FORMS OF INDUSTRIAL ORGANIZATION
Forms of Industrial Organization
Introduction
According to McConnell and Brue “Economists group industries into four distinct market structures: pure competition, pure monopoly, monopolistic competition, and oligopoly. These four market models differ in several respects: the number of firms in the industry, whether those firms produce a standardized product or try to differentiate their products from those of other firms, and how easy or how difficult it is for firms to enter the industry” (McConnell & Brue, 2005, chap. 21). As part of the MBA/501 course the learning team is tasked with identifying a company for each market structure, and describe the pricing and non-pricing strategies the companies identified use. As a team we have identified the cash crop coffee, AT&T, Toyota Motor Corporation and British Waterways. As part of the assignment the team was also tasked with providing a brief explanation of how the industry evolved using the “Market Structure” simulation.
Pure Competition
According to McConnell and Brue, “Pure competition involves a very large number of firms producing a standardized product (that is, a product identical to that of other producers, such as corn or cucumbers). New firms can enter or exit the industry very easily…. In a purely competitive market individual firms exert no significant control over product price. Each firm produces such a small fraction of total output that increasing or decreasing its output will not perceptibly influence total supply or, therefore, product price. In short, the competitive firm is a price taker” (McConnell & Brue, 2005, chap. 22). Coffee is a cash crop whose price varies in the world market depending on the supply and demand. According to the International Coffee Organization (ICO) in 1990 Vietnam produced 1.39 million bags (Each bag weighs 60 kg’s) of coffee in 2006. Vietnam produced 15 million bags of coffee that is an increase in production of over 10 times in the span of 17 years. According to the ICO in 1990 Vietnam exported 1.16 million bags of coffee and in 2006 their exports were 14.5 million bags of coffee. In 1994 the trade embargo was lifted by the United States on Vietnam, at the same time Brazil, the worlds largest coffee producer, was expanding its plantations this resulted in increased supply pressures. Because of the efficient production of coffee Vietnam was able to sell coffee at a lower price in the international market than the other coffee suppliers. This lower price was sometimes lower than the cost of production of suppliers in countries like Colombia, Nicaragua, Brazil and Ethiopia resulting in closing down of plantations.
Firms may be categorized in a variety of different market structures. Perfectly competitive, monopolistically competitive, oligopolistic,
This organization belongs to the oligopoly market structure. The oligopoly market structure involves a few sellers of a standardized or differentiated product, a homogenous oligopoly or a differentiated oligopoly (McConnell, 2004, p. 467). In an oligopolistic market each firm is affected by the decisions of the other firms in the industry in determining their price and output (McConnell, 2005, P.413). Another factor of an oligopolistic market is the conditions of entry. In an oligopoly, there are significant barriers to entry into the market. These barriers exist because in these industries, three or four firms may have sufficient sales to achieve economies of scale, making the smaller firms would not be able to survive against the larger companies that control the industry (McConnell, 2005, p.
Market structure refers to the amount of competition that exists in the market between producers. The degree of competition can be thought of as lying along a continuum with very competitive markets at the end and markets in which no competition exists at all at the other end.
There are several market structures known. They include monopoly, monopolistic competition and oligopoly market structures. Travelodge operates in a monopoly market structure. A monopoly market structure is one which, there is only one seller.it has the most significant market authority (Haines, 2009). A monopoly market structure is a good example of an imperfect market. Bearing in mind, it has the power to raise the price of its services and products. In relation to Travelodge, monopoly arises as a result of lowering the cost of its products and services. Having grown and fully established itself, lowering of its prices on services and goods would not affect its marginal profits as much. On the other hand, it will motivate other upcoming firms to make profits and hence withdraw from the market (Sexton, 2008).
Under monopoly one firm has no rivals (Rittenberg and Tregarthen, 2009). On the contrary, in perfect competition many small firms co-exist, none with the power to influence price (Sloman and Sutcliffe, 2001). Equally important, as a combination of monopoly and competition, monopolistic competition represents the market with freedom to enter and many firms competing. However, each firm produces a differentiated product and therefore has some control over its price. Finally, oligopoly exists when few large firms can erect barriers against entry and share a large proportion of the industry. Moreover, firms are aware of their rivals and concerned about their response to competitive challenges (Allen, 1988). Consequently, oligopolies operate under imperfect competition.
