Monopolistic competition in the soft drinks industry

Monopolistic Competition

Introduction to the Situation

Globalization has brought about increased opportunities for corporations to expand their businesses across national boundaries. In this process, several multinational entities were able to create economies of scale. This materialized in their incremental ability to satisfy a growing number of customers. The competition was significantly threatened and local mom and pop stores were forced to close their operations as they could not even ensure a recovery of their investments. The most relevant example in this sense could be offered by number one American retailer, Wal-Mart. Yet, threats of such situations are ever present within all industries, and could lead to the formation of monopolistic competitions. The studies in micro and macroeconomics to explain the monopolistic competition are generally difficult to comprehend. For ease of understanding, the Coca Cola Soft Drinks Company will be used to exemplify some of the most important features of a monopolistic competition.

2. Supply, Demand and Price on the Short-Term

In the immediate aftermath of a monopoly being established, the general tendency is for the supply to decrease. This is due to the fact that, despite the increased capacity and the scale economies from which the monopoly benefits, it still might find it difficult to cover the entire offering of the competitors it eliminated. Not just in terms of product quantities, this reduced demand might be more intensely felt in terms of product diversity. Basically, the same quantities of soft drinks could be available, but the variety of the offer could be limited.

The short run formation of the prices within a monopolistic competition is a fluctuating one, in which prices could be low, as to not create panic and attract customer dissatisfactions, but they could also be increased as to make a clear statement that the respective company controls the soft drinks market. Customer demand depends directly on pricing strategy implemented by the monopoly. If they promote a low price, demand is likely to increase; if they promote an increased price, demand is probable to decrease (McConnell and Brue, 2004).

3. Supply, Demand and Price on the Long-Term

The general misconception about monopolistic prices is that they are established at the discretionary wishes of the company which controls the market. While this could be true on the short run, its applicability on the long run is reduced. Otherwise put, the long-term prices within a monopolistic competition are expected to be relatively stable, still set by the features of the economy and still affordable to the public. This conclusion can be explained by two features. First of all, the price continues to be dictated by the industry as the manufacturing and distribution of the soft drinks remains pegged to the collaboration of the purveyors. Secondly, soft drinks are not products absolutely necessary for life, meaning that they can be easily replaced by substitute products, such as home made juices, teas or other non-alcoholic beverages. Given this situation, demand for the soft drinks could easily decrease if the retail price suffers a significant increase (von Mises, 1981).

Similar to the price of the soft drinks in a monopolistic market, the demand and the offer are also expected to reach levels of equilibrium, also generated by the confluence of the customers' needs and wants, the capabilities of the provider and the role of the purveyors.

5. Economic Factors

There are generally three types of production factors required to operate the soft drinks business: natural, human and financial. Each of these resources has numerous distinct, but equally important, applications. For instance:

(a) the natural factors of production are required to offer the commodities to be used in the manufacturing of the soft drinks, such as the water, the sugar or other ingredients

(b) the human resource is required to handle the manufacturing and distribution processes

(c) the financial resources are required to set the two other categories of production factors into motion; additionally, they are required for additional investments, distribution and so on (Mulcrone, 2001)

6. Using Economic Factors to Create Competitive Advantages

Each of the three categories of production factors outlined throughout the previous section can be successfully used to generate competitive advantage. The lines below reveal some examples as to how this could be achieved:

(a) the company could decide to use cleaner water from less populated natural sources; such a decision would significantly improve customer satisfaction, would enhance organizational reputation, and as a result, would improve competitive strength.

(b) the company could place an increased emphasis on developing HR policies which improve employee on the job motivation, and as such enhance their levels of performance. This translates into higher levels of productivity, and an increased volume of the offer, to once again strengthen the company's competitive position

(c) Finally, the means in which the financial resources could be used to generate competitive advantages include the ability to invest in newer and better technologies, motivate the staff members, purchase the most adequate commodities, promote the organization and so on.

References:

McConnell, C.R., Brue, S.L., 2004, Microeconomics: Principles, Problems and Policies, 16th Edition, McGraw-Hill Professional

Mulcrone, P., 2001, McGraw Hill's GED: The Most Complete and Reliable Study Program for the GED Tests, McGraw-Hill Professional

Von Missess, M., 1981, Socialism: An Economic and Sociological Analysis, Liberty Fund