Sample Business Studies Essay on Market Structures

Market Structures

At their core, firms operate to maximize their profits while consumers are keen on maximizing their satisfaction. The intersection between the goals of firms and consumers creates markets within which the different firms operate. A market, therefore, is the constellation of consumers and organizations involved in the production of particular goods or services. Firms operating within a particular market make decisions on levels of output produced and the price at which the products sell. The decisions on the two, however, depend on the market structure within which the organization operates. A market structure is the description of the market as it relates to several factors existing in the market. The characteristics/factors herein include the size and number of players in the market; barriers to entry and exit in the market; the level of similarity of the goods/service sold in the market; the degree of knowledge shared by players in the market; and the extent to which actions by one player affect the operations/profitability of another player in the market. The main market structures in existence include perfect competition, monopolistic competition, oligopoly, and monopoly. Players within each of these structures employ different pricing strategies for market entry, penetration, and gaining market share. One of the companies that have used a successful pricing strategy in its products is Apple with its iPhone. Using a premium pricing strategy, Apple has managed to stay afloat in the mobile telephone market with a healthy market share and profits. In exploring market structures, this paper will analyze different market structures and their pricing strategies including perfect competition, perfect competition, monopolistic competition, oligopoly, and monopoly. It will also delve into the market structure within which Apple operates and analyze its pricing strategy.

  1. Perfect competition

Organizations conduct their business selling goods and services under different market conditions. One of the conditions is known as perfect competition/pure competition, which defines a market structure made up of several factors (Tucker,2011). Among the factors include a large number of players, homogenous products, and the least entry and exit barriers into the market.

  • Description

One of the characteristics of perfect competition is a large number of firms/players in the market. According to Tucker (2011), within a perfectly competitive market structure, “each firm in a market has no significant share of total output and, therefore, no ability to affect the product’s price” (p.173). Within a perfectly competitive structure, therefore, firms act independently with no coordination in the decision made by players in the market. An example of perfect competition with many players is the independent farmers’ grocery market. Each farmer places a price on the grocery the farmer produces and a raise or decline in the price of products from the farmer does not affect the price of produce in the market.

Product homogeneity additionally describes a perfectly competitive market. Grant and Young (1996) inform that within a perfectly competitive market, players produce a standardized product. Homogeneity in the product means that the goods or services offered by the players are identical, ruling out the possibility of rivalry in advertising and quality differences. Moreover, in such cases, buyers remain indifferent in their purchase decision of the players’ product/service.

Few/nonexistent barriers for entry and exit characterize perfectly competitive markets. Within traditional business operations, barriers may include finances, technical knowledge, licenses, patents, and permits (Tucker,2011). Within a perfectly competitive market, none to few of these barriers exist, making it easy for firms to enter and exit the market. The farm products market, for instance, denotes a perfectly competitive market with few barriers for entry and exit.

  • Pricing strategies

Firms operating in a perfectly competitive market are price takers. Tucker (2011) posits that price takers are sellers with no control over the price that the product sells at, rather, the price of the product follows market demand and supply conditions. Traditionally within such a market, players have no control over the conditions. Firms in such a market continually face competition from new competitors making it “impossible for the perfectly competitive firm to have the market power to affect the market price. Instead, the firm must adjust to or “take” the market price” (Tucker, 2011, p.174). Market supply and demand conditions, therefore, set the equilibrium price for products and services in a perfectly competitive market. Firms, therefore, sell at the equilibrium price set by the conditions and cannot sell at prices higher than the market price and risk selling zero output or sell below the market price and reduce overall revenue.

  1. Monopolistic Competition

Monopolistic competition lies in between perfect competition and monopoly. Within such a market are a handful of factors that describe the market. The factors include a large number of firms and product differentiation.

  • Description

One characteristic of monopolistic competition is the large number of firms operating in the market. Like the perfect competition, monopolistic competition has a large number of firms selling similar products. However, the firms in a monopolistic competitive market ten to want to differentiate their products, even when the products are for the same purpose/function. For example, in the smartphone market, while the basic functions of the phones are taking pictures, calling, texting, and browsing the internet, Apple, Samsung, Sony, Xiaomi, LG, and Huawei among others all compete for the same customers.

Another defining feature of a monopolistic competitive market is product differentiation. Hutchnison (2017) posits that since players in the market produce products that serve a similar purpose, firms make the products they produce distinct from their competitors in several ways. Physical aspects of the product, selling location, intangible aspects of the product, and perception of the product mark some of the different ways that companies use in differentiating their products. Physical aspects here include terms such as newly designed and unbreakable. For selling location, firms may opt for a single channel selling location as was the case of online and invites-only sales for OnePlus phones in their early days.

