The Issue of Oligopolistic Market and Nike Inc - Research Paper Example

Nike & Oligopoly An oligopolistic market is a form of market where only a few sellers, collectively known as the oligopolistic, dominates the industry. In most cases, oligopoly occurs as a result of various forms of collusion that work by reducing competition in the market. This situation often leads to higher prices in the market. Oligopoly is closely similar to monopoly, only that there are at least two different firms competing together. Oligopoly is a popular form of market structure whereby all companies compete with one another for the market share. Nike & Oligopoly Introduction With the exception of public utility goods such as defense, oligopolies are rapidly crowding most sectors of the economy. Nowadays, oligopolies can be identified in most kinds of value chains such as the manufacturing (Daughety, 2005), the wholesale level, commoditized industries, retail activities like grocery retailing, branded goods, service industries like credit rating, as well as large ones like consumer electronics. Oligopolistic industries are also multifaceted thereby involving all sorts of industries and their players (Sherman, 2005). Despite this, oligopolistic industries are endangered by many well-known economic factors. Since the beginning of industrial revolutions, many economic factors such as technical progress, market-opening reforms, and accumulation of capital have significantly spurred competitive spirit in the market, which is against the structure of oligopoly. With this, many inefficient firms have disappeared from the market. Similarly, oligopolistic firms face this danger if they cannot endure the competitive tone of the market (Puu, 2010). The persistence research on this topic is perhaps the best expression that there are countless unsettled problems with oligopoly. This research paper explores the issues of oligopoly and purports to suggest some solutions that might work for such companies. This will be done by giving the research both economic and legal perspectives. In the presentation of statistical analysis, this research heavily relied on the use of secondary data. Hypothesis As mentioned in the introduction, oligopoly has so many issues that need to be solved. Although these firms still survive in the modern highly competitive economy, they face numbers of challenges that if not solved threatens their future existence in the market. Over the past decades, several companies have been collapsed because of stiff market competitions. The business environment has significantly changed. Unlike a few decades, the ability of companies to subsist in the modern business environment depends on their competitive prowess. This is because the modern-day business environment is purely based on competitiveness. Strategies such as market collusion, which is widely employed by oligopolistic, might not find a place in this competition-based market structure. The problems of oligopoly largely rely on its inability to compete freely in the market without using restrictive trade measures and collusions (Friedman, 1985). Literature Review Research indicates that a wide range of outcomes may arise under oligopolistic competition (Sherman, 2005). Although only a few firms particulate in the market, this market is marked by stiff competition. The oligopolistic firms may be compelled to employ certain restrictive trade practices to enable them survive in the market. Such restrictive trade practices may include methods such as market sharing, collusion, amongst other possible options. Oligopolistic firms use these restrictive trade mechanisms to restrict their productions and increase prices in a manner similar to a monopolistic market. Proponents of oligopoly argue that, with this kind of market structure, large firms are able to make considerable profits because they have hardly any competitors in the market (Friedman, 1985). This line of thinking might be good, but it does not mean that oligopolistic firms have guaranteed profitability. Another argument in support of oligopoly is that products of competitive firms are usually derived from a larger firm. This means that profits made by the rival firms ends being profits of the bigger parent firm, maybe theoretically. As a result, the bigger firms that are in a position benefits more in the market. Collusion is a common aspect of oligopoly. However, for collusion to be effected by the involved firms, a formal agreement is often required. This is often known as cartel. OPEC is a good example of such cartel agreement that has substantially influenced the international oil prices. Collusion is a tool that is used widely by oligopolistic firms in an attempt to stabilize the market (Shubik, 1999). In particular, oligopolistic firms use collusion to reduce the inherent risks in the market, favor their product development, and protect their investments. Collusion is not always a positive strategy as many countries have different legal restrictions. Secondly, it necessitates the use of a formal agreement to effect collusion. As a result, some firms can be downplayed if they are not smarter. Most scholars, such as Okuguchi and Szidarovszky (2011), agree that the anti-entry strategies used by oligopolistic firms may be healthy for the firms contrary to the competitor’s competitors. New entry considerably threatens the overall stability of the already established market collusions. According to professors Scherer and Ross, foreign imports of goods, for instance, may make the market repeatedly frustrated by the dynamics of the tacit market collusions. Economic theories suggest several ways through which entry undermines collision. First, it enforces the companies to share the collusive profits with additional firms that have entered the market. This event makes oligopolists firms reap less from the market collusions. Secondly, it becomes very costly to monitor the additional entrant into the market (Okuguchi & Szidarovszky, 2011). Albert Einstein once said that it is important to make things simple but not simpler. This statement, when viewed from the supply side of the market, can be interpreted that competition is a prisoner’s dilemma. With this perspective, collusion can be equated to cooperation and competitive behavior as a defection. Therefore, each supplier is individually better off only if other suppliers remain faithful to the cartel. This will certainly undercut the prevailing collusive