Market structure is classified according to the degree of competition firms encounter in their industry (Baker College, 2016). There are four main market structures: pure competition, monopolistic competition, oligopoly and a pure monopoly. Pure competition is where fir...
Ponte, Stefano. 2002. “The `Latte Revolution'? Regulation, Markets and Consumption In the Global Coffee Chain.” World Development. 30(7):1099-1122.
A perfectly competitive market is based on a model of perfect competition. For a market to fall under this model it must have a number of firms, homogeneous products, and easy exit and entry levels into the market (McTaggart, 1992).
Market structure is when an industry has a number of firms making identical products. An industry’s market structure depends on the how many firms are in that in industry and how they will compete in the market. We can focus on those specific factors that will affect how it will change competition and also price. The types of market structure include oligopolies, monopolies, perfect competition and monopolistic competition.
There are many industries. Economist group them into four market models: 1) pure competition which involves a very large number of firms producing a standardized producer. New firms may enter very easily. 2) Pure monopoly is a market structure in which one firm is the sole seller a product or service like a local electric company. Entry of additional firms is blocked so that one firm is the industry. 3)Monopolistic competition is characterized by a relatively large number of sellers producing differentiated product. 4)Oligopoly involves only a few sellers; this “fewness” means that each firm is affected by the decisions of rival and must take these decisions into account in determining its own price and output. Pure competition assumes that firms and resources are mobile among different kinds of industries.
There are three components for the coffee industry which is composed of the suppliers or the farmers, the manufactures or the producers and the consumers or the drinkers. All three of these components of the industry are fighting each other to make the most profit and salary, while also spending the least amount of money. This causes problems when the workers are demanding higher wages which will result in higher cost of production and lead to higher coffee costs. On the other side of the equation the consumers want their coffee to cost less and less for them, which is making workers work harder and for less money. All the arguing between these three aspects of the industry eventually results in a price which makes all the aspects of it happy, although each wants more the benefit them.
Along these lines, the state of perfect competition that items must be indistinguishable from firm to firm is not met. The restaurant, apparel and shoe commercial ventures all display monopolistic competition. Firms inside those businesses endeavors to cut out their own particular sub industries by offering products or services not copied by their rivals. From numerous points of view, monopolistic competition is nearer than oligopoly to perfect competition. Boundaries to section and exit are lower, singular firms have less control over business sector costs and purchasers, generally, are learned about the contrasts between firm’s products. Monopoly and oligopoly are counterpoints to monopoly and oligopoly. Rather than being comprised of numerous purchasers and couple of buyers. These extraordinary markets have numerous dealers however couple of purchasers. The resistance business in the U.S. constitutes a monopoly; numerous organizations make products and services and endeavors to offer them to a particular purchaser, the U.S. military. A case of an oligopoly is the tobacco
Price competition among rivals is close to nil, industry participants are very competitive when it comes to product differentiation. Product offerings to satisfy consumer demands include a variety of coffee, juices, muffins, bagels, cookies, cream cheese sandwiches, soups and other miscellaneous items.
Markets have four different structures which need different "attitudes" from the suppliers in order to enter, compete and effectively gain share in the market. When competing, one can be in a perfect competition, in a monopolistic competition an oligopoly or a monopoly [1]. Each of these structures ensures different situations in regards to competition from a perfect competition where firms compete all being equal in terms of threats and opportunities, in terms of the homogeneity of the products sold, ensuring that every competitor has the same chance to get a share of the market, to the other end of the scale where we have monopolies whereby one company alone dominates the whole market not allowing any other company to enter the market selling the product (or service) at its price.
The second market structure is a monopolistic competition. The conditions of this market are similar as for perfect competition except the product is not homogenous it is differentiated; thus having control over its price. (Nellis and Parker, 1997). There are many firms and freedom of entry into the industry, firms are price makers and are faced with a downward sloping demand curve as well as profit maximizers. Examples include; restaurant businesses, hotels and pubs, specialist retailing (builders) and consumer services (Sloman, 2013).