Forms Of Industrial Organization

Forms of Industrial Organization

Team Paper

University of Phoenix

Have you ever wondered how businesses decide what price to charge for their products, or how much output to produce to meet demand? These decisions largely depend on the type of industry in which the business operates. Economists group industries into four distinct market structures: monopolistic competition, oligopoly, pure competition, and pure monopoly. This paper will discuss these four market models. (McConnell-Brue, 2004, p. 413) We will show how each market is different, the number of firms in the industry, the type of product(s) produced, how they differentiate their products, and how easily other firms enter or exit the industry. We will also cover how each market model uses pricing and non-pricing strategies. Finally, we will discuss how the company in the "Market Structures" simulation evolved through the four market structures over lifecycle of its product. We begin our study by viewing Monopolistic Competition.

Monopolistically competitive markets have the characteristics of many producers and many consumers in a given market, consumers have clearly defined preferences and sellers attempt to differentiate their products from those of their competitors, there are few barriers to entry and exit, and producers have a degree of control over price. In a monopolistic competitive market an organization making profits in the short run will break even in the long run because demand will decrease, then average total cost will increase.

Hyundai Motors is an example of an organization within a monopolistic competition market structure. By producing several variations of the same vehicle, Hyundai Motors is using product differentiation to compete using non-pricing strategies. The production of the Santa Fe Sport Utility Vehicle (SUV) is an example of Hyundai Motor's using product differentiation to compete by using non-pricing strategies, "monopolistic competition is distinguished by product differentiation. Monopolistically competitive firms turn out variations of a particular product. They produce products with slightly different physical characteristics, offer varying degrees of customer service, provide varying amounts of convenient locations, or proclaim special qualities, real or imagined, for their products." (McConnell-Brue, 2004, p. 461)

Hyundai used pricing and non-pricing strategies to compete with other automakers. Price strategies involved discounting the price to increase demand by targeting groups within the market or loyal customers with price incentives and rebates. Predatory pricing was used in a situation where Hyundai deliberately lost revenue in the short run with the aim of driving the competition out of the market. The non-pricing strategies used by Hyundai were marketing strategies and advertising. The purpose of the advertising is to develop brand awareness and create a positive attitude toward the company or brand. Corporate-identity advertising is often based on an indirect objective. Hyundai uses advertising to enhance their brand name, to build company awareness or to promote the corporate image. Hyundai is one of a few auto makers, but there is still enough competition where it is not considered an oligopoly.

The oligopoly is a market structure dominated by a few large suppliers. The degree of market concentration is very high, and a large percentage of the market is taken up by the leading organization. Another important characteristic of an oligopoly is interdependence between organizations. This means that each firm must take into account the likely reactions of other firms in the market when making pricing and investment decisions. .

Burger King is in an oligopoly market structure. Historically, Burger King has been the second largest burger chain in North America. However,. In the early 2000s, Burger King's revenues and market share were declining, and Burger King fell to a near tie for second place with Wendy's. Burger King closed stores that are under-performing, and changed its marketing strategy in an attempt to turn its fortunes around.

Burger King's pricing strategy set off a price war with McDonald's in 2002. Burger king set the price of a Bacon Cheese Burger to 99 cents in an attempt to gain control and dominate the market share by maximizing profits through a reduction in the price of their product. McDonald's then dropped the price of a Big Mac to 1$ which competes directly with the Whopper. Then Burger King dropped the price of the Whopper to 99 cents. In an oligopoly, the competing organizations eventually follow what is called price leadership when they begin to lose money because of the low prices. The leading organization begins to raise prices and everyone in competition follows suit.

Organizations within an oligopoly collaborate to charge the monopoly price and get monopoly profits. Oligopoly organizations compete on price so that price and profits will be the same as a competitive industry. Oligopoly price and profits will be between the monopoly and competitive ends of the scale. (McConnell-Brue, 2004).

Burger King's non-pricing strategies involve mass media advertising and marketing. The use of toys in its Kids Meals, is another non-pricing strategy used. Non-pricing strategies have become very important in the competition for the most sales within the oligopoly market structure. Let us now look at a market type where non-pricing strategy does not exist, the pure competition market.

The broadcasting market is an example of a pure competition market. With the advent of cable and satellite channels, the market is flooded by competition, all seeking advertising dollars. On a national level, The American Broadcasting Company (ABC) is in competition with many other rivals, the National Broadcasting Company (NBC), and the Central Broadcasting Service (CBS) are two main rivals.

Like CBS and NBC, ABC has only one thing it can sell and that is television airtime for advertisements. While viewers may pay a fixed fee to watch television, if at all (for a cable subscription or satellite television), viewers pay essentially nothing for watching any particular program. Instead of charging viewers directly, commercial television broadcasters receive their revenues from selling time to advertisers. Advertisers are willing to spend more for air time (say, a 30-second spot) in programs that have a greater number of viewers (have higher ratings) than in programs with fewer viewers. As a result, the number of "eyeballs" watching a program drives a broadcaster's revenues. (Liu-Putler-Weinberg, 2004, p. 120).

Therefore,