ECO415 Applied Economics in Business
Lowe’s In the Marketplace
Lowe’s was ranked 42nd in the Forbes 500 top companies in 2009. It has grown into the 2nd largest home improvement retailer in the United States. In constant competition with Home Depot and other stores, Lowe’s must find a way to remain competitive in an oligopoly marketplace. It is important to understand not only what type of market Lowe’s operates in but also the advantages and disadvantages when reviewing margin and profits.
Four Market Types
Before delving into the specifics of Lowe’s, a review of the four market types should be conducted. Understanding how Lowe’s is part of an oligopoly marketplace and how it is not a participant in the other market types is important. The four types of markets are Perfect Competition, Monopoly, Monopolistic Competition, and Oligopoly.
Monopoly’s market type occurs when there is one firm providing a unique manufactured good without similar substitutes. Entry into a monopoly type market is difficult and nonprice competition is unnecessary. “Nonprice competition involves firms trying to gain an advantage over one another by differentiating their products (Keat and Young, 2009).” Becoming the only business providing the service or product means that the public specifically has to purchase from this one company. An example of a monopoly would be the Public Utility Commission (PUC) in California. Unlike Texas, where residents have many companies to choose from for electricity, California receives their power bill from one central company.
Oligopoly is similar to Monopoly however; there are several specific differences. A small number of firms in a marketplace that become mutually independent of each other are an oligopoly. Again, like Monopoly it is hard to enter such a market successfully. Lowe’s and Home Depot hold a large share of the marketplace. Although competition is possible, it is more difficult with less competition over standard products. According to Keat and Young, the ability to set apart a product line provides businesses substantial market share.
The third type of market type is Monopolistic Competition. The name may seem to indicate that it is similar to a monopoly. They have very little in common. Monopolistic businesses are a larger number of small firms, which allows entering the market easier for small business owners. Nonprice competition is even more important in this type of market. An example of monopolistic competition is shoe stores. Each store provides their own version of the same styles and types of shoes the public wants to purchase. With intense competition, nonpricing tools become increasingly more important.
Perfect Competition is the fourth type of market in today’s business environment. They provide standardized products and there are many to choose from. While it is easy to become part of the perfect competition marketplace, nonprice competition is impossible.
How Do These Market Types Maximize Profits?
The perfect competition market type occurs when a market has no participants large enough to have the market product to set a homogeneous price. An example of an organization that exercises the perfect competition market type would be the New Zealand dairy farming industry called Fonterra. According to Fonterra, this organization has more than 11,000 shareholders. They use the cooperative structure, which is owned and controlled by the people, which use its services. Fonterra would prefer to maximize their profits, so they should work towards attracting more participants and creating contracts for their buyers. This will lead to set prices for their products.