Given the similarity in product purpose, the market tends to rely heavily on marketing and advertising. Heavy advertising, cutthroat competition in pricing, and packaging are among the marketing methods used by firms in a monopolistic competitive market. Players in the market employ particularly heavy advertising as seen in the technology market where companies allocate 13.8% of their revenues to marketing: Samsung, for instance, spent $4.8 billion TV, print, radio, internet, and in-store ads in comparison to $1 billion spent by Apple (Moorman & Finch, 2017). Pricing additionally plays an important role here, where firms tend to want to appeal to their customers by pricing their products lower in comparison with their competitors.

  • Pricing Strategy

Firms in monopolistic competitive markets have a low degree of market power and are therefore price makers. To employ a pricing strategy, monopolistic competitors first determine their profit-maximizing quantity of output and charge the maximum it can on the quantity (Hutchnison, 2017). Pricing here, therefore, follows not only the fear of competitors but also new entrants into the market with differentiated products and the potential to erode the profitability and market share held by players in the market. Product differentiation means that firms can set different prices for different products differentiated by features present or absent in some of the products they produce, even for products produced by the same firm. For instance, Samsung’s Galaxy and Note series are the top-tier products from the company, charged at premium prices. The phones have almost similar prices to Apple’s iPhone Pro and Pro Max, OnePlus’ OnePlus, OnePlus Pro, and OnePlus T, Xiaomi’s Mi and Mi Note and Note Pro, Nokia’s Pureview, and LG’s Velvet phones.  At the same time, Samsung has it’s a series that features phones from A90 to A20, all with different prices, and priced lower than the Galaxy and Galaxy Note series.

  1. Oligopoly

Perfect competition, monopolies, and monopolistic competition rarely occur; in essence, the most common market structure to exist is an oligopoly. This section of the paper will discuss the oligopoly, the characteristics, and pricing strategies used in an oligopolistic market structure.

3.1 Description

An oligopolistic market structure is one with a small number of large firms with almost all the sales in an industry. While the market may have other players, the combined market share of the large firms usually tramples that of the smaller firms. For instance, in the U.S. the market share of the four main carriers (Verizon, AT&T, T-Mobile, and Sprint) accounts for 98% of the total carrier space (Wallis, 2019). Listed on the Cellular Telecommunications & Internet Association members’ list are more than 30 facilities-based providers.

Oligopolies can either hotly compete with one another or come into an agreement. Hutchnison (2017) posits: “If oligopolists compete hard, they may end up acting very much like perfect competitors, driving down costs and leading to zero profits for all.” On the other hand, collusion among oligopolies has the potential to drive up prices and earn firms high profits. Often, there is mutual interdependence among the players in an oligopolistic market where decisions including price, advertising, and output largely depend on decisions made by other firms. Cable television is such a market with few players including AT&T, Comcast, Charter, Verizon, and Dish among others. According to Newman (2020), other cable TV providers including Verizon, AT&T, and Charter all raised their subscription prices by $10 in December 2020 following Comcast’s raised fees. Herein, the decision to raise the prices of the subscriptions across the wider cable industry was influenced by the decision of one firm.

Oligopolistic market structures additionally have high entry barriers. Traditionally, it is too costly or difficult for rivals to enter the market. Leaders in the market have large economies of scale advantage in addition to the high setup costs for new entrants. High set-up costs are entry barriers since they increase break-even output and delay profit realization. The cost of setting up cellular towers or laying cables across the country for cellular and cable TV services respectively are prohibitive for new entrants into the cellular and cable TV industries. Moreover, firms such as AT&T, Comcast, Verizon, Sprint, and T-Mobile have had years of operation in their respective industries and built years worth of knowledge of the industries giving them a competitive advantage over rivals, consequently limiting the number of new entrants.

3.2 Pricing Strategy

Within an oligopolistic market structure, competitors determine the prices of products and services. The high dependency of firms on one another in setting prices means that no single firm has a monopoly over the price of products. The fact that there are few players in the market means that while a change in a firm’s pricing may affect the market prices, such a firm cannot control the whole market. Oligopolistic competition, therefore, hinges on service and product differentiation and not on price wars.

  1. Monopoly

In rare circumstances, some firms have the sole production or sale of a good or service: this defines a monopoly. Monopolies often exist because there are no close substitutes to the product/service on sale by the sole producer. This section of the paper will describe monopoly, its characteristics, and the pricing strategy used in the market.

4.1 Description

A monopoly market structure is characterized by the presence of a sole trader who has total control over the production of a prospective product and determines its access by other players in the market. The competition towards the production of the product in question is therefore eliminated. In the internet search engine market for example, while other players are competing for market share, Google monopolizes the market with more than 90% market share in the search engine business. Similarly, Google, which owns the Android mobile system, with more than a 70% market share of the global smartphone business, requires original equipment manufacturers (OEMs) to have Google services on their devices (Radia, 2016). While Android is an open-source system, it is only Google that releases updates to the software, with each update coming from them before OEMs can modify it for their devices, making Google a monopoly in the Android market.

