroleum industry, as the example of monopolistic market, is price resistant and can set the price as high as the firm wants – the buyers have no efficient substitute for the product and are forced to adjust the price set by the supplier. Word Count: 1706 References Fudenberg, D & Tirole, J 1991, Game Theory, Cambridge MIT Press. Gabszewicz, JJ & Thisse, JF 1999, Microeconomic Theories of Imperfect Competition, Edward Elgar publishing. Kane, RM 2003, Air Transportation, Kendall/Hunt Publishing. Kreps, D 1990, A Course in Microeconomic Theory, Princeton University Press. Lele, MM 2005, Monopoly Rules: How to Find, Capture, and Control the Most Lucrative Markets in Any Business, Crown Business Publishing. Miller, RL & Fische, RP 1995, Microeconomics: Price Theory in Practice, HarperCollins Press Zachary, G.P, 1999 “Many Industries are Congealing Into Lineup of Few Dominant Giants”, Wall Street Journal. Retrieved November 7, 2003, from http://www.writght.edu/~tdung/oligopoly.htm . Read More