Business Economics - Microeconomic Concepts - Essay Example

Business Economics - Microeconomic concepts Introduction According to Sloman and Sutcliffe (2004), Business Economics is “economic decision making byfirms” (p.5). The primary objective of all organizations, irrespective of service or manufacturing, is to make profit. Taking proper decisions at the right time based on the demands or fluctuations in the market is extremely important for an organization to stay competitive Service industry is one sector in which competition is intensifying at present. Selection of suitable market structure is important for firms in service industry to stay competitive all the time. Headquartered at Atlanta, Georgia Ritz Carlton is one of the prominent hotel groups in the global service industry. It has one central office, seven international offices, 24 hotels in North America, 2 in Europe, 2 in Australia, 8 in Asia, as of 1999 (The Ritz Carlton Hotel Company at a glance, 1999). Ritz Carlton needs to adopt a suitable market structure to compete effectively in the global service market. This paper analyses various market structures prevailing in the service industry and recommend monopolistic competition as the suitable market structure for Ritz Carlton. Basic business objectives of Ritz Carlton Ritz Carlton is currently trying to expand to overseas markets. The increased readiness of overseas countries in recent times in attracting foreign direct investment is helping Ritz Carlton to think positively about market expansion. Since competition is different in different regions, the objective of Ritz Carlton is to identify less heavily competitive service markets across the world. Asia is the rapidly emerging region at present and Ritz Carlton is giving more attention to this region at present. Identification of proper market structure is necessary for Ritz Carlton to excel in emerging markets. Ritz Carlton and market structure Based on the competition in the market, market structure can be divided into four major categories such as Perfect competition; Monopolistic competition; Oligopoly and Monopoly. In markets with perfect competition, the market determines the price whereas in monopoly, instead of market, the company decides the price. For example, Microsoft is enjoying monopoly in OS market and hence they are able to set prices for their products. However, consumer electronics industry is experiencing perfect competition and hence it is impossible for companies in this market to fix prices for their products. On the other hand in market with Oligopoly, only few suppliers are there and it is possible for the firms in such markets to control the price and market activities in such market structure. For example, OPEC is enjoying oligopoly in oil market. In monopolistic competition, there could be numerous suppliers; however, only few enjoy monopoly. In smartphone market, APPLE and Samsung are ruling now. Even though companies such as Nokia, LG, Blackberry, and Sony Erickson are there, only APPLE and Samsung have the upper hand. Even though monopolistic market structure is the primary objective of all organizations, it is difficult to maintain supremacy in such markets for a prolonged time. It is almost impossible for Ritz Carlton to think about following a monopoly or oligopoly market structure at present because of the huge capabilities of competitors. At the same time, it is possible for Ritz Carlton dominate the hotel industry along with prominent competitors such as InterContinental Hotel Group, Marriott International Hilton Hotels and Global Hyatt. Key internal and external factors affecting Ritz Carlton Manpower cost is extremely high in American and European regions compared to that in Asian region. Moreover, global wealth is currently shifting from American and European is not so good for Ritz Carlton. Monopolistic competition helps companies to attain huge profits for a short period and a normal profit in the long run which is evident from the following illustrations. (Monopolistic competition, n. d.). From the above graph it is evident that the arrival of new players may cause damage to the demand for the products of existing firms. However, until the arrival of new firms, existing firms can enjoy more profits. However, the super normal profits would give way for normal profits when new firms arrive in the market which is illustrated in the graph below. (Monopolistic competition, n. d.) In a highly competitive global service market, it is desirable for firms like Ritz Carlton to think about the long objectives instead of short term objectives. Monopolistic competition helps Ritz Carlton to enjoy super normal profit for a short term and normal profit in the longer run, which is acceptable considering the current fluctuations in the market. Why monopolistic competition ideal for Ritz Carlton? “The concept of monopolistic competition was originally defined by Edward Chamberlin and Joan Robinson in the 1930s” (Advantages and Disadvantages of Monopolistic Competition, 2013). “Monopolistic Competition is a market structure in which many firms sell products that are similar but not identical” (Monopolistic Competition, n. d., p.1). Service quality plays an important role in deciding the competitive power of an organization in hospitality industry. Tourists often visit a particular hotel repeatedly if they get good service from there. Moreover, they give mouth publicity to such hotels so that the brand