For the monopolistic competition practical observation, two brands of chocolate production were chosen: Dove and Hershey. Specifically, the dark chocolate candy bags of two brands were analyzed. The prices for the Dove chocolate bags were approximately 10 dollars higher than the Hershey ones. Regarding the design, Dove used the traditional for the company logo and color pallet with the additional images of the colorful-packaged chocolates included in the bag. Hersheys production had more gloom combinations of brown, green, and red colors (Du and Wang, 2018). The peculiar design feature of the bags was the standing out sign of organic production. The Dove chocolate bags, as well as the Hersheys production, were placed on the middle shop shelves where people could quickly notice the product. The essential criterion was that the goods differed in ingredients (Dhingra and Morrow, 2019). The price changing was conditioned by the uniqueness of the product and its quality. Hersheys production was likely to be oriented toward the price-conscious consumer because it had a wide variety of price categories.
The repeated observation allowed me to figure out that the mentioned example is a monopolistic competition because the brand companies can change the prices, adding specific features to the products. Hersheys chocolate bags without organic components had lower costs than Doves ones. The non-price competition was the marketing strategy used by brands because they strived primarily to improve the quality of their products rather than to upper the cost (Parenti et al., 2017). The differentiated products were unique but, at the same time, had similar features, which defined the chocolate market as having monopolistic competition.
During the observation, I could have applied my theoretical knowledge in practice to analyze the products. I found out that monopolistic competition is a widespread phenomenon because many goods were suitable for my observation. I have also learned that when a new similar product is released, many brands lower the costs slightly unless they have a new unique product. Therefore, the prices change in monopolistic competition has its limits. In conditions of monopolistic competition, the main differentiating feature of the goods is cost. Each firm can control the price only partially because the producer may attract the customer by presenting the unique product or lowering the price. Although, as was described earlier, price competition can influence the market under particular conditions, monopolistic competition also refers to non-price competition. The producers strive to increase the quality of the products or present new designs to differentiate the product from the competitors ones.
The sixth market principle, which states that markets are usually a good way to organize economic activity, can be addressed during my chocolate bags brands observation. Economic activity should be treated as a means of determining, for example, quantity and quality regarding the demand and supply. The practical observation allowed me to figure out that as far as monopolistic competition ensures almost-free price formation, the economic activity is organized without additional ruling power. More precisely, the markets decentralize the economy because the customer determines the demand while the producers establish the supply level. Previously, Hersheys chocolate bags product line was not popular enough among customers. Therefore, the brand lowered costs and produced new healthy products, which gained popularity right away. This example illustrates that the market brands can regulate the correlation between demand and supply, thereby organizing the economic activity.
Competition is the concept of business people or institutions working towards gaining the greatest market share for their products, both goods and services. Competition is very instrumental in the growth of any industry. This is because as the market environment becomes crowded, companies and other business establishments have to come up with new products or services that would help them cut a niche.
This essay seeks to look at the advantages of competition among producers of goods and services to the consumers of given products. To this end, two of the greater benefits of competition will be analyzed before a counter-argument to the advantages is provided.
Three articles on the topic of competition will be used to define the boundaries discussion and they all have been chosen because of their relevance to the argument that competition brings about great benefits to the customers.
The first article Fear of losing: Using competitive instincts to your advantage generally suggests that manufacturers and product makers tend to win customers by proving that the customers cannot do without their given product. Moreover, the author says that competition is a big part of the life and it manifests in both social and economic aspects.
The second article titled Sports: When winning is the only thing, can violence be far away? by Robert Stewart mainly illustrates the fact that competition particularly among product makers and manufacturers tends to come with negative effects especially if proper regulatory measures are not taken.
The third article titled Dr. Spock says todays parents should teach less competition by Clayton Finchley tries to illustrate that constantly encouraging the spirit of competition to children ends up bringing about the negative sides of individuals once they grow up.
The greatest beneficiary of competition, however, is the customer who ends up having the advantage of choice aside from getting the same product at a much reduced cost. These two primary benefits arise from the fact that as more and more manufacturers and providers of a similar product enter the field, they tend to try and add new changes to the items they produce with the aim of winning more clients.
As illustrated by Stewart in his article, sometimes winning is the only thing on the minds of individuals and this tends to manifest in the form of intense competition. These upgrades come at the same price as the original product and therefore allow the customer the advantage of choosing what to go for from the variety that is placed before them.
As far as the prices and costs of products and services are concerned, competition among product and service providers translates into a reduction in the source price of commodities. This is because as more and more of the same good/service infiltrate the market, the producers have no option but to revise downwards the prices at which these items are given to the consumer.
