Oligopolistic Market Structures And Management Of Them Economics Essay

Oligopolistic Market Structures And Management Of Them Economics Essay One constructive approach of categorizing a market is by dividing it in terms of the number of firms on the supply side of the market and the buyers concentration on the demand side. Oligopoly represents one of the market structure where there are a very few firms on the supply side and a huge concentration of buyers on the demand side. As the buyers cannot affect the market conditions, they are going to adopt it as such and the supplier will be busy in anticipating the rival behavior. Oligopoly looms large in industries of steel, petroleum, automobiles etc. Many industries can operate geographically as oligopolies. For example banking in a small town operate as oligopoly since there will be one or two banks in the area and the residents will be forced to take their business to the local banks.( Friedman, 1983) Oligopoly a complex market structure Oligopoly is virtually a big business. Under this market structure, the rivalry takes on its worst form. Product innovations, aggressive advertising and innovative marketing tactics are frequently applied to outweigh each other. Oligopolistic market structures are the most difficult to analyze as they are highly interdependent and interwoven, where moves and countermoves are taken rapidly. For example a simple action by Ford may lead to a reaction by General Motors, which in turn cause a readjustment in Fords plan, thereby modifying GMs response and so on. So anything can happen anytime in oligopoly. There are few models that highlight oligopolistic behavior. They are: Cartels A case arises in monopoly when all the firms attempt to promote interdependence and they all mutually agree to set price and output. The firms through their mutual coordination try to create a giant monopoly. OPEC (Organization of Petroleum Exporting Countries) is an example of a cartel platform. Price leadership and Tacit Collusion It is an arrangement in which one or two firms make an arrangement of the pricing for the entire firm. Other firms are forced to follow the same price pattern although no such agreement exists in the industry. For example: In the infant formula industry, Abbot laboratories, Bristol Myers Squibb and American Home Products deliberately set their prices closer to each other to dominate the industry. The Kinked Demand Curve This model elaborates the stickiness in pricing in an oligopolistic structure. It has been hypothesized in this model that if for example, a firm X lowers its price in an oligopolistic market, the rival will be forced to lower its price to in order to avoid the loss of its market base. The demand curve dd is thus the relevant curve in case of a price reduction. dHowever, if the firm X goes for a price increase, then the case wont be the same. The rivals will not imitate this time, and would continue to enjoy the customer support as they would flee the firm X products. In this case the demand curve would be DD. The firm then tries to remain in a segment of the elastic demand curve between dd and DD. The true demand curve is represented by DAd, known as the kinked demand curve which silently points out the fact heads you lose, tails you lose (Baumol and Blinder, 2009) D A Price 8 (Competitors prices are fixed) 7 D d (Competitors respond to price changes) 0 Quantity per year 1,400 1,100 1,000 Game theory and the Oligopoly Game theory has been formulated to understand the behavior of the firms in an oligopolistic market structure that do not work on a collaborated output and pricing. The underlying assumption is that the large bossy firms are like players in a game of poker. They make the moves of lowering or increasing the price, to advertise or not to advertise, to discount and so on, based on their rivals move. Understanding the payoffs can put a firm in a better position to compete with its rival and be in a profit maximizing and rational position. For example the game between two coffee shops is illustrated as below: C:Documents and SettingsAnumDesktop4th assignmentUnderstanding Oligopoly Behavior a Game Theory overview Economics in Plain English_filesgame-theory-1.jpeg Source: Welker, J. (2009).Understanding oligopoly behavior-A game theory overview. Available from: http://welkerswikinomics.com/blog/2009/12/15/understanding-oligopoly-behavior-a-game-theory-overview// According to the above figure, both San Francisco coffee and Starbucks is following a dominant strategy. They are working up to maximize their outcome through advertising, ignoring what their competitor does. If S.F advertises, Starbucks earns profit ($12 vs. $10) through advertising. This means the pay offs are the same. Since both firms are enjoying profit through advertising they will do so, though the total profits are less in case when both are advertising, as compared to when they are not advertising. But such a condition would be a condition of instability, as to advertise is likely to be beneficial for both. So we say that advertise/advertise is Nash equilibrium, as at this stage none of the firm is going to change its strategy since it is bringing incentives to both (Jason Welker, 2009). Market failure due to Oligopoly Keeping in view the above theories that try to explain oligopolistic behavior, the market failure due to oligopoly can be attributed to various causes. Inefficiency, instability and indeterminacy brought about by oligopoly may result in a market crash. The firms supremacy is established as the capacity is established more and more, but little is produced in order to create artificial barrier to entry. The competitors compete on the basis of non pricing factors such as heavy advertising, which gives more hold up to the artificial barrier to entry. Prices are well above cost and price discrimination prevails. Some of the firms also engage in self-regulation to preserve their own profits and market share that further detoriate the situation (Grewal and Kumnick, 2006). Oligopolistic firms output and prices substantially differ from what is socially accepted from them. It is also believed that the misleading advertisement by