Forms Of Industrial Organizations

Introduction

The United States economic market can be divided into four market structures; pure monopoly, oligopoly, monopolistic competition, and pure competition. While each of these market structures represents a generic portrayal of the market, each can be used to explain and predict market outcomes through a study of the competition within the market. We will review and identify both pricing and non-pricing strategies used by a specific company within each of the four market structures to distinguish themselves from competitors.

In addition, we will follow a fictional company as it progresses through each of the above market structures during its lifecycle. This demonstration shows how decisions made by this company change as the competition within the marketplace changes.

Industrial Organization

Monopoly: Microsoft Corporation

Microsoft Corporation is one of the world's largest computer technology companies, with annual revenue of $44.28 billion (Wikipedia). This corporation holds more than 90% of the market share and continues to dominate the operating systems industry (Moore, 1999) which indicates a strong monopolistic power within the computer technology industry. However, because Brue and McConnell (2005) describe a pure monopoly as "when a single firm is the sole producer of a product for which there are no close substitutes," Microsoft Corporation's power can be regarded as a near monopoly since it is the sole provider of operating systems.

Microsoft controls the prices of products by using price-making strategies as opposed to price-taking. This can be seen when competition arises and the company prices its products aggressively and competitively (Rothfeder, 1999). Microsoft uses other methods of price control including charging PC manufacturers different prices for its software depending on whether the companies comply with expectations that Microsoft's operating system be pre-installed on the machines (Jackson, 1999). Companies who refuse to comply are charged a higher price for the Microsoft operating system. PC manufacturers thus feel pressured to standardize the operating system because it can offer consumers a cost savings on the machine.

Non-pricing strategies used by the company include large investments in research and development by improving its own products to technologically satisfy consumers (Jackson, 1999). The company has also become interested in hardware development, including game consoles, children's toys, and electronic organizers (Burrows, Cortese, and Hamm, 1998). The significance of this company's monopolizing power will grow as technology continues to play a strong role in the computer market.

Oligopoly: Cablevision Systems Corporation

The cable industry is considered an oligopoly in that there are few producers competing within each state for customer market share. Cablevision Systems Corporation is a media, entertainment, and telecommunications company operating in New Jersey. Cablevision uses the "bundle" strategy, which is both a pricing and non-pricing strategy, to attract new customers and keep old ones.

This bundle promotion is a non-pricing strategy; once signed up, customers are less likely to want to go through the hassle of changing three different provider services (cable, internet, and telephone). In addition, the promotion was a sneaky attempt to lure customers away from other telephone services before those phone companies could set up their own packaged alternative, especially in the digital video services (Duvall, 2004). Of course, this "triple play" package was a pricing strategy as well, because it was offered at a lower price, causing unfounded fears that it would cause a price war.

Beyond this bundle promotion, Cablevision uses both pricing and non-pricing strategies to find and retain customers. Examples of the company's non-pricing strategies include completing the customer's needs--there's no need to pay attention to the promotions of other providers if the customer's needs are already being met. In addition, they make an effort to give the customer what they want by offering access to pay-per-view movies, sports packages, and some free shows. The company also introduced On Demand that allows customers to watch anything from movies to concerts to MLB Extra Innings (Hunter, 2005). These pricing and non-pricing strategies in addition to Cablevision's dedication to technological improvements, has led to the company's success with keeping its customer base happy.

Monopolistic Competition: McDonald's

An example of a company within a monopolistic market structure is McDonald's. Even though the big fast food corporations as a whole are considered large, their individual outlets tend to be small and numerous and are in intense competition with each other. Entry and exit within the industry is relatively easy and the companies spend tremendous amounts of money attempting to differentiate their products since many of their products have close or identical substitutes (for example, the Big Mac and Whopper).

McDonald's has shown evidence of both pricing and non-pricing strategies in an effort to differentiate their products. The company has relied heavily on non-pricing strategies such as advertising and product differentiation. "We are improving our relevance with products like salads, which cast a favorable glow over our brand and the rest of our menu," boasted McDonald's chief financial officer, Matthew Paul (Warner, 2006). This strategy looked to differentiate McDonald's from the other "non healthy" fast food competitors. In addition the chain has begun to emphasize their breakfast meals and their tagline "I'm lovin' it" to further differentiate themselves.

But while these non-pricing strategies have been important for the company, some economists believe that in a monopolistically competitive industry such non-price competition pushes up costs which may ultimately increase prices (McCain). Regardless, McDonald's still says that one of the most important factors in its recent success is the dollar value meal. The dollar value menu allows them to provide options for its customers, at both low and higher prices allowing them to attract a greater market (Warner, 2006). Another example of a past pricing strategy is the value-added meals where much larger portions were provided to customers for a minor cost increase.

McDonald's has shown that while non-pricing strategies are effective at differentiating one brand from another, pricing strategies are still