This competitive strategy for winning more clients has been supported in the article titled Fear of Losing, and even with its negative effects, has been found to be one of the more effective ways of dealing with competition. This has been the status in the mobile telephony providers in most countries where one company enters the market as a dominant party and when other entrants come, they are forced to come with ridiculously low offers on service prices.
Under normal circumstances, a price war ensues with all providers reducing the costs of calling and messaging, leaving the customer to benefit.
In countering these benefits, it can be argued that as much as competition results in more choices for the customer, the quality of the commodities tends to go down. This is because in a bid to make products that will cost less in the market, the manufacturers and producers will have to be flexible enough to cut down on the costs of production by using materials of lower grade/quality.
This challenge in turn translates to a low-quality final product. When it comes to price reduction as a gain made out of competition among manufacturers and producers of goods and services, the argument can be countered by citing examples where competing companies collude to maintain the prices at a given high.
This therefore means that competition does not immediately translate into financial benefits for the customer. As a matter of fact, it can result in a raise in the prices of commodities as competing entities form associations to help them benefit at the expense of the customer who is left with no other choice but to go for the products being offered.
This factor of competition not being beneficial to any of the involved parties has been well illustrated by Clayton Finchleys article.
In conclusion, it can be said that competition amongst product manufacturers and service providers to a great extent ends up benefiting the customer. An analysis of two of the major benefits of competition to the consumer has been provided alongside counter-arguments for the two listed benefits. The focus of this essay has been guided by three articles on the benefits of competition.
A perfect competitive market is hardly found in so many industries. Most scholars argue that this kind of market model does not exist in real world. This might be due to information gap among consumers, some suppliers coalescing to have some control over the market price or inability to find companies offering identical products in the market.
As far as that is concerned, one might recognize that a competitive market structure do exist in Florida (Competition, n.d). In this part of USA, we do find about 70 companies marketing and distributing oil products to the consumers of oil.
Among these companies are: 76 Lubricants, A Plus Auto Oil Change Etc, Bahamas Miracle Crude Oil, Bulk Cooking Oil Solutions, LLC, Capital Oil & Gas, Genpass Technologies, Longrun Oil Corp, Mr Oil and Oil Lube Express of W Melbourne. Most of these companies do have their own filling stations though they also make distributions of oil to other filling stations they do not own. They all deal in petroleum products (Manta, 2011).
Discussion
The high number of the marketers and distributors of this product indicate that no single company can have control over oil prices. The market forces of demand and supply do set the price. An owner of a filling station or any consumer of the oil product would run away from the distributor who sets high price and buy from the one selling at a lower price.
This means that this industry would at most be earning supernormal profit in the short run but as prices adjust in accordance with the stiff competition in the global market, particularly concerning the price, most probably the price would get to the lowest where firms would be earning normal profit. For example, the price of one gallon of regular unleaded gasoline goes at approximately $3.84. Generally, it is assumed that all firms are price takers.
As movements in prices up and down takes place, some firms do exit from the industry after they fail to keep up with the price and high operating cost. The high number of oil distributers shows that the market is free for any firm to enter while at the same time, is free to exit (Florida, 2011).
This is one industry where products are not different across the firms. For instance, the regular unleaded gasoline is similar to all companies. When it comes to information flow to/from oil distributors, all customers are perceived to have full and equal information about the market although this is not a fact as per this market.
Some companies were seen selling petroleum products at high prices and still customers do buy from them although the information asymmetries does not hold for long. These factors make the market not to be perfectly competitive.
The government seems to have little influence on this market. Apart from taxation of oil firms and control of suppliers in the country, the government does not seem to give much attention to oil prices even after oil prices increased recently. Additionally, the government is not keen on finding other sources of energy and therefore no close substitute to influence the market price of oil (Competition, n.d).
Conclusion
In short, this market does have many features of a perfectly competitive market such as free entry and exit of firms in the industry, sale of homogeneous products, firms taking price set by the market, and consumers having full knowledge of the products and prices charged by all firms. Nevertheless, information gap on oil prices for all the firms that do exist in the industry affirms that this kind market model hardly exist in real world.
Perfect competition matters because it creates numerous producers of identical goods and services, so no single producer may affect the market price. Prices are governed by supply and demand dynamics and are identical for all producers. This form of competition generates an efficient market since each producer is motivated to produce the best product at the lowest price. It also promotes innovation, as each producer strives to distinguish their product from the competition. It also results in lower pricing, as competition prevents producers from charging excessively (Shapiro, & Greenlaw, 2018). Through perfect competition, consumers receive the most value for their money, and competition among providers is encouraged, which helps to maintain low costs. Perfect competition prevents enterprises from dominating the market, which can result in increased pricing and restricted access to goods. Perfect competition is essential for efficient production because it incentivizes producers to provide goods and services at the lowest possible cost (Shapiro, & Greenlaw, 2018). This helps keep prices low and enables people to obtain the necessary goods and services reasonably. In addition to creating a fair playing field for all suppliers, perfect competition stimulates innovation by encouraging manufacturers to create new and improved goods and services to stay ahead of the competition.