the large firms also deludes the consumers and compels them to b uy products that they do not want. They impose political and economic power and hover over the mind of the consumers working like an invisible hand. Market Form Number of firms in the market Frequency in Reality Entry Barriers Public Interest Results Long Run Profit Equilibrium Conditions Oligopoly Few Produces Large share of GDP Varies Varies Varies Varies Source: Economics: Principles and Policy By William J. Baumol, Alan S. Blinder MC=MR applies for a profit maximizing firm, under equilibrium. However, in oligopoly, MC is usually unequal to MR mainly because in oligopoly the firms are seeking to adopt strategies in accordance with the game theory, or they look for techniques such as increasing sales for profit maximization as their ultimate goal. Conclusion In a perfectly competitive market place the behavior of the firms automatically lead to a maximization of consumer benefits through an efficient allocation of resources. In oligopoly however, resource allocation is usually is not well set, more focused is paid on restricting output in an attempt to maneuver prices and profits. In an oligopoly everything is possible, can happen anytime anywhere, so the economists are still unable to clearly predict its behavior. Besides, its ability to lead the market down, some economists are of the belief that oligopoly has made a significant contribution towards the economic growth in the past two decades resulting in an increase in the average income of the rich countries.(Baumol and Blinder, 2009). Question two What are the implications for management of businesses in such structures? Introduction Oligopoly is a market characterized by a few firms. Managers of a firm in such a structure know that their firm enjoys a market power. But the other players have their share of power too. If the managers take the right course of action, properly assessing the behavior of their rivals in the industry, they are likely to make a profit. Strategic behavior Strategic behavior refers to the firms ability of proper consideration of their market power and awareness of their rivals move. Strategic behavior occurs in oligopolistic structures where there is less product differentiation and a competitive industry exists (Taylor and Weerapana, 2009) Implication for the managers The most important implication for the managers regarding oligopoly is the pricing practice on the basis of mutual interdependence. In case of monopoly, the absence of competition enables the managers to follow the MR=MC role to maximize its profit. However in Oligopoly, simply following the MR=MC isnt just enough. Example Consider, for example the case of Proctor and Gamble, where the manager hires a consultant for the thorough analysis of the cost, structure and demand. After a detailed analysis of the structure of the body soap products, the manager follows the MC=MR rule and set the retail price at $1.99.In a sudden move, the competitors Colgate-Palmolive , Lever brothers etc set the price of the comparable product 10 to 15 below to that of proctor and gamble. What the manager is likely to do? Either he can go for advertising and heavy promotion to compete against the lower prices of the competitors or can lower its prices down. Or he can simple do nothing if he is confident enough of the strong loyalty that his brand enjoys among consumers. The point is that, that pricing in oligopolistic structure cannot be done without taking into account your competitor. This is the essence of mutual interdependence (Young and McAuley,1994) The second implication for the managers is to understand that it can be extremely difficult to make money in a competitive market. Firms are required to be as much cost efficient as possible because they cannot control the prices. The managers are supposed to be vigilant enough to be able to spot opportunities and enter the market before the others could enter. They should be able to make their place before the demand gets high enough to support an above normal price. A situation could arise in oligopoly, where the managers in a firm become so successful in beating up the competition that the firm turns into a monopoly, or the one that can exercise monopolistic power. Such a case happened with IBM when In 1969, the firm dominated the computer market so much so, that the department of Justice had to issue an antitrust suit against it (Keat, Young and Benerjee, 2009) Global implication for managers The managers should keep in mind that the process of benchmarking in an oligopolistic structure strategy formulation should be done keeping in view both domestic as well as the global competitors. For example AT T communications not only took into account Northern telecom but also Siemens, Ericsson and NEC and Fujitsu. Many of the firms that refuse to take challenge from the foreign firms are likely to face consequences. Like many American firms got a serious blow from their Japanese competitors in the past 20 years. Companies like IBM and Caterpillar enjoys success because they established a strong hold in the Japanese market well before time. The oligopolistic structure also highlighted the importance of alliance for the managers. Alliances enable the firm to acquire technology from the rival firm. Whilst the acquisition of the technology can be a source of benefit for the firm, the firm giving up the technology can face causalities ( Yoffie,1993) Conclusion The managers of an oligopolistic market structure have to take into account several aspects in their decision making. The managers are plunged into complex pricing decision. They take into consideration the three Cs of Cost, customers and competition in their decision making. Price wars were common in an oligopolistic market, but they are becoming less frequent with the passage of time, mainly due to the realization of the managers. Managers have understood, through their bitter experiences, that the price wars are costly and do not bring any benefits. They chose to compete on the advertising and on product variations. So they have chosen not to compete on prices and have found for themselves a path of mutual advantage.

