Deborah J Ross
Auto Edge & Oligopoly
Colorado Technical University Online

Abstract: At noon, I share an elevator ride with Auto Edge’s Executive VP, George Wirtz. Ingrid stated that I gave her some good data about relocation. The President could use my help with a presentation that he is making to a crucial group of shareholders. I will discuss the 4 various kinds of market structures. I understand that each market structure is different as related to the number of firms that compete in each one, competition levels, coming into and exiting the economy, the price range of goods, and product variety. I will relate Auto Edge’s market structure to pricing concepts. The demand for goods is related to price sensitivity. This differs. I will align market structures with elasticity of demand structures. A monopoly involves no pressures as related to competition. This can well be related to government regulation. Consumers have no freedom as related to choices. Monopoly is an example of perfect inelasticity. Government regulations are hard to keep without legal restrictions. The post office is a great example of a monopoly. They only deliver envelopes (Hagen, 2014). De Beers is a great example of a monopoly. They offered diamonds very openly. They put a complete lockdown on the whole chain of supply. De Beers put quite a bit of pressure on retailers to just sell their diamonds. The company would buy up all diamonds; so that the diamond supply was limited because of De Beers’ monopoly and ways of doing business. Until a few years ago, another monopoly was seen as related to the commercial airlines. Boeing had a monopoly over certain product lines until now. Pure competition involves many competitors. It has no leader. Competitors come and go. These are very competitive surroundings. No restrictions are in place. Pure competitions have very basic goods. Diamonds can be sold in this kind of market structure. One newer venue for this is with online stores; which have “purified” rivalry (Hagen, 2014). Increased replacement goods add another layer. The people selling on Amazon and EBay are a great example. Cost leadership is linked with pure competition. It involves being a leader in prices. The competitive strategy is to have lower prices and lessen overall expenses. There have to be well-managed logistics such as Wal-Mart has. The demand curve for the output created by a very competitive firm is perfectly elastic as related to the market price. The company can sell all of the output that it wants to at its own price because it is a pretty small part of the market. As a price taker, the company has no ability to charge more as related to price; and no good mentality for charging a lower one. The market price facing perfectly competitive surroundings is average revenue & marginal at best (Amos Web, 2014). Monopolistic competition involves stores like Walmart & Amazon as related to shipping, inventory and warehousing together. There are not many barriers to entering into the market. There are not very many legal and regulatory restrictions either. There are not many resource limitations; just people marketable items that are created to satisfy wants/needs of customers, and cash. Many industries fall within this market structure in capitalist kinds of countries. Tariff restrictions could be included (Hagen, 2014). Monopolistic competition has many of the traits of perfect competition. MC falls somewhat short of reaching the ideal benchmark that is perfect competition. It is the best estimation of perfect competition that there is. The traits of monopolistic competition mean that a competitive firm faces a pretty elastic (not perfectly elastic) demand curve. Demand is relatively elastic because all firms face rivalry from many, various, close imitations (Amos Web, 2014). Demand is not perfectly elastic due to the output of every firm. The firms differ from one another as related to outputs. A monopolistically competitive company is a price setter. It has some degree of control over the price. These firms have the ability to raise/lower the price somewhat. Like a monopoly, the price received by a monopolistically rival company is (firm’s average revenue) is more than the marginal revenue. Most people assume that these firms are motivated through making the most profits. The firm chooses to produce the amount of goods that bring in the best possible profit levels, given price, market demands, cost circumstances, good technology, etc. The MC kind of environment reaches equilibrium at an output that brings in economies of scale. At this level of output, the downward-sloped demand curve is contradictory to the downward-sloping part of the long run-average expense curve (Amos Web, 2014). This process is achieved through two steps:
-The first step is when companies come into and then leave the industry. This ensures that companies earn no financial profits and that price is equal to the average cost.
