Market Structures

RUNNING HEAD: MARKET STRUCTURES

Market Structures

University of Phoenix

Market Structures

In this paper, we will discuss the four market structures of Monopoly, Oligopoly, Monopolistic Competition and Pure Competition. We have identified four companies that operate in each of these market structures: Salt River Project, The Coca Cola Company, Russ's Market, and Columbia House. In each market structure we will describe the pricing and non-pricing strategies of the companies operating in that market. We will also examine Quasar, a notebook computer company. They entered the market with a new product and we will explain the progress from one market segment to the next as the lifecycle of the product changes and the number of suppliers and consumers also that changed along with it.

Monopoly Market Structure

The concept of monopoly arises when one firm is the sole producer and marketer of a product or service. According to McConnell and Brue (2004) monopolies come in being when a single firm is the sole producer of a product that has no close substitutes. Monopolies are characterized by a single seller, no close substitutes, price maker, blocked entry and non price competition. The market structure that Salt River Project called SRP operates in is monopoly. SRP is the sole generator of electricity in the Phoenix metropolitan area. The SRP website (2007) state that the company established in 1937 generates hydro, thermal and gas operated electricity. The Phoenix area is specifically assigned to SRB by the government and no other company competes with it. The company uses different pricing strategies to deal with its customers. The strategies are penetration pricing which is designed to initially capture a customer by charging low prices, (Koh, 2005). They also use price matching which matches the price charged by other monopolies like APS, geographical pricing which results in charging different prices in different geographical areas and differentiated pricing in which they charge higher prices in summer because of excessive demand due to the high temperature and lower prices in the winter due to low demand, (Strategic Pricing, 2007). The company also uses the following non-price strategies to stimulate demand. According to Contact (2007) a monthly newsletter of SRP, the company states that customers can pay the same amount every month irrespective of the period and this is calculated by the average monthly payment of the previous year. The company also has energy saving devices like wind power, landfill gas energy, geothermal generation that uses water which is converted into steam and land fill gas energy. SRP is also environmental friendly and embarks on tree planting, archeology sponsorship, bird protection, air quality promotion and incentives to become a member of the company by having an account in SRP Credit Union which entitles customers to vote for directors and policies that have effect on the operations of the company. The company provides efficient services to its customers but since it is a monopoly in the Phoenix area, its effectiveness cannot be adequately assessed in terms of price since there are no competitors.

Oligopoly Market Structure

Oligopoly is a market structure characterized by a small number of large firms that dominate the market, selling either identical or differentiated products and having significant barriers to entry such as patents, resource ownership, franchises, start-up cost, brand name recognition and decreasing average cost. Oligopolistic industries are "price makers" but like the monopolist can set its price and output levels to maximize its profits (McConnell and Brue, 2004, p.467). Since there are few firms in the market for an oligopolistic industry, there is mutual interdependence when means that "each firm's profit depends not entirely on its own price and sales strategies but also on those of the other (oligopolistic) firms" (McConnell and Brue, 2004, p.467). Prices are kept relatively constant in the marketplace for oligopolies because competitors are likely to match price decreases but not price increases. Therefore, the oligopolistic firm has little to gain from utilizing pricing strategies that results in rigid or inflexible prices. Oligopolistic firms rely on non-pricing strategies of competition such as advertising, product differentiation, and barriers to entry. The goal for oligopolies is to increase market share while keeping price constant. The Coca-Cola Company is the global leader for carbonated soft drinks (Carbonated Soft Drinks Industry Profile: United States, 2005). In 2004, Coca-Cola had a 44% volume of the U.S. market, PepsiCo, Inc. had a 31.1% share, Cadbury Schweppes p/c had 15.2% (Carbonated Soft Drinks Industry Profile: United States, 2005). The Coca-Cola Company, PepsiCo, Inc. and Cadbury Schweppes p/c hold 90.3% market share of carbonated soft drink (CSD) sales in the U.S. while private label brands have only 0.4% share of the market (Carbonated Soft Drinks Industry Profile: United States, 2005). The Coca-Cola Company, Inc. exhibits oligopolistic characteristics whereby it is the largest of three oligopolistic CSD companies in the U.S. market, offers differentiated carbonated soft drink products, controls price with mutual interdependence, limits barriers to entry by significant brand recognition and trademarks and has a high concentration ratio of 44%. Pricing strategies for Coca-Cola and the other CSD oligopoly firms, as stated above, reflect a kinked-demand curve assuming non-collusion and exhibit price inflexibility. For noncollusive oligopolistic industries prices are generally stable due to demand and cost reasons (McConnell and Brue, 2004, p.472). The kinked-demand curve reflects that increases in price will result in customers buying other substitute products and other oligopolistic firms will match decreases in price. Therefore, a price decrease in the inelastic region decreases total revenue with production of higher output resulting in increased total costs. The broken marginal-revenue curve suggests that even if the oligopolist's costs change significantly, the oligopoly may have no reason to change its price (McConnell and Brue, 2004, p.472). Non-pricing strategies such as advertising also demonstrate the mutual interdependence of oligopolies because each oligopolistic firm will consider how rivals will react. In response to decreased sales of Diet Coke by 2.2%, in 2006 Coca-Cola launched a national advertising