Forms of Industrial Organizations

Abstract

The authors’ purpose of this paper is to provide the reader with and understanding of different types of market structures as well as pricing and non-pricing strategies used in the various market structures. First, the authors’ explore the pure competition market structure. Second, the author will discuss the monopoly market structure. Third, the authors’ explain the oligopoly market structure. Fourth, the authors’ describe the monopolistic competition market structure. Last, the authors’ explain how a virtual industry evolves through the four market structures over the lifecycle of the product as well as changes in the aggregate number of suppliers and consumers.

Forms of Industrial Organizations

Pure Competition

Pure competition is defined by Investorwords.com as, “A market characterized by a large number of independent sellers of standardized products, free flow of information, and free entry and exit. The sellers are "price takers" rather than "price makers" (Investorwords.com, 2007). The term “price taker” is used to describe the sellers in this market because the large number of sellers and the homogeneous products make it nearly impossible for one seller to charge higher prices than the competition. The fact that the products are standardized means that the consumer has many choices of sellers and the entry into and exit from this market are relatively easy. An example of a purely competitive industry is the bottled water industry. Bottled water is an industry in which there are numerous sellers, many consumers, standardized products, and relatively stable pricing across the industry. Because of the aforementioned, the sellers in the bottled water industry must try to differentiate their products from those of the competition in an effort to gain market shares. An article in Beverage Industry, lists some information from Beverage Industry’s Product and Development survey. According to the survey, “efforts for the bottled water category will be directed toward flavors, sweeteners, and vitamin and mineral fortification” (Bubbling with, 2007). An interesting example of a company that is doing very well for itself in this purely competitive environment is, Roll International, the company that sells Fiji bottled water. According to Grace Jeon, vice president of marketing and national accounts, their main focus has been to educate the consumers as to the intrinsic value of Fiji water. “Those values include the virgin ecosystem of Fiji, the product’s flavor and health benefits” (Theodore, 2007). According to the company, the primary benefit of Fiji water is the amount of silica present. President and CEO, John Cochran, admits that there is pressure to, “stack it high and sell it cheap” (Theodore, 2007). However, he has seen Fiji expand its audience by sticking to its principles. “The higher margins and quick turn rates on Fiji often persuade retailers to provide space for the product” (Theodore, 2007). Roll International is a prime example of how companies differentiate its product from its competitors; how to make a profit in a purely competitive market.

Monopoly

A pure monopoly exists when a single firm is the sole producer of a product, which there is no close substitute (McConnell & Brue, 2004, p. 438). Pure monopolies are characterized by the following: (a) Single seller of a product or service, (b) no close substitute of the unique product or service sold, (c) a price maker by maintaining control over quantity supplied thus control over price, and (d) blocked entry to the industry in the form of economic, technological, legal, and other types (McConnell & Brue, 2004, p. 438 – 439). Microsoft Corporation fits nicely in the realm of a monopoly by controlling 90% of the software operating system market (Schonfeld, 2007, p. 23). Microsoft Corporation develops, manufactures, licenses, and supports software products for many computing devices. Microsoft uses the profit-maximization rule by producing the MR = MC output; the economic profit lay between the demand and average total cost (ATC) curve (McConnell & Brue, 2004, p. 445). Microsoft’s non-pricing strategies are licensing, research and development (R&D), and branding. Licensing protects Microsoft against firms entering the software industry and using Microsoft’s technology. Microsoft’s flagship Windows 95 operating system (OS) and subsequent OS improvements have secured Microsoft’s vitality; effectively blocking potential rivals’ entry to this industry. Interestingly, Microsoft’s suppliers are computer manufactures such as Dell, Compaq, and lesser-known computer manufactures which sell computers with Microsoft’s OS. Furthermore, Intel and Advanced Micro Devices (AMD) manufacture their microprocessor chips, the brain of the computer, to take advantage of Microsoft’s OS. Moreover, Microsoft’s “strong brand image makes Microsoft a preferred operating system over its competitors. In addition, strong brand image promotes greater trust in the company's product and services, which could boost the demand for the company's products” (Datamonitor, 2007). Microsoft effectively uses pricing and non-pricing strategies to maintain its monopoly status.

