¶ … Market Structures Principles of Microeconomics

ECO/365 Principles Microeconomics

Differentiating Between Market Structures

Cadillac Automotive

Cadillac Automotive is a U.S. based automobile manufacturer that manufactures luxury vehicles. The company is owned by General Motors. Cadillac originally used to make carriages. The company sells in more than three dozen countries with its major operations centered in North America. It is regarded as the second oldest automobile manufacturer in U.S. after GM marque Buick. The industry Cadillac operates in is highly lucrative and money making (SWOT analysis of General Motors, 2013). The luxury cars do not make money by mass production rather by selling on premium prices. Here is the analysis of industry Cadillac serves in and a discussion of its market structure (Automotive Strategy, Planning & Analysis: IHS Automotive, 2013).

Market Structures

The market structure tells the way business is done in an industry. The market structure can be of four basic types. A market may have strong government regulations or no government intervention at all. Also the market structures differ on the basis of companies in an industry. Following table describes how automotive industry differs from other industries and what market structure it has.

Perfect competition

Monopoly

Monopolistic competition

Oligopoly

Cadillac Automotive

Automobiles

There are many automobile manufacturers

But only few main players

Major players are GM, Ford, Toyota, Honda, Ferrari, Lamborghini, BMW

In perfect companion, there is no product differentiation in the produces offered. E.g. agricultural

The monopoly offers products that are not offered by any other company e.g. Space Technology, Electricity. It has no substitutes

The product is differentiated in monopolistic competition because a company will only stand out others if it is different from others. The example is soft drink beverages.

The oligopoly market players may offer same or different products or services. The example is automobile industry.

Barriers to entry

Investment

Expertise

Environmental Regulations

Easy

Not very high investment, expertise, and regulations are involved so barriers to entry are low.

Protected, very difficult.

In monopoly, very high investment and cutting edge expensive technology is needed and here are environmental regulations hence entry is very hard in monopolistic market.

Easy

Any entrepreneur can enter the business if he has average level of skills and can run business since barriers to entry are medium to low

Difficult

Few market players may make clusters or cartels that hinder entry into market

Number of organizations

Too many

Since there are no barriers in industry, there are too many organizations in the industry. For example, many agricultural companies sell products since cost and regulations are low.

Single

No more than one company operates in monopoly. It is too big to be completed by the other market players. It may be protected by policy too.

Many

There can be multiple organizations in the industry

Few

There is few yet big market players that do not let other companies grow so that that market share does not dilute.

Price elasticity of demand

High

Since too many people are offering same product that cannot be differentiated, the buyer may shift to other company on the price basis

Low

There are no substitutes hence the byer have any choice and there is low price elasticity of demand or the price elasticity is zero.

High

Multiple players and undifferentiated product leads to high price elasticity of demand

Low

There are multiple players but they agree to set prices hence the customer does not have a wide variety of available prices to switch to.

Is there a presence of economic profits?

No

The organizations do not have high economic profits but only marginal ones

Yes

There are high economic profits involved being sole producer

No

The companies do not have too big market shares or economic profits

Yes

There are high economic profits involved due to organizational clustering

Why the market structure was decided upon

The market structure is all about the economic environment of the business. The market structure of an automobile company like Cadillac Automotive is oligopoly since the market features tell that there are only few major market players in the industry that define the rue of game informally that are followed strictly. There are high costs involved to enter in market and there are environmental and governmental limitations too. The company is running a business that offers products that are same yet differentiated. All the market players in automotive...

The cars differ on the basis of style, design and comfort. Each organization focuses on product differentiation in the advertisement campaigns. The company is part of cluster of major market players. There have been excessive mergers and acquisitions that lead to an oligopoly market structure. Even Cadillac Automotive was purchased by GM hence the ownership or automobile business is among few players (SWOT analysis of General Motors, 2013).
How this market structure differentiates from the other alternatives

The automobile industry could have been a perfect competition since there are thousands of automobile manufacturers in the industry. Yet the market structure is oligopolistic since the major players running globally are only few. The market structures also differ on the basis of demand curves.

In Perfect Competition, the demand is constant and there are too many sellers as well as too many buyers. There is no one very big seller or buyer who can hold the market and affect it. The price is based on simple demand supply basis. The companies can't earn any economic profit and also there is no economic loss. The companies are freely entering and exiting market. The price is set minimum to cover costs and earn marginal profits.

In Monopoly, the single market player represents the industry. There are no other companies. The many has access to all the resources and can set rules. There are generally high costs involved and the company covers costs and earns high revenues by charging price of its choice. The firm makes economic profit since the price is inelastic and people would buy product whatever since there are no substitutes. The price elasticity of demand in such market is shown below:

The Monopolistic Competition has price elasticity of demand since those has access to products that are similar yet differentiated. The demand curves hence look like following:

The case that suits automotive industry is Oligopoly in which there are few yet powerful players that have agreed on a set price therefore the price elasticity of demand is low as depicted above. The companies offer prices in a range hence it does not matter which company is selected however it may be affected by factors other than price.

How the market structure positively and negatively affects the firm?

There are many advantages of being a part of an oligopoly structure. The company has advantages that the price is set at minimum level that bring profits above costs any way. The company has fewer threats of new entrants in the industry and it it's protected by industry policies that may be informally deigned (Automotive Strategy, Planning & Analysis: IHS Automotive, 2013). There is considerable demand for company products hence the consumers have to buy the products and they have to buy on price set by industry. However there are some disadvantages of being a part of oligopoly two. The first disadvantage is that the company cannot charge want it things matches its superior quality. The price range is to be followed. The second disadvantage is that the company can hardly maintain its differentiated image.

Efficacy of Oligopoly

The oligopoly may be disliked by the new investors and entrepreneurs. The reason is that although they think the indusrty is profitable and they can make money by doing business in the industry, yet they cannot enter the industry easily (Comparing Market Structures, 2012). The businessmen are not hindered by government policies but the existing players. However, this is favorable for the companies in the business. The structure is considered efficient since there are no price wars (De Lorenzo, 2013). The companies have agreed upon a price range and the only reason business can differentiate itself is quality, style, usefulness and uniqueness of product features. It enable she consumer to have high quality products that are ever improving and becoming comfortable. It is oligopoly structure that enabled consumers to have fuel efficient, smooth driving comfortable cars that fulfill their personal and family driving needs (Comparing Market Structures, 2012).

The companies can use differentiation strategies in the areas mentioned above like fuel efficiency, speed, long life, engine power and maintenance services (Automotive Strategy, Planning & Analysis: IHS Automotive, 2013). The differentiation strategies develop unique image in the minds of consumer and they are willing to pay premium prices for the car.

More Competitive Strategies

The pricing strategy of penetration and skimming can work in automobile industry. Since it is oligopoly structure, the price penetration, i.e. setting lower prices initially, may not work. However the prices can be lower but not low than the set prices. This will call user to consider purchasing prices. In luxury cars the skimming pricing strategy works and the users like to buy first cars in the market however high the prices are (Comparing Market Structures, 2012). The company can also follow location-based strategies where it focuses its efforts in one area or niche for example sports niche to sell its cars t. this may be a very small market with respect to size but…