Research Paper: Market Structures in Detail

Pages: 9 (3091 words)  ·  Bibliography Sources: 8  ·  Level: Master's  ·  Topic: Economics  ·  Buy This Paper

SAMPLE EXCERPT:

[. . .] Monopolies on the other hand lie at the other end of the continuum, so that they become price setters. This they can do by either adjusting quantity or price itself. The strategy that the firms follow under this regime are that of optimal pricing, where the firm tends to produce where average costs are the lowest.

As far as firms in monopolistic competition are concerned, these too set prices competitively at the point where the MC equals the marginal revenue added. The price is determined by the average revenue curve, which is also the industry demand curve.

Looking at firms in oligopolistic competition, these firms set prices based on competitor's prices as well as the relative elasticity of their product. Prices at each point are determined at the point where the Marginal Cost and Revenue Curves are equal.

Case Study

The case under consideration here will be that of Toyota Car Company, with its base in Japan. The Japanese motor company revolutionized the car industry in the U.S.A., taking advantage of the opportunity provided by the oil crisis in the late 1970's when the OPEC countries raised process by restricting quotas without any announcements, exposing the world's dependency on oil.

The company is known for its small, fuel efficient cars, and for its focus on efficiency and cost reduction. Many business theories and models have been based on the continuous improvement kaizen models that are followed by Toyota along with their no wastage assembly lines. According to (Saporito, Schuman, Szczesny, & Altman, 2010, Para 12):

"One organizing philosophy behind TPS is popularly ascribed to a concept called kaizen -- Japanese for "continuous improvement." In practice, it's the idea of empowering those people closest to a work process so they can participate in designing and improving it, rather than, say, spending every shift merely whacking four bolts to secure the front seat as each car moves down the line. Continuous improvement constantly squeezes excess labor and material out of the manufacturing process: people and parts meet at the optimal moment. Kaizen is also about spreading what you've learned throughout the system." (Saporito, Schuman, Szczesny, & Altman, 2010, Para 12)

The car company is competing in a saturated market, which requires heavy investments, and is still flooded by cars of different makes, shapes, sizes and models by car manufacturing companies all over the world. Although there are many brands there are few strong suppliers in the market as the barriers to entry are high. This indicates that the firm is operating in an oligopolistic market structure where each car serves the same function and yet is differentiated on the basis of quality, strength or engine power.

Some of its major competitors in the car industry are General Motors, Honda, Suzuki, KIA, Nissan, Mercedes, BMW and so on. But before going on to describe the industry in detail; it is important that some details about the company be looked at in brief.

The company was founded in 1937, by Kiichiro Toyoda, as a separate entity from its parent company.

The company today is a mammoth company and is looking to further expand its network in Japan and employ more the 70,000 people directly from Japan keeping a control over their production processes in order to keep prices low.

However in its bid to lower costs as much as possible, and in order to retain higher margins on their sales, the company has suffered losses, to the extent of tarnishing its once formidable reputation as many cars have had to be called back due to quality lapses. In an article titled 'The Humbling of Toyota' the authors give an example of a vendor who was interested in working for Toyota and when breaking down one Camry to study the parts, he realized that traditional Toyota quality had been 'watered down due to years of nips and tucks'.

This fall in quality has given the players in the field in the U.S. The chance to take this as an opportunity and work on their cars and marketing campaigns in order to seize the opportunity to grab the market.

However there are factors that are working against the company especially as far its dependency on Japan and the dependency of Japan on it is high. This indicates that in the presence of these external political pressures, the company will not be able to hold on to its cost reduction philosophy as indicated as follows:

"Even if leaving Japan didn't run counter to so much of Toyota's history and culture, the company's size brings its own political pressure. Toyota directly employs over 70,000 people in Japan, and several times that if one counts subsidiary plants and dealerships and the parts suppliers it keeps in business. After Renault bought Nissan, the new CEO, Carlos Ghosn, closed five Nissan plants. "It didn't have so much of an impact on the Japanese market," says Endo. "If Toyota decides to close two or three, it would be a huge impact on the Japanese market and on the economy as a whole."

This is indicative of the oligopolistic market structure under which Toyota operates with even a small chance of success being grabbed at by competitors in all possible ways.