price in the market, enabling the company to surpass her quota. By all standards, this would be the simplest and easiest way of capturing the competitor’s dilemma. However, it is not simple because two important features are missing in this oligopolistic model. First, the market and society at large determine the supplier’s dilemma. Secondly, almost all legal orders of the world step to combat cartels in the market. This leaves a heavy burden with oligopolistic structures. When operating under pure profit maximization criterion, it is not expected of suppliers (firms) to inflict harm to their rivals in the market. Instead, they look for marketing mechanism that would substantially up their game in the market. This requirement is contrary to the market structure and settings of oligopoly, which is marked with collusion, and other unwelcome trade restriction measures, which harm their opponents. Similarly, oligopolistic firms use all kinds of mechanism to bar entry of new rival firms into the market (Mazzeo, 2005). According to Mazzeo (2005), oligopolistic industries usually produce similar or identical products. This is because their line of business is the same. As in this case, Nike, Reebok, Puma, and Adidas are producing sports footwear. In consequence, the companies will only be identified by their brands. That is why oligopolistic firms spend immensely on advertisements so that their products become known in the market. Production of identical products makes oligopoly behave like a typical monopoly competition. With this regard, oligopolistic industries appear in two varieties that are identical product oligopoly and differentiate product oligopoly. Under identical product oligopoly, the company tends to produce intermediate goods or process raw material while under differentiate product oligopoly the company tend to focus of sales of goods for personal consumption (Mazzeo, 2005). Much experimental literature shows that an oligopoly is legally and socially embedded. This market structure favors massive effects of externalities especially on passive outsiders. Although little study has been done on the same, there are enough evidences to justify this point of reasoning. The ultimatum game presented by Guth and van Damme (1998) evidences that if subjected to externality, the third inactive party may have no say. Methodology Characteristics of Oligopolistic industries The first primary characteristic of an oligopoly is the presence of fewer sellers in the market. There are only a few companies selling their products to consumers. This can be in the range of two to three but not more than 20 companies. These companies control most or all of the sales in the market. Barrier to entry of new industries is another strong characteristic of oligopolistic market. The oligopolistic firms are generally large in terms of resources and market share. This makes it largely benefit from the economy of scale, thus barring other new firms from entering the market. The new firms will need considerable capital and expertise to compete well these firms (Stroux, 2004). Interdependency is another strong characteristic of oligopolistic industries. The firms are relatively large concerning the market within which they operate, making them interdependent. Because of this, the changes in marketing strategy or prices by one firm directly affect the other rival firm(s). For instance, if Nike lowers its prices by 20 per cent, both Puma and Adidas, which are competitors, will be significant. If these two companies do not respond to Nike’s change of prices, they will certainly lose significant market share (Daughety, 2005). Oligopolistic industries are also characterized by prevalent advertising, especially on a national scale level. Such firms employ defensive and aggressive marketing and advertising weapons to enable them gain greater market share. They also do this with motives of maximizing their company sales. In view of this, oligopolistic firms have to incur greater many advertisement deals to enable them maximize their sales. They also use other measures and techniques of sales promotion. In consequence, oligopolistic industries use a lot of advertisements and promotions in their market structure (Mazzeo, 2005). Nike’s Concentration Ratio Market concentration ratio is a function that expresses the number of market shares of the firm. The Concentration Ratio of a firm is calculated by summing the total number of its individual market shares. This ratio is significant as it reflects both distribution of the firm’s market shares and market composition outside other top firms. Nike has a considerably high concentration ratio. By the beginning of 2014, this Greek giant shoes manufacturer had a concentration ratio of 79.1%, which actually shows its strong market share. This figure shows that Nike still has a stronger market share for its output in sales. Because of its strong market share, Nike’s concentration ratio has barely remained the same for several years (Daughety, 2005). How Nike Influences the Price and Restricts Its Output Since Nike is an oligopolistic firm, it influences prices and restrict out in accordance with the structure and forces of oligopoly. In other terms, it has to play according to the rules of an oligopolistic industry. In an oligopoly market, the firm sets its own prices of goods sold. However, the competitors in the market directly influence the firm’s pricing decision. In addition, the quantity of goods sold is also determined by the firm’s own prices (Friedman, 1985). Considering this, and the fact that it has a higher market share by calculation of its concentration ratio, Nike influences the market price largely. If it decides to increase prices, other competitors will do the same. As well, if Nike decides to lower prices, its competitors will do the same. If they do not respond in the same way, they will be faced out of the market. Nike also restricts its output according to the market demand forces. It restricts its production in accordance to the prevailing market demands for its products (Mazzeo, 2005). Nike’s pricing Strategy and Marketing Strategy Nike uses a marketing and pricing strategy that rests completely upon its product image. This strategy is considerably favorable to Nike because it allows it has allowed this Greek company to develop into a leading multinational manufacturer. Its favorable products have been prevailing in the market owing to a strong relation with the company’s