AutoEdge Analysis - Case Study Example

Micro & Macro economics Introduction This paper is an analytical examination of AutoEdge in a marketing/ economic context. The analysis is going to focus on certain functional aspects of the company such as market structure, competitor analysis, and market forces with a particular focus on price elasticity, demand elasticity, pricing structure, market position etc. The analysis is going to be based on the information provided along with research conducted of existing firms, market conditions, market forces and different kinds of market structures and their respective prevailing variables and economic conditions. AutoEdge: AutoEdge as defined in the scenario is an automotive supply company with three decades of industry established experience. Focusing on engines and transmission parts, the company has been an established client of the three largest U.S based car manufacturers (General Motors, Ford, Chrysler) for the duration of its existence. Its core competencies are the signature, high end quality of the finished product and it has carved a niche for itself in the market based on this differentiation with a loyal brand following that swears by its product. AutoEdge has been outsourcing its main operational activities overseas to South Korea for some time now, gradually shifting to a mainly marketing and strategic based position in the US based on the need to competitively maintain its prices in relation to the other firms in the market, as such we can assume that there are other firms in the market that offer some form of competition to the company. Analysis: Market Structure: As already discussed above, AutoEdge is an automotive supply company that has been offering its services for the better part of thirty years; it also has a long term professional relationship with the three major players in the US automotive industry (GM, Ford, and Chrysler). This puts AutoEdge in the realm of an oligopoly. An oligopoly, by definition, is a market structure that consists of a few large firms that dominate the market either by the virtue of the uniqueness of their products or due to the prohibitive barriers to entry to that market, whether they may be high costs of establishing business, specialized technical knowhow, or sometimes simply judicial regulation that prohibits entering of firms into that field. An oligopoly is perhaps most characteristic of the automotive industry and even if we were to not take into account AutoEdge’s background information and assessment, the simple fact that it is in the US automotive industry places it by default into the oligopolistic market structure. But let us take a look at the information provided to us about this company: AutoEdge produces automotive spare parts for the US automobile industry, apart from selling to large businesses such as the major car manufacturing companies; AutoEdge also sells directly to the end consumers. This provides the company with a fairly large market comprising of not only business sales but also a consumer market of vast and considerable reach. As a producer of Automotive spare parts, it is safe to assume that the company produces a product that is unique and fairly similar to others differentiated only on minute details such as quality and other secondary variables such as ease of access, technology, marketing and communications. It also means that the industry is highly capital and labor intensive, entailing significant startup and operational costs that would mean entry into the market place would be extremely limited only to those with the sufficient capital, labor and most importantly: the technical expertise required for the manufacturing of such highly specialized products as automobile spare parts. In the given scenario it was also presented that AutoEdge has been hit adversely by the drop in quality following the outsourcing shift to South Korea, this means that the industry accommodates competition on a non-price basis, another marked feature of oligopoly. However, going into technical details we have to say that the market also exerts a degree of control on the firm as such we might say that the company is functioning in an oligopolistic market, but strictly speaking it is an imperfect Oligopoly. Level of competition: The distinctive feature of an oligopoly is interdependence. Oligopolies are typically composed of a few large firms. Each firm is so large that its actions affect market conditions. Therefore the competing firms will be aware of a firms market actions and will respond appropriately. This means that in contemplating a market action, a firm must take into consideration the possible reactions of all competing firms and the firms countermoves. It is very much like a game of chess or pool in which a player must anticipate a whole sequence of moves and countermoves in determining how to achieve his or her objectives. For example, an oligopoly considering a price reduction may wish to estimate the likelihood that competing firms would also lower their prices and possibly trigger a ruinous price war. Or if the firm is considering a price increase, it may want to know whether other firms will also increase prices or hold existing prices constant. This high degree of interdependence and need to be aware of what other firms are doing or might do is to be contrasted with lack of interdependence in other market structures. In a perfectly competitive (PC) market there is zero interdependence because no firm is large enough to affect market price. All firms in a PC market are price takers, as current market selling price can be followed predictably to maximize short-term profits. In a monopoly, there are no competitors to be concerned about. In a monopolistically-competitive market, each firms effects on market conditions is so negligible as to be safely ignored by competitors Behavior of price elasticity, demand elasticity and market position: The best way to explain the behavior of elasticity of price and demand in an oligopoly is through a kinked demand curve: The above given figure is an illustration of the Kinked demand curve, which best explains the behavior of price and demand in an oligopoly: The nature of price elasticity in an oligopoly is based upon collusion and co-ordination by all the firms present in the market, as such the kinked demand curve is based on the assumption that any firm in an oligopoly faces a dual demand curve that is dependent on the most likely reaction of other firms present in the oligopoly to any change in its price or any other competing variables. It also works on the assumption that an oligopolistic firm is looking to maintain its own share of the market and protect it against loss from a competitor as such rival firms are not very likely to increase their prices, but may match price decreases. Therefore if a business raises prices but other firms in the market do not then that makes the demand relatively elastic causing the business to lose market share and see a fall in profits. However if the business reduces prices and other firms follow suit the demand would be relatively inelastic, leading to the same conclusion; that of loss of revenue with little to no effect on the market share. The kinked demand curve displayed above predicts that instead of raising or dropping prices a business searches for a stable profit maximizing equilibrium and have little incentive to alter prices. Thus we can make the following statements about AutoEdge: 1) AutoEdge is an oligopolistic firm with high number of customers, relatively few sellers, high barriers to entry and a collusive form of market 2) The price elasticity and demand elasticity depend on where the firm is on the kinked demand curve model and depends heavily on the behavior of the other firms. An Ideal situation for AutoEdge is to look for a profit maximizing equilibrium position and maintain itself at that position as firmly as it can. 3) The competition in the current industry is high and of a collusive nature, based on non-price variables and as such AutoEdge depends heavily on its brand name, recognition and following to maintain its leadership position and should do all it can to regain it following the South Korea fiasco. References: I. Kamien, Morton Market Structures and innovation 2004, Oxford University Press R. Krugman, Paul Market Structure and Foreign Trade: Increasing returns 2001, MIT Press Baldwin, William Market Structures and change 2002, Psychology Press Norman, George Market Structure and Competition Policy 2000, Cambridge University Press Read More