The presence of both buyers and sellers in the market is necessary for the existence of perfect competition. This enables the price of an item or service to be set by the interaction of supply and demand. This interaction enables the market to clear or achieve a price where the quantity of an item or service requested is equal to the quantity supplied. This equilibrium price is efficient because it optimizes the total benefit for both buyers and sellers (Shapiro, & Greenlaw, 2018). The presence of several customers and sellers assures that no buyer or seller can control the price of the product or service, assuring a competitive market.
The market productivity of identical items draws a large number of vendors, resulting in the availability of numerous customers for identical commodities. The availability of items ensures that buyers and sellers have access to pertinent market information, allowing them to make reasonable decisions regarding their purchasing and selling capacities. Consequently, enterprises are unrestricted in their ability to enter and exit the market.
The presence of perfect competition in the market permits most enterprises to employ the policy of price-taking, as the nature of the market compels firms to accept the equilibrium prices prevailing in the market. This prevents market monopolization by other enterprises, buyers, and sellers.
Furthermore, perfect competition prevents enterprises from raising commodity prices, allowing them to retain clients and ward off competitors. Suppliers also maintain the quality of their products since it allows them to maintain relationships with their customers (Shapiro, & Greenlaw, 2018). Thus, the formation of a market based on equilibrium enables the effective and efficient utilization of resources and the transfer of resources from one market participant to another. Consequently, this results in increased economic growth and enhanced living standards.
Price-taking matters in a market with perfect competition because it ensures that all firms produce goods and services at the same price. This promotes competition based on efficiency and quality, as opposed to price, by leveling the playing field for all businesses. Price-taking also ensures that market prices accurately reflect the actual manufacturing cost and that consumers are not overcharged. In addition, it ensures that companies cannot acquire a competitive advantage by decreasing their prices and pushing out their rivals.
The existence of a perfect market matters because it enables organizations, particularly profit-seeking firms, to make things that enable them to analyze their products, which generates economic rewards. Consequently, businesses can make high-quality goods (Shapiro, & Greenlaw, 2018). Despite poor economic situations, corporations can continue operations and remain profitable due to good economic profits. This helps to maintain market stability and inhibits the formation of monopolies and oligopolies. Long-term, this is favorable for both customers and businesses. In addition, economic earnings offer incentives for additional enterprises to enter the market, which increases competition and enhances market efficiency (Shapiro, & Greenlaw, 2018). This increased competition results in reduced pricing, higher quality goods, and more consumer options. Additionally, increased profits result in increased investment, stimulating economic growth.
In a market with perfect competition, free entry and departure matter because they stimulate competition among firms and keep prices and expenses low. In a competitive market, businesses must accept the prevailing market pricing. Without unrestricted entry and departure, enterprises may become complacent and cut output, resulting in higher pricing (Shapiro, & Greenlaw, 2018). In addition, free entry and exit lower entry barriers, allowing new enterprises to enter the market and compete with established ones (Shapiro, & Greenlaw, 2018). This fosters competition, which increases efficiency and maintains low prices and costs. Any company that cannot produce at the market price in a perfectly competitive market will be put out of business (Shapiro, & Greenlaw, 2018). This guarantees that the market remains competitive and that prices remain low. Additionally, it discourages enterprises from becoming monopolistic and excessively huge (Shapiro, & Greenlaw, 2018). Therefore, in perfect competition, free admission and exit are essential to creating an efficient and competitive market.
The effects of perfect competition on small business owners vary. It allows small business owners to boost output beyond minimal costs, hence increasing profits. Small business owners benefit from the production of profit-generating commodities because it keeps them motivated. The perfection of market competition compels small business owners to determine demand and supply based on underlying cost changes driven by market price equilibrium (Shapiro, & Greenlaw, 2018). Therefore, privately owned enterprises can be chosen by criteria such as lower prices and the adoption of innovative technologies. This may change the supply, causing small businesses to provide higher-quality consumer goods. Quality productivity results in customer satisfaction and fosters positive relationships between consumers and producers. This fosters a healthy rivalry that assists small business owners in identifying areas where they may enhance their operations to ensure client loyalty and happiness.