-The second step involves going after the best profits. Every firm in the industry does this. This strategy ensures that companies produce the amount of output that equals marginal revenue with short-run and long-term marginal expenses (Amos Web, 2014). Porter’s Generic Strategies include cost leadership & differentiation. These strategies are ways of obtaining & keeping competitive advantage. They help firms to build an “edge” that gets them sales and/or steals it from the rivals. There are two main ways of achieving this within a cost leadership strategy:
-increasing profits by lessening expenses; while charging average prices
-adding market share through charging lower prices, while still making a good profit on every sale due to lessening expenses (Mind Tools, 2014).
Cost leadership is about lessening expenses to the firm as related to delivering goods & services. The expense/price paid by the consumer is a separate issue. The cost leadership strategy involves being the leader as related to expenses in your industry/market. Simply being among producers that have the least costs is not good enough. The firm is then open to attack by other low cost producers who may outwit your prices and block your attempts to increase market share.
A company has to be confident that they can accomplish and keep the number one position before picking cost leadership as a strategy. Firms that are successful in achieving cost leadership normally have:
-access to the capital that they need to invest in technology that will bring expenses down
-a low base of cost: labor, materials, facilities.
-way of keeping costs below those of other rivals (Mind Tools, 2014). The greatest risk in going after a cost leadership strategy is that these sources of expense production are not unique to just one firm. The other guys can copy the firm’s cost reduction strategies. This is why it is crucial to constantly find ways of lessening every cost. One good way of doing this is by using the Japanese Kaizen. This is the school of thought that stresses constant improvement. The Differentiation Strategy involves making your goods & services differ from (and more appealing than) those of rivals. How you achieve this depends upon the exact nature of your industry and of the goods and services themselves. This usually is related to features, functionality, durability, support, and brand image. The consumers value these aspects of the business (Mind Tools, 2014). To make a success of this strategy, firms need:
-solid research, development, and new innovations
-the chance to deliver high-quality goods & services
-effective sales & marketing. The market understands that there are perks offered by the differentiation kind of strategies.
Big companies that go after this strategy need to stay constant with their new product development processes. Otherwise, they take a chance on getting attacked (in many ways) by rivals who are going after Focus Differentiation strategies in different market regions (Mind Tools, 2014). In an oligopoly, there are big fiscal barriers and legal barriers to entry (Hagen, 2014). There are intense supply chains; like Auto Edge has. I believe this is so due to the nature of Auto Edge’s business. It makes sense to me that they be put into this market structure, because they are big and deal with patents, copyrights, and trademarks.
Oligopolies have many legal and regulatory restrictions (Hagen, 2014).America is good at pooling investor money here; and giving it to companies that really need it. It is easier to do business in the U.S. than in Europe. They are quite cautious there compared to America. Europe has different surroundings and a different state of mind. America is very efficient in using only so many fiscal resources. America has the capital that is needed to start huge companies like Boeing.
I also believe that Auto Edge is a monopoly because they are trying to move into America. As stated above, it is really easier to do business in America. I know this is in conflict with my views of going global. I am somewhat divided now that I have done more research into this. I have done much research in my classes on going global, so I thought that this was a great idea for Auto Edge. Now I am not so sure.
As my research will state, there is a good amount of competition between the smaller firms of an oligopoly. A small number of firms are in competition in an oligopoly. For a quantitative description of it, the 4-firm concentration ratio is often used. This measure expresses the market share of the 4 biggest companies in an industry; as a percentage. As of the 4th quarter of 2008, Verizon, AT&T, Sprint, & T-Mobile together control about 90% of the US Cellular telephone market (Wikipedia, 2014). Oligopolistic competition can lead to a big variety of outcomes. In some cases, firms may use restrictive trade processes; like collusion, etc. to raise prices & restrict production (similar to how a monopoly does it). When there is a written agreement for collusion, this is known as a cartel. A good example of this is OPEC. They have a big influence on the international price of oil. Firms often collude to try and stabilize wavering markets. This helps to lessen the risks that are there in these markets for investment & good development. In other circumstances, competition between sellers in an oligopoly can be quite intense. This is related to the lower prices & high production. This could lead to an efficient outcome that approaches perfect rivalry. The competition in an oligopoly can be greater when there are no companies in the industry than if, the firms are regionally based and did not rival directly with each other. Welfare of oligopolies is sensitive to parameter values that are used to show what the market structure means (Wikipedia, 2014).