Oligopoly

An oligopoly market structure is dominated by a few large producers of a homogeneous or differentiated product. Because of their fewness, oligopolists have considerable control over their prices, but each must consider the possible reaction of rivals to its own pricing, output, and advertising decisions. Although the most common oligopolies are national, the beer and automobile industries are examples; there can be regional or local oligopolies. The retail automobile parts industry is one such local oligopoly.

In the Colorado Springs area, there are few retail automobile parts companies, Pep Boys, AutoZone, Checker, and Advanced Auto Parts, that control the market. Although these companies sell products to consumers and repair shops, Pep Boys tries to differentiate itself by marketing to the Do-It-Yourself consumer. Because of the mutual interdependence between the companies, Pep Boys must use methods other than pricing strategies to maximize revenues. One way Pep Boys reduced labor costs, in 1996 Pep Boys implemented a new slotting plan for the distribution centers, modeling the new plan on retail stores pegboard hooks. They categorized products by family groups and created store shipments consisting of reusable totes packed with aisle-specific, family groups. This reduced the store-stocking time by 30%, from 18 hours to 12 hours per delivery (Pep boys, 2007). In 2004, Pep Boys implemented a voice-directed system in its distribution centers. This system allowed the warehouse workers to replace handheld devices and printed instruction sheets with headsets that are connected to belt-worn computers. This frees up the worker's hands, keeps his eyes on the job, and speeds up the time it takes him to complete each task. This new system gained Pep Boys a 12% increase in productivity and a 50 percent increase in accuracy (Sowinski, 2005). By finding creative ways to reduce costs and improve productivity, Pep Boys is able to compete in local markets while still maximizing revenue.

Monopolistic Competition

Monopolistic competition is a market structure characterized by a large number of independent sellers with a small percentage of the total market share. Firms in this environment differentiate their products or services with slightly different in physical characteristics, the degree of customer service, convenience of location or special qualities of their product (McConnell & Brue, 2004). There is widespread non-price competition in this market structure as well as easy entry into or exit from the industry (McConnell & Brue, 2004). Grocery stores or supermarkets are prime examples of monopolistic competition, as their products and services are similar. Safeway is a good example of a firm that exists within this type of market structure. Historically, market forces that influence grocery stores were local demographics and location. However, this changed when traditional retail stores, like Wal-Mart and Target, started carrying groceries. These firms challenged competitors in the grocery industry by offering consumers low prices and one-stop shopping (Business & Company, 2006). Since Safeway realized that they could not increase revenue by lowering prices, they focused on one of the other factors in monopolistic competition, differentiation. Safeway knew it needed to stand apart from other grocers to compete and remain profitable in the market. Safeway invested in a marketing strategy to create an environment that would enhance their products, this lifestyle format, incorporates large images of delicious meals, welcoming lighting, and a customer friendly atmosphere (Wilson, 2005). Another marketing strategy was the addition of gasoline pumps. Safeway added gas pumps on supermarket property to maximize convenience and offer discounts for frequent customers of their store (Hamstra, 2007). Safeway also began selling gift cards redeemable at restaurants in the area of their supermarkets (Coupe, 2007). These non-pricing strategies were successful in this industry of monopolistic competition. Safeway made a full-scale recovery from the storm of 2001-2002 when Wal-Mart had its big expansion into the supermarket industry. Indeed, in 2006, the stock market overall slowed Safeway and Kroger to be the biggest gainers; their stock prices rose by double digits (Hamstra, 2007).