value and reputation of the hotel could be boosted. It should be noted that hotels in hospitality industry is working hard to increase the service quality. They know very well that keeping existing customers is as important as finding new ones. In monopolistic market structure, “Each firm makes independent decisions about price and output, based on its product, its market, and its costs of production” (Monopolistic competition, n. d.). It is not necessary that the cost incurred for delivering a service item in Ritz Carlton is the same as that of the competitors. The ability to reduce overhead expenses would help an organization to reduce their prices of its products and services. It should be noted that the visitors forced to pay more than the actual cost of products or services while they purchase something from a hotel. It is not necessary that the room rents in Ritz Carlton and Marriot are the same even if they operate in similar locations and delivering similar standards. Since Ritz Carlton is operating globally, it faces competition from all corners. In some regions, they may face less competition whereas in other regions they may face huge competition. Based on the peculiarities of each market, Ritz Carlton should make adjustments in its service prices and outputs. The ability to set different prices to different markets (price discrimination) is one of the major advantages of having a monopolistic market structure. “Companies in a monopolistic competition have the option of determining which customers receive discounts or premiums on goods and services, such as senior citizens or students receiving discounts”(Capozzi,2013). For example, American service market is highly competitive whereas Asian service market is less competitive. Moreover, standard of living in America is extremely high compared to that in Asia. Based on such peculiarities in each market, Ritz Carlton can make adjustments in the prices of products offered to different parts of the world. “Firms operating under monopolistic competition usually have to engage in advertising. Firms are often in fierce competition with other (local) firms offering a similar product or service, and may need to advertise on a local basis, to let customers know their differences” (Monopolistic competition, n. d.). The advertisement strategies used in America may not be suitable for Asia because of the huge political, economic, cultural and environmental differences between these two regions. For example, Tiger Woods could be a good brand ambassador for Ritz Carlton in America whereas in India, Sachin Tendulkar would be an ideal candidate for the same post. Tiger Woods may not excel in India and Sachin may not excel in America as brand ambassadors since Golf is not so popular in India and Cricket is not so popular in America. In short, monopolistic market structure helps firms to market their products and services with the help of customized advertisement or marketing activities for each region. “One of the main positives to come out of a monopolistically competitive market is that in order to be a competitive firm within such a market place, a firms primary goal is to differentiate itself from others in order to gain greater custom than its rival competitors” (Advantages and Disadvantages of Monopolistic Competition, 2013). In monopolistic market structure, consumers may not get an option to compare a product with other products. For example, Microsoft Windows is currently enjoying monopoly in the OS market. Consumers all over the world believe that this product is a superior one since they have no option to compare it with another product. On the other hand, in smartphone industry, even though APPLE is enjoying supremacy, consumers are getting opportunity to compare iPhones with Samsung Galaxy or Nokia Lumia. In short, market structure with monopolistic competition gives more comfort and flexibility to consumers while they take buying decisions. Conclusions Monopolistic competition would be a perfect market structure for Ritz Carlton while they try to expand their activities in overseas countries. Such a market structure would help the company to implement price discriminations based on the peculiarities of each market. Monopolistic competition helps Ritz Carlton to prove the worth of its products and services to the customers. Moreover, it helps Ritz Carlton to enjoy huge profits for short terms and normal profits in the long run. References Advantages and Disadvantages of Monopolistic Competition. 2013. [Online] Available at: http://www.infobarrel.com/Advantages_And_Disadvantages_Of_Monopolistic_Competition [Accessed 05 February 2013] Capozzi, C. 2013. The Advantages of Monopolistic Competition. [Online] Available at: http://smallbusiness.chron.com/advantages-monopolistic-competition-20585.html [Accessed 05 February 2013] Monopolistic Competition, n.d., [Online] Available at: http://www.econ.uiuc.edu/~seppala/econ102/lect15.pdf [Accessed 05 February 2013] Monopolistic competition, n.d. [Online] Available at: http://economicsonline.co.uk/Business_economics/Monopolistic_competition.html [Accessed 05 February 2013] Sloman J and Sutcliffe M. 2004. Economics for Business. Publisher: Financial Times/ Prentice Hall; 3 edition (25 Mar 2004) The Ritz Carlton Hotel Compnay at a glance, 1999. [Online] Available at: http://corporate.ritzcarlton.com/NR/rdonlyres/22E2CEC9-62A4-4EA2-9C3C-51628265E10E/0/rcappsum.pdf [Accessed 05 February 2013] Read More