Forms of Industrial Organization
University of Phoenix
Have you ever wondered how businesses decide what price to charge for their products, or how much output to produce to meet demand? These decisions largely depend on the type of industry in which the business operates. Economists group industries into four distinct market structures: monopolistic competition, oligopoly, pure competition, and pure monopoly. This paper will discuss these four market models. (McConnell-Brue, 2004, p. 413) We will show how each market is different, the number of firms in the industry, the type of product(s) produced, how they differentiate their products, and how easily other firms enter or exit the industry. We will also cover how each market model uses pricing and non-pricing strategies. Finally, we will discuss how the company in the "Market Structures" simulation evolved through the four market structures over lifecycle of its product. We begin our study by viewing Monopolistic Competition. Monopolistically competitive markets have the characteristics of many producers and many consumers in a given market, consumers have clearly defined preferences and sellers attempt to differentiate their products from those of their competitors, there are few barriers to entry and exit, and producers have a degree of control over price. In a monopolistic competitive market an organization making profits in the short run will break even in the long run because demand will decrease, then average total cost will increase. Hyundai Motors is an example of an organization within a monopolistic competition market structure. By producing several variations of the same vehicle, Hyundai Motors is using product differentiation to compete using non-pricing strategies. The production of the Santa Fe Sport Utility Vehicle (SUV) is an example of Hyundai Motor's using product differentiation to compete by using non-pricing strategies, "monopolistic competition is distinguished by product differentiation. Monopolistically competitive firms turn out variations of a particular product. They produce products with slightly different physical characteristics, offer varying degrees of customer service, provide varying amounts of convenient locations, or proclaim special qualities, real or imagined, for their products." (McConnell-Brue, 2004, p. 461) Hyundai used pricing and non-pricing strategies to compete with other automakers. Price strategies involved discounting the price to increase demand by targeting groups within the market or loyal customers with price incentives and rebates. Predatory pricing was used in a situation where Hyundai deliberately lost revenue in the short run with the aim of driving the competition out of the market. The non-pricing strategies used by Hyundai were marketing strategies and advertising. The purpose of the advertising is to develop brand awareness and create a positive attitude toward the company or brand. Corporate-identity advertising is often based on an indirect objective. Hyundai uses advertising to enhance their brand name, to build company awareness or to promote the corporate image. Hyundai is one of a few auto makers, but there is still enough competition where it is not considered an oligopoly. The oligopoly is a market structure dominated by a few large suppliers. The degree of market concentration is very high, and a large percentage of the market is taken up by the leading organization. Another important characteristic of an oligopoly is interdependence between organizations. This means that each firm must take into account the likely reactions of other firms in the market when making pricing and investment decisions. . Burger King is in an oligopoly market structure. Historically, Burger King has been the second largest burger chain in North America. However,. In the early 2000s, Burger King's revenues and market share were declining, and Burger King fell to a near tie...
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