Market Structure and Coca Cola - Case Study Example

Name : xxxxxxxxxxx Institution : xxxxxxxxxxx Course : xxxxxxxxxxx Title : Market Structure and Coca Cola Tutor : xxxxxxxxxxx @2010 TABLE OF CONTENTS I. INTRODUCTION II. BODY A. Types of Market Structures 1. Monopoly 2. Oligopoly 3. Perfect Competition 4. Monopolistic Competition B. Coca Cola III. CONCLUSION IV REFERENCES Market Structure and Coca Cola Exclusive Summary The laws of demand and supply form a market economy and as such should be closely monitored. The extremes of market economy are monopolies and perfect competition. Coca Cola Company falls within the two extremes and is monopolistic competitive. Introduction The supply and demand of goods and services is one of the most vital concepts that relate to economics and is the cornerstone of a market economy. Demand is the amount of service or product that is desired by buyers. The amount of goods demanded refers to the total amount of goods that people are willing to purchase at a particular price. The relationship that exists between quantity and price of goods is the demand relationship (Ernest & Bulent, 1996). Supply refers to the quantity of a given good that producers are able to supply when they obtain a certain price. The relationship between price and the supply of goods is referred to as supply relationship. It is therefore concluded that price is a representation of the forces of demand and supply. In light of the differences that pertain to the forces of demand and supply, the following market structures can be obtained; monopoly, oligopoly, monopolistic competition and perfect competition. Monopoly A monopoly is a form of market structure that is comprised of a single seller/producer for a particular product. It can also be viewed that the single business is the entire industry. The entry into a monopolistic market is limited due to various impediments or high costs which may be political, economic or social (Chamberlin, 1933). A good example of a monopoly is when a government controls a particular industry for instance electricity. Other monopolies exist when an entity has exclusive rights to a particular resource. For instance, in Saudi Arabia the reigning government has sole control of the oil industry. Also, monopolistic market structures maybe formed when a company holds a patent or copyright that prevents other players from entering the market. For example, Viagra was patented by Pfizer (Rudolf, 2004). Below is a diagrammatic representation of monopoly. The monopoly diagram is viewed to be the same in the long as well as the short run. Maximum profit manifests when MR = MC. Equilibrium is therefore at Qm, Pm. The following are the features of the diagram above; There exist barriers to entry in the Monopoly. The firms in the monopolistic market structure are price makers. The industry demand curve is similar to the firm’s demand curve. The profits are maximized at output in which MR=MC. The aforementioned statement therefore implies that the set price is greater than MC which is generally inefficient. In the diagram above, the firms generate supernormal profits since AR is larger than AC. Oligopoly In this form of market structure there exist a few numbers of firms that comprise it. The few firms that make up the market have control of the price. An oligopolistic market also has very high barriers to the entry of new market players (Stigler, 1957). The products that are produced by oligopolistic industries are more often than not identical and the companies that compete for the market share are duly interdependent as a result of the market forces that exist. Take a hypothetical situation in which an economy needs 100 widgets. Company K produces 50 widgets while its competitor, Company L produces another 50 widgets. The prices of the two different brands will duly be interdependent and thus identical. In an instance where Company K begins selling its widgets at a reduced price, then it will obtain a larger market share, the aforementioned move will compel Company L to sell at a lower price as well. Perfect Competition Perfect competition is an extreme form of market structure and it is the opposite of monopoly. It is a system in which a huge number of firms produce similar products for a huge number of buyers. The firms that exist in the market share similar market/product knowledge and have the luxury to enter or leave the industry (Stigler, 1957). It is characterized by many sellers and buyers, a large number of products that are identical in nature and therefore many substitutes. Perfect competition is a form of market structure in which there are very few entry barriers for new companies and the prices of the products or services are determined by the interaction of the demand supply. The producers in this market structure have no leverage over the prices of their products or services and as such have the prices determined by the market. For instance, in the event that a firm in a perfectly competitive market increases the price of its products then the consumers can easily turn to one of the competitors in the market for a better price. Since consumers in a perfectly competitive market can change the suppliers