Positive competition can also be an effective tool for small business owners. It can assist them in becoming more innovative, productive, and efficient and in recognizing growth prospects. It can also boost their businesss visibility, attract new clients, and assist them in remaining competitive. It fosters a healthy level of rivalry, which can assist small business owners in establishing partnerships with other companies (Shapiro, & Greenlaw, 2018). Thus, it enables accessibility of resources, tangible and intangible products
In conclusion, a perfect market is important because it leads to the development of producers with similar goods and services; hence, no single producer can influence market pricing, as equilibrium supply and demand pressures decide prices for all buyers and sellers. Due to the use of price-taking, this type of market fosters a competitive atmosphere that encourages the production of high-quality goods at low prices, allowing consumers to get the most for their money. The lack of market domination by perfect competition creates a fair playing field for all producers and consumers, stimulating the development of new and superior products. Due to the perfection of market competition, the freedom of market entrance permits other enterprises to enter the market, creating minimal market monopolization. The existence of perfect competition in the market encourages small business owners to be creative and imaginative; as a result, it generates opportunities for growth and client acquisition, allowing them to remain competitive in the market.
Monopolistic competition is described as an imperfect competition where a small number of producers sell differentiated products, which are not necessarily substitutes (Borenstein, Bushnell & Stoft, 2010). Werner & Kirk-Duggan (2009) provide several explanations for this imperfection. They are of the view that the imperfection is brought about by such factors as location, quality, and branding of the products or services. In a monopolistic competition scenario, a firm focuses more on the prices that rival companies are offering than on the effects of its prices on other firms prices. In the short- term, firms reap the benefits of a monopoly, such as the ability to utilize their market power to create more profits. However, new entrants disrupt the benefits derived from differentiation in the long- term. The disruption is brought about by increased competition in the market. In monopolistic competition, firms offer differentiated products, which serve comparable purposes (Bushnell, 2008: p. 34). Sellers make the consumers aware of the differences between the products, which makes it possible for them to control prices to some extent.
In the United States of America, monopolies are quite a few in number as a result of rigid government regulations (Farrell, 2012). Most of the companies, which can be described as monopolistic, are either legal or natural monopolies. Legal monopolies refer to firms whose products have been patented. In such a case, the company holds exclusive rights of use (Farrell, 2012: p. 33) courtesy of the invention process or production. Patents are limited because they are issued for a specified period of time, which is twenty years in most cases. Within this duration, other companies can only use the patented process or product with the direct permission of the holder. The main objective of patents is to help firms recover the costs incurred in research and development of patented technologies and products.
According to Boysen (2012), natural monopolies are significantly different from their legal counterparts. They refer to public utility companies, such as gas and electricity suppliers. Such firms invest large sums of money in the provision of services and goods. The huge investment makes it unviable to duplicate the provision of such services and products. Such companies conduct their business without competition from other firms. However, they are regulated by the government. For instance, the government prevents them from charging exorbitant fees to the public (Boysen, 2012).
Objectives of the Paper
The current paper has one major objective and one specific objective. The major objective of this paper is to analyze monopolistic competition in public utilities. The specific objective is to analyze monopolistic competition among energy companies based in California. Special focus will be given to Pacific Gas and Electric Company in California.
Literature Review
Introduction to Pacific Gas and Electric Company
Pacific Gas and Electric Company (herein referred to as PG&E) is an electricity and gas utility company, which supplies electricity and natural gas to approximately 15.5 million people in central and northern California. The core business of PG&E is the supply of energy. By the end of 2010, the company had 5.2 million accounts, which were held by its electricity customers. In addition, 4.4 million accounts were held by gas customers. PG&E operates a hydroelectric system, which provides the citizens of California with a renewable source of energy (Boysen, 2012).
Competition Models
According to Bremberger, Bremberger & Rammerstorfer (2012), the government of California has taken several initiatives since 2000 to supply people with reliable and cheap power. However, the prices of natural gas and electricity have continued to increase in spite of the deregulation measures taken by the government. The prices in California are now far much higher than those in other states in the US. In a market where a handful of companies hold power to determine sales, perfect competition is not easily attainable.
According to Bushnell (2008), there are two models that can be used to explain the competition in this industry today. The models can be applied in the case of the power utility companies in America. Bertrand and Cournot are the two models that Bushnell (2008) is talking about. According to the two models, firms engaged in competition reach equilibrium, which is the point where they optimize their profits. They work on the assumption that other firms will not change their strategies. According to the Cournot model, competing firms set targets for sales and accept the resulting market price. Going by the Bertrand model, competing firms fix prices and supply the quantity demanded by the market. In cases where the goods and services supplied are homogenous, the Cournot model of competition calls for prices that are above the competitive level. The prices set depend on on-demand elasticity. The Bertrand competition model gives rise to the competitive price that is charged in the market.