The company therefore is treading on fragile ground as there are risks that the company has taken in nipping quality. What is worse is that the company delayed recalls fighting customer concerns by putting the blame on the customers themselves on having installed floor mats incorrectly so as to hinder the braking systems. The company therefore lost reputation to its major competitors.

The company therefore has to follow a pricing strategy that is similar to competitors, especially now, since the debacle where customers have probably gone beyond the kink, and have realized that Toyota can be substituted for other brands, on the basis of the fact that its quality has suffered, and considering the premium price that the brand charges, it is only logical.

Conclusion

The conclusion that can be drawn here is that the market structure is an important determinant of the pricing strategy that a firm needs to follow. While these are only models that are proposed in books, it has to be said that they set a framework for companies deciding upon a pricing strategy. That help the decision makers remember the constraints that their firm faces and the considerations that need to be kept in mind while making decisions.

It is also true that it might be difficult to assign a numerical value to the marginal revenue and average revenue curves based on market data but it has to be said that empirical studies might make this task possible.

In all accuracy is not so much of a factor in making pricing decisions as is the fact that all risks and constraints are considered and kept in mind before taking a decision.

These models help bring to light the various structures that may exist and help firms place themselves in a market context to enable them to compete successfully. According to the case study that has been considered here, Toyota is a company that has to consider price and production figures, but at the same time it is also faced with internal weaknesses and environmental challenges that elucidate that a company cannot work under controlled circumstances. Along with price and quantity decisions the firm has to also consider quality and customer satisfaction.

References

Bennett, D., Hagiwara, Y., & Kitamura, M. (2011, September 5). Toyota Bets on Japan. Bloomberg Businessweek, pp. 70-73,. Retrieved from http://web.ebscohost.com/ehost/detail?sid=fbe40510-c02e-4a4c-afc8-b21dbb1445c3%40sessionmgr11&vid=1&hid=10&bdata=JnNpdGU9ZWhvc3QtbGl2ZQ%3d%3d#db=bth&AN=60477158

Cusumano, M.A. (2011). Technology Strategy and Management Reflections on the Toyota Debacle. Communications of the ACM, 54 (1), 33-35.

John Petersen (2011). Bernstein and Ricardo Report: Cheap Will Beat Cool in Vehicle Electrification. Retrieved from http://www.altenergystocks.com/archives/2011/11/bernstein_and_ricardo_report_cheap_will_beat_cool_in_vehicle_electrification.html

Lipsey, R.G., & Chrystal, K.A. (2007). Economics. Oxford: Oxford University Press. Retrieved from http://books.google.com.pk/books?id=HgXWV8JMC10C&printsec=frontcover&dq=Economics+lipsey&hl=en&sa=X&ei=qPIuT9DdPM7wrQeQ_LzYDA&redir_esc=y#v=onepage&q=Economics%20lipsey&f=false

Moffatt, M. (n.d.). Price Elasticity of Demand. Retrieved February 4, 2012, from About.com: http://economics.about.com/cs/micfrohelp/a/priceelasticity.htm

Ohnsman, A., Green, J., Inoue, K., Welch, D., Fisk, M.C., Levin, D., et al. (2010, March 22). The Humbling of Toyota. BusinessWeek, pp. 32-36. Retrieved from http://www.businessweek.com/magazine/content/10_12/b4171032583967.htm

Samuleson. (2010). Managerial Economics. New Baskerville: John Wiley & Sons.

Saporito, B., Schuman, M., Szczesny, J.R., & Altman, A. (2010, February 22). Toyota Tangled . Time, pp. 26-30. Retrieved from http://www.time.com/time/magazine/article/0,9171,1969287,00.html

Welch, D., Naughton, K., & Helm, B. (2010, Febraury 22). Detroit's Big Chance . BusinessWeek, pp. 38-44. Retrieved from http://www.businessweek.com/magazine/content/10_08/b4167038017102.htm

Wessels, W. (2000). Economics. New York: Barron's. Retrieved from: http://books.google.com.pk/books?id=Q5OfIb9LJQgC&printsec=frontcover&dq=economics&hl=en&sa=X&ei=r_AuT5fMM4bqrAes1LjyCw&ved=0CDQQ6AEwAA#v=onepage&q=economics&f=false [END OF PREVIEW]

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Market Structures in Detail.  (2012, February 4).  Retrieved April 24, 2019, from https://www.essaytown.com/subjects/paper/market-structures-detail/3007035

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