Forms of Industrial Organization
Forms of Industrial Organization
According to McConnell and Brue “Economists group industries into four distinct market structures: pure competition, pure monopoly, monopolistic competition, and oligopoly. These four market models differ in several respects: the number of firms in the industry, whether those firms produce a standardized product or try to differentiate their products from those of other firms, and how easy or how difficult it is for firms to enter the industry” (McConnell & Brue, 2005, chap. 21). As part of the MBA/501 course the learning team is tasked with identifying a company for each market structure, and describe the pricing and non-pricing strategies the companies identified use. As a team we have identified the cash crop coffee, AT&T, Toyota Motor Corporation and British Waterways. As part of the assignment the team was also tasked with providing a brief explanation of how the industry evolved using the “Market Structure” simulation. Pure Competition
According to McConnell and Brue, “Pure competition involves a very large number of firms producing a standardized product (that is, a product identical to that of other producers, such as corn or cucumbers). New firms can enter or exit the industry very easily…. In a purely competitive market individual firms exert no significant control over product price. Each firm produces such a small fraction of total output that increasing or decreasing its output will not perceptibly influence total supply or, therefore, product price. In short, the competitive firm is a price taker” (McConnell & Brue, 2005, chap. 22). Coffee is a cash crop whose price varies in the world market depending on the supply and demand. According to the International Coffee Organization (ICO) in 1990 Vietnam produced 1.39 million bags (Each bag weighs 60 kg’s) of coffee in 2006. Vietnam produced 15 million bags of coffee that is an increase in production of over 10 times in the span of 17 years. According to the ICO in 1990 Vietnam exported 1.16 million bags of coffee and in 2006 their exports were 14.5 million bags of coffee. In 1994 the trade embargo was lifted by the United States on Vietnam, at the same time Brazil, the worlds largest coffee producer, was expanding its plantations this resulted in increased supply pressures. Because of the efficient production of coffee Vietnam was able to sell coffee at a lower price in the international market than the other coffee suppliers. This lower price was sometimes lower than the cost of production of suppliers in countries like Colombia, Nicaragua, Brazil and Ethiopia resulting in closing down of plantations. According to the Schoenholt’s 2002 article “the World Bank looks upon Vietnam's coffee victory with pride. ‘Vietnam has become a successful producer,’ the San Francisco Chronicle quoted Don Mitchell, principal economist at the World Bank. ‘In general we consider it to be a huge success.’ He added that nations (such as Guatemala, with a three-dollar-per-day minimum wage) that cannot compete with Vietnam's one-dollar-per-day labor costs or Brazil's mechanized plantations need to shift to farming other crops” (Schoenholt, 2002, p. 1). According to the ICO website Vietnam in the year 2006 is the second largest coffee exporter in the world after Brazil exporting 13904703 bags of coffee. To gain greater value from the coffee crop, “In a speech given to the International coffee Association, Doan Trieu Nhan, Chairman of the Vietnam coffee-Cocoa Association, described a state plan to diversify the country's robusta-saturated coffee growth and output, growing more arabica in the northern region of the country” (Scofield, 1999). In short with efficient use of resources, diversifying coffee variety and maintaining low cost Vietnam has been gaining market share in a highly competitive market.
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