The two models have different outcomes. In most cases, the most applicable model is selected to analyze the monopolistic competition. The selection depends on market factors. For example, there are some markets in which firms set prices and produce the quantity demanded. There are also markets in which firms plan for production and then accept the resulting prices, which allow them to sell their output. In the case of electricity and natural gas, the Cournot competition model is more appropriate than the Bertrand model. The reason is that the exchange of electricity and gas clears the market, which depends on the available quantities.
Need for Regulation
PG&E Company is the largest public utility entity in California. The company filed for bankruptcy in April 2001. However, the move was taken only after the company had transferred more than 4 billion USD of its earnings to the parent company, Pacific Gas, and Electric Corporation (Bremberger et al., 2012). The energy crises in California at the time, together with the actions taken by PG&E, justify the need for increased scrutiny of public utilities in California and the US in general. The need for increased scrutiny is accentuated by the fact that utilities are moving towards market- based rates. For example, if PG&E retained the earnings mentioned earlier before filing for bankruptcy, the company would have remained stable for a long period of time. It is possible that the prolonged duration would have helped the company weather the crisis. In such a case, the government in California would not have resorted to importing energy.
For a long time, three utility companies have accounted for more than three-quarters of the sales of electricity in California. The three companies are PG&E, San Diego Gas & Electric (herein referred to as SDG&E), and Southern California Edison (herein referred to as SCE) (Farrell, 2012). Historically, competition in the countrys energy sector is regulated by the California Public Utilities Commission (herein referred to as CPUC). The commission collaborates with other local, state, and federal agencies to regulate the competition. With the deregulation of the trucking, telephone, and airline industries, it was assumed that power monopolies would also be deregulated (Farrell, 2012). The energy crisis that was experienced in 2000 led to the deregulation of public utilities in the power industry. However, no additional power plants were commissioned as envisaged. Consequently, the reduced funding of utilities ate into the power surplus.
Less than one year after deregulation, the cost of power increased tremendously. The increase was attributed to deliberate hoarding practices perpetrated by the companies. Such unethical practices discouraged potential investors. In addition to this, competition in the retail sector failed to take off. The failure was attributed to the fact that only less than 2 percent of consumers were able and willing to switch to new providers. Under normal circumstances, competition leads to a reduction in prices of goods and services. However, this is not always the case. It is noted that the case is different when basic commodities, such as gas and electricity, are exchanged in the open market. As such, utilities should be regulated by the government to protect consumers (Werner & Kirk-Duggan, 2009).
Analysis
In this section, the author will analyze the various aspects of the monopolistic competition evidenced in the countrys utilities industry. Market analysis and five force analysis are some of the highlights in this section.
Market Analysis
The power industry in the United States of America recorded unprecedented positive growth starting in 2004. However, the growth declined sharply in 2009. It only picked up in 2010. The industrys total revenue is currently estimated to stand at 257 billion USD. It represents a Compound Annual Rate of Change (CARC) of -2.9 percent for the period spanning between 2006 and 2010. The Asian-Pacific and European industries recorded CARCs of 16 and 2.7 percent respectively during the same period. A comparison between the two regions reveals that American power utilities are lagging behind.
Between 2006 and 2010, the volume of consumption in the industry increased by 2.7%. The volume is expected to rise up to 2015. In general, it is expected that the industry will improve at a rate of 1.5 percent CARC in 2015. To this end, the US industry is expected to lag behind the Asian-Pacific and European power utility industries, which will experience a 10.8 and 3.2 percent growth, respectively (Boysen, 2012).
Five Force Analysis
Buyers Power
The power of buyers in Americas utility industry varies from one state to the other (Borenstein et al., 2010). Some states operate in liberalized markets, while others operate in markets controlled by monopolies. In states that are less liberalized, the buyers (both individual and institutional end-users) have little bargaining power because switching to other providers is quite expensive. According to Bremberger et al. (2012), the number of customers is another factor determining the bargaining power of buyers. For example, large companies are able to nullify contracts with gas retailers if they are not comfortable with the price.
Suppliers Power
In monopolistic markets, the power of suppliers is quite high. The situation is attributed to the fact that retailers set their prices depending on the prices set by the suppliers and the availability of gas. Nonetheless, because gas is an undifferentiated commodity, the retailers determine which supplier to purchase from depending on price (Boysen, 2012).
Threat from New Entrants
The threat from new entrants is very low. It can be attributed to the fact that the initial outlay needed to get into the power utility industry is quite high. However, for retail companies in the gas utility industry, there is always the constant threat of new entrants from other countries. Once they manage to establish themselves in the liberalized ends of the market, such foreign companies expand into the rest of the country (Farrell, 2012).