unique and distinct slogan and logo. The company invests in a lot of commercials and promotions like its major marketing strategy. This strategy is coherent with the structure of oligopoly market (Okuguchi & Szidarovszky, 2011). Nike also uses value-based pricing strategy. Under this pricing strategy, the company finds the cost of the item, then research on the amount that buyers are ready and willing to pay for the product. Accompanied with this vital information, they are able to determine the appropriate prices for their products. However, Nike being an oligopolistic industry, it has to consider what their competitors are charging for the same or similar product. They have to consider their rivals have a direct influence on their strategy. For instance, if companies like Puma and Adidas decide to lower prices for similar products, then Nike has to respond effectively. This might trigger collusion with rival firms in the market (Puu, 2010). In general, Nike uses marketing and pricing strategies that are similar to its rivals such as Adidas and Puma. This is because they are in an oligopolistic setup where all the firms are dependent because they offer substitute goods. If Nike increases prices for its products, then customers will go for Adidas’ products because become cheaper and offers the same level of satisfaction that it they is substitutable (Mazzeo, 2005). Nikes Advertising Expenditure as an Element of Product Differentiation One thing that differentiates Nike from other competitors in the market is its strong advertising strategy. The company uses high-level advertising strategies to differentiate its products from those provided by the rival companies such as Adidas and Puma. The company also relies on high-end advertising mechanisms to enable it increase its sales worldwide. As a result of using this strategy, the company’s advertising expenditure is considerably the highest compared to its market competitors (Sherman, 2005). Nike uses all forms of advertisement and promotions to enable its products sail through in the oligopolistic market. For that reason, Nike’s brand images, name, and trademark are undeniably recognizable in the world. The company has been able to make their brand and products recognized worldwide simply by using strong and regular advertisements. Once the product is advertised quite often, it sticks in the people’s memory. Nike uses this strategy for its product differentiation. For that reason, the companys sales increases as many more people build trust in their products (Stroux, 2004). Statistical Analysis Although it does badly in some areas, the statistical analysis of the past 10-year’s data reveals that Nike is a competitive company. Below is a Business Competitive Position Matrix that shows this analysis. Table Showing Business Competitive Position Matrix Against Adidas Against Reebok Success Factors Weight Rating Score Rating Score Market Share .07 5 .35 4 .28 Breadth of Product Line .10 5 .50 3 .30 Sales Distribution Effectiveness .06 4 .24 3 .18 Price Competitiveness .10 3 .30 2 .20 Advertising Effectiveness .14 5 .70 3 .42 Production Capacity .04 5 .20 4 .16 Relative Product Quality .10 4 .40 3 .30 R & D position .18 4 .72 3 .54 Caliber of top management .03 5 .15 4 .12 Experience Curve .05 5 .25 4 .20 Corporate Culture .05 5 .25 3 .15 Profitability Ratios .08 5 .40 4 .32 TOTAL 1.00   4.46   3.17 Graphically, the statistics can be presented as follows: Graph of Business Competitive Position This graphical representation of the Nike leads in almost all success factors such as market share, breadth of product line, sales distribution effectiveness, price competitiveness, advertising effectiveness, production capacity, relative product quality, R & D position, caliber of top management, experience curve, corporate culture, and profitability ratios. Conclusion Oligopolistic industries are common in the market. Just like other industries, these companies play significant parts in the market. Most of the oligopolistic industries are leading in terms of the market. The competition in an oligopolistic market is indeed stiff, although these firms dominate the market share. This is because only a few numbers of firms dominate the industry, and entry into the market is restricted. This fierce competition often occurs since they have high productions and low prices. Because of the nature of the market, oligopolistic industries may use different kinds of restrictive trade practices to control their production and increase prices of their goods (Shubik, 1999). There may be collusions in the market because only a few firms dominate the oligopolistic market, according to Puu (2010). Oligopolistic firms may collude in both their marketing and pricing strategies. They may collude to price their products the same way because the pricing of one firm directly affects another firm. Oligopoly has its both advantages and disadvantages to the firm. On one hand, the firm may benefit greatly by controlling the market share. However, they are affected by decisions made by their competitors in terms of marketing and pricing strategy. If their competitors changes strategy or prices, they have to respond accordingly (Shubik, 1999). Nike Inc. is an example of an oligopolistic company that is embroiled in stiff competition. A company uses various kinds of competitive methods to ensure that it maintains its high market share. Nike is largest recognized for equipping athletes and other sportspersons with the finest sports equipment. The company dominates its market competitors such as Puma, Reebok, and Adidas. Nike is undoubtedly one of the most successful companies in the oligopolistic market. References Daughety, A. F. (2005). Cournot Oligopoly: Characterization and Applications. Cambridge UK: Cambridge University Press. Friedman, J. (1985). Oligopoly Theory. New York: CUP Archive. Mazzeo, M. J. (2005). Product Differentiation and Oligopoly Market Structure: An Empirical Analysis of the Motel Industry. Stanford: Stanford University. Okuguchi, K., & Szidarovszky, F. (2011). The Theory of Oligopoly With Multi-Product Firms. London: Springer London. Puu, T. (2010). Oligopoly: Old Ends - New Means. Arlinghton: Springer. Sherman, R. (2005). Oligopoly: An Empirical Approach. Chicago: Lexington Books. Shubik, M. (1999). Political Economy, Oligopoly and Experimental Games. London: Edward Elgar Publishing. Stroux, S. (2004). US and EC Oligopoly Control. Nevada: Kluwer Law International. Read More