Simulation Explanation: How the Industry Evolved through the Four Market Structures

Quasar computers is the company portrayed in the market structure simulation located on the University of Phoenix rResources secure website. Quasar computers developed a groundbreaking all-optic notebook computer, named Nutron, making it almost five times faster than existing microchip-based computers. Quasar computers patented the all-optic computer technology and enjoyed a monopoly market for three years. Quasar set its price using the profit-maximization rule MR = MC; however, Quasar’s Nutron laptop was not well known. Quasar initiated a branding campaign resulting in record sales for the second year. As demand increased for Nutron laptops, Quasar had to find a way to streamline manufacturing to meet demand. However, streamlining production results in added cost; therefore, Quasar had to determine how the change in production costs would affect price, demand, revenue, and profits. Profits were being eroded by the current production process and machinery; therefore, upgrading the production process and machinery was targeted. After streamlining the production process and upgrading the machinery, the price per unit was set at profit-maximization resulting in lower cost per unit thus increasing demand and total revenue. Conversely, had Quasar decide to pass on cost to the consumer, the price of the laptop would increase and demand would decrease resulting in reduced quantity sold and lower profit. Therefore, to improve profits, even monopolies have to advertise, improve production, and cut costs.

The patent Quasar’s enjoyed on its all-optic laptop expired and Orion Technologies has entered the market with a similar optic computer giving Quasar stiff competition. Quasar’s monopoly has now evolved into an oligopolistic market.

Maximizing profits through the stages of market structures is challenging and different techniques are used in each stage. During the monopoly stage Quasar's profits are maximized using pricing, advertising and production improvements. Because there is no competition prices are set at the point where the demand is highest relative to the average total costs. Although setting the price lower to gain more demand may position the company for a higher market share in the future there are other techniques for gaining market share in future stages. Advertising budgets are set so that consumers are informed about Quasar's product and production improvements are implemented to reduce the costs associated with producing the product. During the Oligopoly stage profits are maximized by setting the price at a point where the company can maintain market share. The company must also predict the competition's reaction to its price change. As additional companies move into the market during the monopolistic competition stage, the company's market share decreases. To continue to maximize profits the company must strongly differentiate its product. Quasar's best strategy would be to introduce a new brand into the market. This will reduce the unused capacity in the manufacturing plant and improve demand for both products. During the perfect competition stage Quasar should maximize profits by continuously improving processes. This will reduce costs, which is the main strategy used in this stage of the market structures.

Conclusion

The authors’ purpose of this paper was to provide the reader with and understanding of different types of market structures as well as pricing and non-pricing strategies used in those various market structures. First, the authors’ explored the pure competition market structure. Second, the authors’ discussed the monopoly market structure. Third, the authors’ discussed the oligopoly market structure. Forth, the authors’ described the monopolistic competition market structure. Last, the authors’ explained how a virtual industry evolves through the four market structures over the lifecycle of the product as well as changes in the aggregate number of suppliers and consumers.

References

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Business & Company Resource Center. (2007). Grocery Stores. Retrieved May 1, 2007, from Business & Company Resource Center on University of Phoenix Website.

Coupe, K. (2007). Compete is a verb: A rallying cry for 2007. Retrieved May 1, 2007, from Business Source Complete database.

Datamonitor Business Information Center. (2007). Microsoft Corporation. Retrieved April 30, 2007, from Marketline Business Information Center on University of Phoenix Website.

Hamstra, M. (2007). Reversal of fortune. Retrieved May 1, 2007, from Business Source Complete database.

Investorwords.com website. (2007). Retrieved April 28, 2007, from http://www.investwords. com/ 3962/pure_competition.html

McConnell, C., & Brue, S. (2004). Economics: Principles, problems and policies (16th ed.). New York: The McGraw-Hill Companies.

Pep boys revs up its distribution: the focus of any slotting program is to reduce employee travel time and increase productivity. How that is accomplished will vary widely. (Slotting). In Material Handling Management 62.3 (March 2007): 38(5). InfoTrac OneFile. Thomson Gale. University of Phoenix. 1 May. 2007
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Sowinski, L. (2005). Talk about getting more out of your warehouse! Voice-directed technology is taking warehouses to new levels of productivity while improving the bottom line for shippers' supply chains. World Trade 18.8 (August 2005): 54(3). InfoTrac OneFile. Thomson Gale. University of Phoenix. 1 May. 2007
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