Threat from Substitutes
The threat from substitutes is low. It is low because other sources of power, such as solar and wind, are more expensive compared to electricity and gas. Additionally, the cost of switching from fossil fuel to non-fossil fuel is very high (Boysen, 2012).
Competitive Rivalry
Competitive rivalry varies from one state to the other. For instance, the markets in California and New York are liberalized, meaning that the end-users determine their gas suppliers. However, in such states as Texas, the market is protected. In such a case, local monopolies enjoy a large share of the market (Boysen, 2012).
Conclusion
In conclusion, it is noted that monopolistic competition characterizes the power utility industry in America. Market imperfections are caused by differences in the quality, location, and branding of products and services. The government regulates the activities of electricity and gas suppliers to avert the exploitation of customers. The growth of the power utilities industry in Asian-Pacific and European nations is far much higher than that of the industry in the US. The competition in the different American states is determined by market liberalization.
References
Borenstein, S., Bushnell, J., & Stoft, S. (2010). The competitive effects of transmission capacity in a deregulated electricity industry. RAND Journal of Economics, 31(2), 294-325.
Bremberger, C., Bremberger, F., & Rammerstorfer, M. (2012). The impact of different unbundling scenarios on wholesale prices in energy markets. Energy Journal, 33(3), 183-214.
Bushnell, J. (2008). A mixed complementarity model of hydrothermal electricity competition in the Western United States. Operations Research, 51(1), 80-82.
Farrell, K. H. (2012). Key policies and market structure. United States Power Report, 12(1), 54-68.
Boysen, Y. H. (2012). United States and the power industry. United States Power Report, 2(3), 1-91.
Werner, R., & Kirk-Duggan, M. (2009). Regulation of monopolistic methods. Journal of Marketing, 54(3), 92-95.
Ajefu and Barde (2015, p. 20) define a market as a place where the prices of goods and services are determined. Comparatively, a perfect market is characterized by the efficient or optimum allocation of resources (Djolov 2014; Maritan & Lee 2017). In this type of market structure, rivals are not in competition with each other because they sell the same goods and services at an identical price (Djolov 2014).
Rodger and Macculloch (2014) say that these are the two main conditions for the development of perfect markets: effective resource allocation and production efficiency. The latter comes from a profit-maximizing model that is characterized by the equality of the price and marginal cost of production. Although it is practically impossible to achieve a perfect market, its dynamics could help to understand market efficiency. This paper uses the aforementioned two preconditions of a perfect economy (effective resource allocation and production efficiency) to explain how an idealized market structure would explain the efficiency of markets.
Production Efficiency
Production efficiency in a perfect market is related to the manufacture of goods and services at the lowest possible cost (Djolov 2014). Such outcomes are developed by tweaking a companys production capacity to supply more goods to the market and at the lowest possible cost. Stated differently, the prices set by firms will mostly be to recoup production costs (Rodger & Macculloch 2014). If this production model was presented graphically (see figure 1), much of the movements in cost and revenue would occur on the production possibility frontier. However, the achievement of perfect equilibrium between supply and demand does not necessarily mean that there is an efficient allocation of resources because the economic model is only focused on production output (Djolov 2014).
In a perfect market, production efficiency is achieved when there is no wastage (Rodger & Macculloch 2014). Therefore, most production or manufacturing strategies are represented by the production possibility frontier (Rodger & Macculloch 2014). The long-run review of a perfectly efficient market suggests that the market price is equal to the cost of production. Stated differently, goods and services will be sold to customers at the lowest cost of production (Djolov 2014).
Therefore, in such perfect market conditions, the profit motive is often disregarded and the need to be efficient is maximized or prioritized. Comparatively, an imperfect market, such as an oligopoly, does not generate maximum efficiencies because prices are set at a significant mark-up, which is set by the few firms operating in the market (Ajefu & Barde 2015).
Resource Allocation Efficiency
The efficient allocation of resources occurs when there is a perfect production of goods and services in the market. One key characteristic of this type of outcome is the optimal distribution of products and services (Maritan & Lee 2017). The optimal conditions create an environment where the cost of producing goods is similar to their price. Consequently, effective resource allocation efficiency is achieved. This outcome only suffices when a products marginal utility is the same as its marginal cost. The resource allocation model demonstrates as much because the point of optimum resource allocation is achieved when the prices consumers pay for products are similar to their utility values (Moscati 2018). Figure 1 below outlines this relationship.
Figure 1. Resource allocation model (Source: Moscati 2018).
According to the graph above, production will be inefficient at a price below $7 because the customers would be significantly underpaying for the goods sold. However, efficiency could be realized at a cost of $7, because consumers would be willing to pay for the product at the maximum allocation efficiency level. Therefore, pricing the goods above $7 would lead leads to under-consumption. However, if there was a decrease in price, a commensurate increase in societys enjoyment of the good or service would be reported. Broadly, organizations that compete in a perfect market operate at an allocation efficiency level determined by P=MC. This model is represented in figure 2 below.