of their products then a firm that increases the price of its product is bound to lose profits and market share. The players in a perfectly competitive market are price-takers and as such sell as much of the product as is possible at the prevailing market price. The output is stipulated where the marginal cost is equal to the marginal revenue. After a long period of time, the average revenue is equal to the marginal cost and firms have the luxury of benefiting from normal profits. Below is a diagrammatic representation of perfect competition market structure. In the long run in a perfectly competitive market; The firms in the market will generate normal profits. The price of the products is set by the prevailing supply and demand. Since the firms in the market are price takers then they set a high price that nobody would purchase because of perfect knowledge. The firms in the market therefore have elastic demand curves. Below is a diagrammatic representation of firms making a loss in a perfectly competitive market; In the event of a fall in demand then the price of the products will duly fall. At the price p2, firms make a loss since AR < AC. Since firms make a loss then some will go out of business and thus supply curve’s leftwards shift. The supply curve will deep until price increases to P1. At P1 the firms generate normal profits. The aforementioned point is referred to as the equilibrium point. Monopolistic Competition It was developed by Edward Chamberlin and Joan Robinson who were economists. They lived between (1899-1967) and (1903-1983) respectively. Monopolistic competition therefore refers to the competition that exists between a numbers of firms that produce products that are almost identical in a given market. The demand for the goods produced in the market is far from being perfectly elastic. The monopolistic firms demand brand loyalty and are not price-takers. In a monopolistic competitive environment, the total product equals the total sum of marginal revenue and marginal cost. The features of a monopolistic competitive environment are as follows: The existence of a great number of firms. It is easy for a firm to come into the market and exit. The produce is highly differentiated and hence firms have inelastic demand. The firms in the industry are price makers due to the highly differentiated nature of the goods. The firms generate normal profits over a long period of time. The firms could generate supernormal profits over a short period of time. It is productively and allocatively inefficient. Restaurants and hair dressers are industries that are monopolistic competitive. Coca Cola Coca Cola is among one of the biggest non-alcoholic beverage producers. It was started in 1892 and is located in Atlanta, Georgia. Its worldwide employee base is around 50,000 employees. The Company’s key business (approximately 86 of revenues) is in the production of syrups and soft drink concentrates (Sprite, Coca Cola and Diet Coke). The company also takes part in the sale of juice products such as coffees, Minute Maid, Water, teas and sport drinks such as Powerade (Khan, 2009). They have a brand base of around 400 which are sold in more than 200 countries. The company’s bottling network is also extensive. The network is constituted of 25 independently owned bottlers, 58 bottlers of which Coca Cola does not have controlling interest, 10 fountain and completed beverage operations and 7 of which Coca Cola has controlling ownership interest. The company sells syrups and concentrates to the bottlers and distributors. The company also helps the partners in their product and marketing distribution (Khan, 2009). Coca Cola’s market structure is monopolistic competition. It has highly differentiated its products and as such has been able to maintain a large market structure. Many African countries solely associate it with carbonated drinks. This form of brand proliferation has made it difficult for new industries to come into the market. This would be because it would be difficult for a new firm to compete against the numerous Coca Cola established brands. Coca Cola produces carbonated drinks that are almost identical with other players in the market. For instance, Pepsi who produce similar carbonated drinks. Since there are other players in the market who produce carbonated drinks then Coca Cola’s stardom is seen to be as a result of brand loyalty. This is one of the major characteristics of monopolistic competition. They are therefore not price takers and Coca Cola is seen to operate as a monopolistic competitive company. Conclusion The forces of demand and supply play a vital role in price determination and therefore form the cornerstone of a market economy. The extreme forms of market structures are monopoly and perfect competition. The other market structures that fall in between the extremes are oligopoly and monopolistic competition. Coca Cola one of the most reputable companies in the world is monopolistic competitive. It is not a price taker and has specialized in the production of differentiated products. There are a number of players in its field and as such it only demands brand loyalty. 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