Invention of the Internet Essay

Technology has also been a part of our daily lives. The implementation of technology influences the values of a society by changing expectations and realities. New inventions of technology are usually created to simplify life somehow. One of the greatest inventions in the last hundred years is the internet. The ever expanding internet has revolutionized the way Americans live their lives. The internet has a major impact on society and our culture. The internet has completely broken down the borders that our ancestors had. With the internet, everything that we could possibly want is at the click of a button. People can instantly instant message and video chat will people half way across the world. People now work from home, shop from home, do everything they possible want from home. But if people do not have access to the internet they cannot compete is this new global market place of unending ideas. In the beginning, when the internet first came into play America’s were startled and amazed by the possibilities of communication that the World Wide Web brought. He web is mainly a way that brings people together to communicate. The web is a layer of system upon system (Bowell). The Web is a continual ongoing process. It has never stopped replicating itself or processing since the first day it began. However, even though there many different systems on the web, no website is subject to special rules. The internet has become a sensation all over the world and more people use the internet than in other time in history. The internet has been a huge economic boom to our country. We now live in a global market. With the help of the internet, businesses can reach customers worldwide. Many businesses now have websites where customers do not even have to visit the store to buy their products and these companies want your business. The internet has a huge selection of items to purchase online. More people use the web to shop than ever before in history (bowell). Online shopping is the process whereby consumers directly buy goods or services from a seller in real-time over the internet. (wiki re) A majority of consumers choose online shopping for a faster and more efficient shopping experience. For customers, shopping online can mean less time traveling and lower cost. Many stores offer special sales and discounts to customers who order online. Also, traveling to the store means that customers can only go during business hours whereby ordering online is more convenient for their schedules. Conveniently, many stores online are available 24 hours a day. Online retailers have seen tremendous jumps in their online earning potential (bowell). Of course there is also disadvantages to online buying. One big disadvantage is the customers concern of how unease it would be to return the item. The customer is not absolutely positive that the item they are buying will satisfy and meet their expectations. Sometimes, returning an item can become a hassle and have to wait long periods of time to actually get the item in hand. Since the customer cannot see the merchandise they wish to purchase customers are at higher risk of fraud buy ordering online. Of course, a major concern of consumers is identity fraud. There have been many cases where hackers break into a web site and can steal a customers personal information. One unexpected disadvantage that comes with online shopping is the amount of trash that consumers produce. The more items that people purchase online, the more boxes and packaging they have to throw away. This past Christmas, New York show a 20 percent increase in paper recyclables with a parallel increase of 25 percent of online sales. The biggest buzz about the internet is social networking. One of the main uses of the internet is for relationships. The internet has revolutionized the way that people communicate with our friends and the world. People used to write letters and sent them off then waited even weeks to get a reply. Now a days, people communicating instantly through instant messaging, video chat, face book and e-mails. We can communicate instantly with people all the way across the world. Social networking sites have people set up their own personalizes profile that is just about them. (These sites help fill in the gap) These sites help everyone stay more in touch with their friends and family. Social networking seems to make the world smaller by bringing everyone together. It helps us realized the way other people live and the cultures that they have (elliot). The social networking that is in place now more closely mimics face-to-face conversation than e-mail. We are no longer restricted to rely on people in our neighborhood, church, or workplace to provide the interaction we desire (Hoover all). Social networking services expand the pool of people we have the opportunity to meet to near limitless possibilities (Hoover all). A very new popular fad that has become normal to Americans is online dating. More and more people these days are finding their partners online through dating websites.