Based on figure 2 above, firms that operate in a perfect market are deemed to realize their maximum allocation of resources (efficiency) at level Q1 when P=MC. Comparatively, P3 represents an industry located in a perfectly competitive market. The point of balance is P1 and P3 (for both Q1 and Q3) because perfect competition is realized when the marginal cost of production is at the same point as the market price (Moscati 2018). This focal point also represents the phase of production where resources are perfectly allocated.
According to Q1 above, the point at which the average cost (AVC) intersects with the marginal cost (MC) is deemed the optimum efficiency level of the market. Perfect market conditions occur when production costs are equal to marginal revenues (Moscati 2018). Therefore, any company that wants to maximize its profits should set its market price at the same level as the marginal cost.
The above-mentioned relationship underscores the basis for the development of the neoclassical approach of economics, which formed the basis for the development of the supply curve (Madra 2016). Relative to its use, proponents of the neoclassical theory believe that consumers will always try to maximize personal satisfaction when making a purchase (Morgan 2015). If competition is free and fair, the neoclassical theory contends that there will be an efficient allocation of resources (Barnett et al. 2014).
Therefore, because of the immense power wielded by free-market participants in setting the price of goods and services in a perfect economy, it will be difficult to create monopolistic market behaviors. This is why monopolistic markets do not have a supply curve in the first place. Furthermore, they allocate resources inefficiently because they increase their prices above the marginal cost of production (Barnett et al. 2014). Due to their immense market power, they can influence the market by reducing surplus production through price increases (Madra 2016).
Alternatively, perfect market competition explains the efficiency of the markets through resource allocation. Therefore, in an idealized market, all competing firms should have the same resources for production (Moscati 2018). Alternatively, they should be allocated the same capital to compete effectively with each other. However, this is not often the case because, by design, some firms often have resource advantages over others (Bikker & Spierdijk 2017).
For example, large multinational firms have a disproportionately significant number of resources compared to small and medium-sized firms. Therefore, it is difficult for both sets of firms to compete fairly in the global market. Furthermore, some resources (such as experience and knowledge) are unseen or difficult to quantify (Nason & Wiklund 2018). Consequently, some firms are likely to have a stronger competitive advantage over others.
The resource allocation model suggests that market and economic forces should be designed to maximize social good. Therefore the desired point of production is one that optimizes this outcome (Moscati 2018). Again, it is not possible to make a profit in such a market because there is no mark-up price for products sold in the market (Nason & Wiklund 2018). In other words, goods would be sold in the market to maximize the social good and not shareholders interests (Bikker & Spierdijk 2017).
Therefore, the prices consumers pay for goods in a perfect market represent their social and not market value. Such perfect markets force firms to set prices that are commensurate with their marginal cost of production because their manufacturing expenses will often align with the social cost of the goods made (Nason & Wiklund 2018). Alternatively, in a perfect market, competing firms will try to maximize their profits using the model P=MC. However, the price they will set will not only cover their production costs but also represent the value that customers will be willing to pay for their goods or services. In this context of analysis, there is a perfect allocation of resources.
Summary
Although this paper has demonstrated how perfect competition helps to achieve market efficiency, the model used is a hypothetical benchmark of production. This is because, in the real world setting where some firms often operate as monopolies or oligopolies, prices are rarely set at their marginal cost of production. Therefore, it is difficult to realize production or resource allocation efficiencies in such settings.
Implicitly, the perfect market competition model ignores pertinent aspects of the real world market, which affect production and efficiency. For example, pollution, innovation, and poverty are key market dynamics that affect demand and supply but are not necessarily captured in the perfectly competitive market model discussed in this document. Therefore, in the real world setting, buyers and sellers have to manage imperfect and unclear information that is pertinent to the market. Broadly, it is also important to acknowledge that perfect markets do not exist and the models outlined in this document are based on hypothetical scenarios. Therefore, the use of the perfect market model to understand efficiency is idealized in a hypothetical environment.
Reference List
Ajefu, JB & Barde, F 2015, Market efficiency and government intervention revisited: what do recent evidence tell us?, Journal of International Business and Economics, vol. 3, no. 1, pp. 20-23.
Barnett, A, Broadbent, B, Chiu, A, Franklin, J & Miller, H 2014, Impaired capital reallocation and productivity, National Institute Economic Review, vol. 228, no. 1, pp. 35-48.
Bikker, JA & Spierdijk, L (eds) 2017, Handbook of competition in banking and finance, Edward Elgar Publishing, London.