The presence of a monopoly leads to a limited choice of product by the customers. Where consumers have a choice in alternative products it is easy for them to move from one manufacturer to another; however, in a monopolistic market, consumers do not have the choice. Across Africa, there are monopolies, particularly in the energy sector where state monopolies are the sole distributors of electricity. Kenya Power, Eskom, Umeme, Transmission Company of Nigeria are among the main power monopolies in Kenya, South Africa, Uganda, and Nigeria respectively (E, 2019; Herbling, 2018). These companies are the sole distributors of electricity in their respective countries and customers have no choice in alternative power distribution companies.

A monopoly is additionally characterized by fluctuation in the price of products. Monopolies do this in an attempt to get maximum profits through any means necessary. One of the ways of maximizing profits is keeping the market understocked hence creating demand-pull which consequently leads to an increase in the price of the product (Hutchnison, 2017; Tucker,2011). In the aforementioned countries, power outages are a norm, even as it takes months from application to connect to the power grid (E, 2019; Herbling, 2018). The lack of a close substitute makes sure that the customers have no other choice but to rely on the monopolists’ products.

4.2 Pricing Strategy

A monopoly traditionally has one firm supplying a product or service. Within such a structure, the firm is a price setter given the absence of competitors. Monopolists, however, take great care in setting their prices, avoiding prices that are too high in a bid not to attract competitors or bringing change to consumer habits gravitating towards substitutes.  Moreover, monopolies are additionally wary that raising prices too high could also lead to a fall in sales given price dependence on demand.

  1. Case Study

Apple, the manufacturer of several consumer electronics, is one of the most profitable and valuable companies in the world. The company’s list of products includes the iPhone, iPod, MacBook, iMac, Mac Pro, iPad, Apple Watch, iCloud, iTunes, and AppStore among others. The iPhone is the most successful product and accounts for more than 55% of the company’s total revenue (Pressman, 2020). The iPhone competes in a monopolistically competitive market structure, where aside from the operating system, most phones serve the same purpose. Although Apple ushered the smartphone age with the introduction of the iPhone in 2007, rival companies running Google’s Android operating system have caught up with the iPhone, and even surpassed it with Google’s Android taking the lion’s share in the smartphone software industry.  As open-source software, Android has allowed a plethora of OEMs to manufacture smartphones that directly compete with the iPhone. Samsung, Google, LG, Motorola, Huawei, Asus, Lenovo, BBQ (OnePlus, Oppo, and Vivo), and Xiaomi are among companies with products that directly compete with the iPhone.

For the iPhone, Apple follows the traditional marketing strategy for monopolistically competitive markets. Hutchnison (2017) informs that firms in a monopolistically competitive market are price makers. Apple employs a premium pricing strategy for the iPhones with some of its iPhones having a starting price of $1000. Apple’s premium pricing strategy hinges on the belief that the company’s products offer better offerings than its competitors and that customers are willing to pay the premium prices for the company’s offerings. The company has also recently digressed from its tradition of offering only its top-tier iPhone and is now catering to more price-sensitive customers. The iPhone SE, XR, and base models of the flagship iPhone cater to price-sensitive customers by offering them the Apple experience for cheap.

Conclusion

Different market structures exist for different products. Among the market, structures include perfect competition, monopolistic competition, oligopoly, and monopoly. Each of these market structures has distinctive features that differentiate them from the rest. In perfect competition, there are similar/homogenous products and no single seller has a hold on the market. Sellers are, therefore, price takers. In monopolistic competition, there are many sellers with goods/services that serve a similar purpose. Sellers largely rely on product differentiation to capture customers and make pricing decisions independent of competitors in the market. Oligopolies, on the other hand, have few players accounting for the majority of sales in an industry. These players can either compete or collude and the product prices of a major player are dependent on the other players. Monopolies are singular players in the market and traditionally set the price for the products and services. As a technology company, Apple operates in a monopolistically competitive market and uses a premium pricing strategy given its seemingly superior product range and services offered to customers.

References

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Grant, S. & Young, R. (1996). A Level Economics. London: Palgrave. Retrieved from https://link.springer.com/chapter/10.1007%2F978-1-349-13606-3_9.

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Radia, R. (2016). Monopolies, like Google, are innovators, which is good for consumers. The New York Times. Retrieved from https://www.nytimes.com/roomfordebate/2016/04/28/is-google-a-harmful-monopoly/monopolies-like-google-are-innovators-which-is-good-for-consumers.

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Wallis, A. (2019). The wireless carrier market: A two-horse race. Seeking Alpha. Retrieved from https://seekingalpha.com/article/4271824-wireless-carrier-market-two-horse-race.