Advantages and Disadvantages of Globalization Essay

Globalization is â€Å"the integration of states through increasing contact, communication and trade to create a single global system in which the process of change increasingly binds people together in a common fate.† Some economists see globalization as being in the best interest of all states involved, while others believe that increasing modern trade and global economic relations is harmful in many ways. While globalization marks a move in the direction of a more open world-trading government, it can also be connected to damages on independence, making countries lose the ability to be totally independent. As a result, issues of globalization and free trade are surrounded by an excited debate and controversy. The economic demands of globalization have made countries less independent, making them incapable of taking care of their own issues, economies, and governments, with out the help of foreign aid. The more the weaker countries take from the more fortified countries, the greater their dependence and inability to take care of themselves they will become. While they depend on other countries for financial and political support, they do not learn how to be more self sufficient. They do not create enough revenue or have enough political power to stand on their own with out the threat of a financially or governmentally crashing. The more self-reliant countries therefore have to use their own resources to support these nations and therefore there will is less money and goods available to support their own societies and economies. Globalization slowly drains capital and commodities from the stronger, more independent countries. The resources go to countries that will probably never be able to thrive with out aid, but with out it would dissolve and disrupt the balance of the political and economic scales. To make global or worldwide in scope or application of trade, communication, and resources is what is known as globalization. The idea of unifying the world markets, the infinite numbers of ways to correspond, and the limited resources of humankind sounds like an intelligent idea. Many have come to realize however that by helping countries by giving them financial aid and the resources they need makes them dependent, not any stronger or self- sufficient. Advantages: Productivity increases faster when countries produce goods and services in which they have a competitive advantage. Living standards can increase more rapidly. Global competition and cheap imports keep a constraint on prices, so inflation is less likely to disrupt economic growth. An open economy promotes technological development and innovation, with fresh ideas from abroad. Jobs in export industry tend to pay about 15% more than jobs in import-competing industries. Unfettered capital movements provide the United States access to foreign investment and maintain the low interest rates. Disadvantages: Millions of Americans have lost jobs because of imports or shifts in production abroad. Most find new jobs that pay less. Millions of other Americans fear of getting laid-off, especially at those firms operating in import-competing industries. Workers face demands of wage concessions from their employers, which often threaten to export jobs abroad if wage concessions are not agreed to. Besides blue-collar jobs, service and white-collar jobs are increasingly vulnerable to operations being sent overseas. American employees can lose their competitiveness when companies build state-of-the-art factories in low-wage countries, making them as productive as those in the United States.

Read 180 Intervention At Allen - 1232 Words

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