In this paper
we will talk about “Market Structures”
simulation. We will deal with the question what
is the best profitability strategy under different
competitive environments. We will also see how
one competitor reacts to pricing and output strategy
of the other competitor. Additionally what other
factors can influence such a situation will also
figure in our discussion.
Analysis
Market structures simulation is simply a study/observation
of different strategies like pricing, level of
advertising expenditure, product improvement etc.
on business results under conditions of monopoly,
oligopoly and pure competition.
1.0 Monopoly. In the illustration (run) provided
for this paper we can easily determine that the
highest profit of $1.29 bn is achieved when the
price is $ 2250 per unit. At this level the total
revenue is $13.5m and the total costs is $12.18bn.
Again at this point the marginal cost equals marginal
revenue and as per economic theory this is the
optimum production level.
1.1 Under monopoly conditions only, the profits
can be maximized if a sustained advertising campaign
is launched to boost sales. The advertising alternative
that proposes an expenditure of $600m is to be
preferred, and a slight downward adjustment in
price from $2550 to $2450 per unit will bring
in the highest profits of $2.74bn.
The lesson to learn here is that even under monopoly
conditions a lowering of price and massive advertising
was essential to enhance overall revenues and
profits. The lesson to draw is that the price-volume-cost-profit
relationship is important to monitor under even
monopoly situations.
1.2 If the production processes were upgraded
and the price adjusted further to $2200 per unit
the profits will be $2.21bn.
2.0 Oligopoly. In the next stage a competitor
Orion makes its entry into the market. This makes
it necessary to try and predict competitors price
strategy as closely as possible so that Quasar
can price its products correctly. Pricing is the
key here. Quasar predicted Orion’s price
for this month as $1750 and matched it and got
a 50 percent market share.
The lesson here is that though the price and
profits have stabilized but can there not be a
way to achieve better results. In the next section
we will learn about such ideas.
3.0 Monopolistic competition. The introduction
of product differentiation, or variants, and cost
reductions are the key areas. The product differentiation
is ideally a slightly superior product in that
it has a few extra features. Essentially though
it is same so no additional development expenditure
has to be incurred.
4.0 Perfect competition. This is where the true
test will arise. It will involve targeting savings,
large or small. Cost control is the core issue
here. The situation comes up where the building
of a variant or a development of new line ($200
required) will bring in better results. Perhaps
a combination of both will bring the best results.
The lesson to learn here is that under conditions
of perfect competition the efficiency level has
to be at its peak for the sake of survival and
growth.
An idea that can run in conjunction with the
ideas presented above is to think of acquisitions
or mergers to achieve diversification and achieve
economies of scale. Another idea can be to associate
universities and colleges in the development of
some new features because the university students
after graduation will have the brand loyalty already
with them. This will provide a big advantage over
the competition.
Conclusion/Summary
We have seen how price, technological advances,
product differentiation influences profits under
different competitive conditions. It is important
to understand the implications of this theoretical
exercise. Unless the team in charge of the business
is enlightened in such concept/s it will be difficult
to survive in a state of perfect competition.
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