Assignment 1: Discussion—Market Structures
Industries can be classified under different market structures and this classification strongly dictates decisions made by managers within the market. For example, in an industry classified under perfect competition, or in a perfectly competitive market, many competitors offer the same product and entry into the industry is easy. In this market, the pressure to maintain the same prices as the competitors is high, which characterizes this market.
On the other extreme, some industries are classified as monopolies and some fall under monopolistic competition. In a monopoly, there is only one provider of a product or a service, which has an inelastic demand. In this case, there is little incentive for the monopoly to be efficient or price competitive. In a monopolistically competitive market, there are many firms selling a product or service that is only slightly differentiated from one another, and in the long term, these firms start showing characteristics of a perfectly competitive market.
Find an article about an industry in the United States, such as the pharmaceutical industry. You can consult sources such as the Wall Street Journal, Financial Times,Bloomberg Markets, the Economist, US News and World Report, and other publications for your reference.
After reading the article, respond to the following:
Identify the market structure that best characterizes the industry described in the article.
Explain the factors you considered when identifying the market structure for this industry.
Analyze whether this industry will work better if it changes its market strategy and starts showing characteristics of another market structure.
Critically analyze the advantages and disadvantages of the market structures that you studied in the readings.
The article studied “Regional Grocery Stores Feel the Squeeze”, by the Wall Street Journal dived into both the retailer and consumer world by analyzing the control over the supply and demand. “The U.S. Food Retail Industry comprises foods sold at food retailers such as grocery stores, mass merchandisers, drug stores, convenience stores and food service facilities. The market structure that best characterizes this industry described in this particular article is “oligopoly”. “Regional grocers are struggling to stay afloat in an increasingly competitive industry, creating an opportunity for national chains to buy up brands and shuttered stores” (Haddon, 2017). Oligopoly is a market structure in which a few firms dominate. When a market is shared between a few firms, it is said to be highly concentrated. “Although only a few firms dominate, it is possible that many small firms may also operate in the market” (Economics Online, 2018).
The factors that I deliberated when identifying the market structure where the types of products and the number of firms. By understanding the key market structures and the characteristics of each market, I was able to differentiate perfect competition, oligopoly, monopoly and contestable market from each other. For example, I analyzed the number of firms, the market share of the largest firms, types of product, and barriers to entry; as well as super-normal short run profit, super-normal long run profit, pricing power, non-price competition, and the economics based upon the articles’ detailed description of the industry. The article highlighted the number of firms stating that there were few dominate firms such as Nestlé, PepsiCo, Coca-Cola to name a few dominating the industry and that these firms were perceived to have interdependent behavior. These characteristics are defined by oligopoly as products are offered by a series of firms. However, the number of sellers is not large enough to guarantee perfect competition price; which immediately eliminated perfect competition and monopoly.
The U.S. Food Retail Industry would work better if its market strategy was moved to a perfect competition, although not realistic; this would allow a great number of buyers and sellers to influence pricing as well as increase the economy by consumers purchasing more products. Unfortunately, as mentioned this is not realistic and the U.S Food Retail industry does well in an oligopoly structured market as it is similar to a monopoly. Though, the market power is consolidated in the hands of a few multinational corporations, “every retail category is available from some oligopoly, or on Amazon—the on-line monopoly” (Berger, 2017).
Based upon my readings, there are both advantages and disadvantages of this market structure. For example, the age old phrase “If you can’t beat ‘em, join ‘em” holds significantly more believability in the U.S. Food Retail Industry. “The food industry is subject to heavy competition, and by merging, companies get to maintain their share of market presence. The reality is that these companies can create scale economies in key parts of their business, such as within their supply chain, marketing, and general purchasing power, all of which can help save costs and maintain margins” (Mian, 2016). This is an advantage for companies within this marketing structure because this provides implementation of many cost saving initiatives, the ability for smaller companies to compete with established, huge firms and a surefire method to expand and reduce both costs and risks in the process. The U.S Food Industry industry is a big business, with Americans spending $603 billion on grocery products in 2012 (Food & Water, 2013). However, a mere ten companies have managed to usurp control of many popular foodstuffs and beverages which includes: Nestlé, PepsiCo, Coca-Cola, Unilever, Danone, General Mills, Kellogg’s, Mars, Associated British Foods and Mondelez. Monopoly power comes with many drawbacks — except of course, for whoever is at the helm of the monopoly. A disadvantage of this market structure is that prices are hiked up well beyond what can be justified based on product costs and consumers will demand less quantity. “This, in turn, means that the quantity of a product being produced and consumed will be lower than it would be under a more competitive market structure. To put it simply, monopolies create prices that are far too high, and reduce production levels far too much” (Batts, 2016).
Batts, V. (2016). 10 Corporation Have A Monopoly On Almost Everything You Buy At The Supermarket. Natural News. Retrieved from, https://www.naturalnews.com/2016-12-05-10-monopoly-corporations-control-most-food-sold-at-grocery-stores.html
Berger, J. (2017). Is Retailing Becoming an Oligopoly? The Wiglaf Journal. Retrieved from, http://www.wiglafjournal.com/corporate/2017/10/is-retailing-becoming-an-oligopoly/
Economics Online. (2018). Defining and Measuring Oligopoly. Oligopoly. Retrieved from, http://www.economicsonline.co.uk/Business_economics/Oligopoly.html
Food & Water Watch (2012). Analysis of Metro Market Studies. Grocery Distribution Analysis and Guide. Retrieved from, https://www.foodandwaterwatch.org/sites/default/files/Grocery%20Goliaths%20Report%20Dec%202013.pdf
Haddon, H. (2017). Regional Grocery Stores Feel the Squeeze. The Wall Street Journal. Retrieved from, https://www.wsj.com/articles/grocery-stores-feel-the-squeeze-1502542800
Milan, A. (2016). How the Food Industry is Turning Into a Game of Monopoly. NASDAQ. Retrieved from, https://www.nasdaq.com/article/how-the-food-industry-is-turning-into-a-game-of-monopoly-cm643555