The British Car Market and Perfect Competition - Essay Example

The British Car Market The British car market constitutes of only a few producers which makes it an oligopolistic market. There is no reason that a car industry can fall under the category of a perfect competition. The British cars have distinct features. All firms try to innovate and introduce new features in their respective models rather than reducing the prices to attract buyers. Mclaren is the ever dominant producer of sports cars. Its priority has never been price or attracting customers through packages instead it places more emphasis on perfection, speed and delicacy of its product. Introduction to the case To understand why the car market is oligopolistic instead of being a perfect market we first need to understand the functioning of a true perfect market and how can a car market be separated from such a distinction. Perfect Competition The perfect competition is mere terminology that is used to describe a situation which can be easily comprehended by new learners in Economics. In the real world there is no market that can be classified as being a perfect market. The main idea behind the perfect market is the term "perfect competition". Perfect competition refers to the case where every aspect of competition is known thus giving all information to the market. In a perfect competition, an individual firm is called a price-taker; this is because the market forces decide upon the equilibrium price and quantity. The point that everything is known means that regardless of how much a firm produces it will get the same price throughout its schedule as demand is constant and no one can raise the price or even lower it as the elasticity is 'ZERO' in this case and the addition of each unit in the output brings bout the same change as the previous one. This could be well reflected by the understanding of the Marginal Revenue principle. In the perfect market, demand tends to stay at the same level throughout the schedule so any increment to the cost will only add up to the loss. The main tendency of a perfect market is to produce at the lowest cost possible because price is the only factor which is considered important. In a perfect market, there are a large number of buyers and sellers. This means that the market concentration ratio is very low for each firm which adds to the fact that there would be no effect upon the market if a firm collapses or enters into competition. The addition would only add to the overall output and nothing else and the addition would be of quite a low grain. Product Homogeneity Homogeneity of production is another factor that hinders the classification of the car market as being perfect. In a perfect competition, the products are homogenous that is they have the same attributes as of their substitutes or competitor products. This means that it will not make a difference that which item you buy and from where you buy as long as it matches your description. Since the products are homogenous in the market than quality issues can be raised whereas in a car market one is paying a worthy amount so it is important to have a distinction on what he buys. Cars are also classified as "Status Symbols", keeping this in mind we come to the point that distinction is necessary and thus homogeneity in this market is not acceptable. Entry and Exit Moving ahead we have the case for entry and exit. In a perfect market, every one is free to enter and exit at will. This means that costs are not an issue in this type of problem as free entry and exit means that the costs are low for firms and they can easily switch production among commodities. Further a perfect competition is dominated by small firms this is why the HHI (Herfindahl index) is low for these firms. Imagine that a car producer can switch production easily. SILLY isn't it Yes it is. The machinery required to manufacture a car is very different from that which makes Balloons. In this case if the demand for cars falls so can the producer shift to the Balloon industry in a momentary run Never, it is difficult to shutdown large plants and further the costs of entry into a car industry are exceptionally high as compared to that of a balloon industry. Economies of Scale From the point of entry and exit it also determined that there are near to NO barriers of entry in the free market since the fixed costs are considered to be low. Further the perfect competition only allows for short term profits whereas the car market has to sustain a long term profit also. In a perfect competition, short run profits are mainly the abnormal profits but as we move along the production line, these abnormal profits disappear as the industry is vulnerable to fierce competition which lowers the price such that all the abnormal profit is lost. Now we have a clear understanding of why a Car industry can not be classified as a Perfect Competition. We have seen that entry in the car market is relatively expensive; people desire a distinction for what they are paying for, further perfect knowledge to your rival will cast away your profits. If more competitors are present then the prices will decline sharply and thus all competitors will suffer a loss. Oligopolies How can the market be characterized as an oligopolistic market An oligopoly situation arises when we have a few sellers who engage into non-price competition. These firms are large firms that rely more on Economies of scale rather than short term profits. Economies of scale can be achieved only by expansion of production over time and requires a long term schedule which is not present in case of perfect competition. Product Differentiation The first aspect that differentiates the two structures is product differentiation. However in oligopolistic markets, products can be homogenous but still they may carry different attributes which are different Brand names or packaging. The oligopolists must consider how their rivals will react to any change in the price, output, characteristics, or advertising. Oligopoly is thus characterized by strategic behaviour and mutual interdependence. By strategic behaviour we simply mean self interested behaviour that takes into account the reaction of others. Firms in this type of competition develop and implement price, quality, location, services and advertising strategies to grow and expand their business. In the oligopolistic market, there are only a few competitors, the reason being barriers to entry. These barriers are composed of mainly the high entry costs. Here high entry costs reflect the term economies of scale. Economies of scale can be achieved if there are only a few producers, hardly 4-7, as increased number of producers would deteriorate the market share thus reducing sales and eventually the economies of scale would diminish over time. Entry Barriers Moreover the existing firms in this structure can restrict entrants through pre-emptive and retaliatory pricing or advertising strategies. Firms in this category do expand their profits but because the rivals are few, there is mutual interdependence, which is a situation in which each firm's profit depends not entirely on its own prices and sales strategies but also on those of other firms. So the oligopolists base their decision on mainly how the rival will react to their strategies. Final Thoughts These attributes are all so present in the British car market thus classifying it as an oligopolistic market. Further these producers do not rely on price; rather they place high emphasis on quality and safety added with after sales services. Read More