The level of dead weight loss is hard to measure. The study of product differentiation indicates that oligopolies might also create big levels of differentiation in order to put a damper on rivals. Oligopoly theory gets quite a bit of use out of the game theory to show the behavior of oligopolies (Wikipedia, 2014).
In conclusion, there is a process called the kinked demand curve of oligopoly. Here demand is relatively elastic due to other companies not matching a price rise. Firms lose market share and some lose complete revenue. This model assumes that a business might face a dual demand curve for its good based on probable reactions of other firms to a change in its price or another variable (Riley, 2012). The common assumption is that companies in an oligopoly are looking to protect & keep their market share and that rival companies are not likely to match another’s price hike, but could match a price go down. Competitive firms within an oligopoly react un-identically to a change in the price of another company. If a firm raises prices and others leave their prices the same, we can then expect quite a big substitution effect; making demand pretty elastic. The firm would then lose market share and expect to see its complete revenue go down. If a firm lessens its prices but other firms do the same, the relative price change is smaller and demand would be inelastic. Cutting costs when demand is inelastic leads to less revenue with little/no impact on market share. The kinked demand curve model make an assumption that a firm might reach a stable equilibrium that brings in great profits at price P1 and output Q1 and have little reason to change prices (Riley, 2012). The kinked demand curve model assumes that there will be times when there is relative stability under an oligopoly when firms focus on non-price rivalry as a means of reinforcing their market position and bringing in big profits. Short price wars between rival firms can still occur under the kinked demand curve model. During a price war, companies within the market are aiming to steal a short-term advantage and win over some extra market share. There are some recent examples of price wars. These include the major UK supermarkets, lower computer costs in China, and a price war between cross-channel speed ferry services. Price competition is often seen in the telephone industry. There is only some real evidence for the kinked model of demand curve. The theory can be criticized for not explaining why firms start out at the equilibrium price and quantity. However, it is one possible model of how firms in an oligopoly can behave if they have to think about what the competition might say (Riley, 2012). The basic measures of competitiveness are in fiscal/marketing terms. A competitive firm might be expected to achieve one or more of these goals:
-a higher growth rate (sales, revenues) than rivals and the complete market
-Higher than average net profit margin (compared to other companies who are in the same business)
-better than basic ROI; compared to rivals
-a good (hopefully leading) market share; measured by value/volume. The leading companies within a market usually like to have a big part of the open revenues or customer demand, unless the market is very split apart.
-Brand awareness; the best brand reputation in the market
-A very defined (different) selling point or USP; that lets the firm differentiate its goods in customers’ eyes
-Great access to, or control of, distribution channels in the market (goods/brands that are well-stocked or demanded by intermediaries who give distribution to final customers
-Great quality of a good: sales support, customer data, and handling of issues/complaints
-Great efficiency: being able to produce at a lower unit price than most rivals; through better productivity
-Faster & more effective business choice-making and communication; with workers in roles where they work with customers. They can be empowered to handle customer problems and able to pass on key market data to managers who make business choices.
-A more motivated and loyal workforce; this brings about more productivity, efficiency, quality, and customer service (Riley, 2012).

References:
Amos Web (2014). Monopolistic & Perfect Competitions. Retrieved from http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=perfect%20competition,%20demand & http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=monopolistic+competition Hagen, J (2014). Live chat 4 ECON 616. Retrieved from https://campus.ctuonline.edu Mind Tools (2014). Porter’s Generic Strategies. Retrieved from http://www.mindtools.com/pages/article/newSTR_82.htm Riley, G (2012). Oligopoly-Non-Collusive Behavior. Retrieved from http://tutor2u.net/economics/revision-notes/a2-micro-oligopoly-overview.html Wikipedia (2014). Oligopoly. Retrieved from http://en.wikipedia.org/wiki/Oligopoly