Djolov, GG 2014, The economics of competition: the race to monopoly, Routledge, London.
Madra, YM 2016, Late neoclassical economics: the restoration of theoretical humanism in contemporary economic theory, Routledge, London.
Maritan, CA & Lee, GK 2017, Resource allocation and strategy, Journal of Management, vol. 43, no. 8, pp. 2411-2420.
Morgan, J (ed.) 2015, What is neoclassical economics?: debating the origins, meaning and significance, Routledge, London.
Moscati, I 2018, Measuring utility: from the marginal revolution to behavioural economics, Oxford University Press, Oxford.
Nason, RS & Wiklund, J 2018, An assessment of resource-based theorizing on firm growth and suggestions for the future, Journal of Management, vol. 44, no. 1, pp. 32-60.
Rodger, B & Macculloch, A 2014, Competition law and policy in the EU and UK, 5th edn, Routledge, London.
This article has written about the origins and development of European competition policy. Many claim that German ordoliberal ideas were the guiding force, but a careful examination of the problem reveals that France and the United States played a crucial role in implementing the most supranational of all European policies. It can be concluded that the European competition policy arose due to fierce bargaining between French bureaucrats who were in favor of competition and German politicians who were opposed. This fact poses a severe challenge to ideological theories, the liberal intergovernmental approach, and ideas of delegation of authority for the sake of trust.
The originalists argue that the judiciary should be concerned only with the observance of laws and not their creation to perform their functions properly. To understand the current state in the formation of self-reinforcing sequences, scholars seek to understand what happened at the beginning of the historical series. Students studying the rational choice of educational institutions argue that it is impossible to define institutions as externally conditioned forms; it is necessary to strive to endogenize this form as a more primitive product. Political scientists conduct a constant stream of research about the moments of the creation of all types of policy, monetary unification, and transport policy. Their findings are helpful in the political process, at a time when various human rights organizations are trying to rewrite history for personal gain.
The history of the ECP is still poorly understood, in contrast to the history of antitrust policy in the United States. The origins of the EPC are focused on US politics, but scholars have ignored US contributions in recent years. They claim that Europeans created the laws on European Coal and Steel Community and Economic Europeans; this point of view belongs to David Gerber. However attractive Gerbers words may be, recent research into the history of law has shown that the ideological interpretation of the history of the ECP is questionable. Analyzing the German experience of the last century, Gerber concludes that it was a failure, but this failure influenced the development and dissemination of the ideas of competition law.
Since past works on this topic included errors, theoretical and empirical methodologies of analytic narratives were used in this work. The economic theory of trade and competition in the 40s-50s was not as unified and straightforward as it is today. It makes determining preferences based on such approaches more problematic, and there is also a large amount of unique literature that will help in the study. This methodology eliminates superficial claims about national interests, especially in trade matters. Systems analysis of ideological explanation is a process that emphasizes the decision-making of well-defined actors. A particular event is distinguished from a non-specific occurrence because it corresponds to action during the actual and final situations. The responses that one actors acts will elicit are analyzed to the point that and actors plans are compatible with one another.
Empirical methodology derives from the theoretical methods of historically-minded analytic narratives. Sources that included a strict triangulation of mutually independent sources of various quality, eras, and countries. In addition to Gerber, who reports based on German materials, various French and German archives were used. Gerber and others have recorded the presence of a solid ordoliberal tradition among German intellectuals, claiming that this implies that the ECP rules are linked to it. These customs, however, are insufficient to justify concrete policy statements. Another potential contender for the paternity of the ECP rules in France had a similar competition practice. The German tradition did not have as much political influence as they claim. The ECP comes from other, perhaps non-intellectual, circles and interests since neither the French nor the Germans were significant participants in the Paris negotiations of 1950-51.
There are two explanations for the actual events that led to the emergence of the ECP rules: In the 1950s, the Paris Accords were negotiated. The ordoliberal ideas of the ECP provided an emphasis on the game of pure teamwork, according to an ordoliberal ideational basis established by Gerber and adopted by many writers. An explanation of redistribution that institutionalizing the ECP rules was off ensuring that ECSC would be a collaborative, efficient venture for the participating states and collectively organize them would organize their political economies.
The philosophical viability of hypotheses that view the European executive branch as a tool for raising trust is seriously questioned in light of this narrative. If Europes founders wanted to establish political legitimacy, the European antitrust regulator should have been modeled after the US Federal Trade Commission. The fact that the ECP rules were passed on to the general public speaks to the security rather than the credibility sought in creating such institutions. Germany would not join the European integration process if it wanted to create a competition policy. Like many other politicians, the ECP has a distinctive redistributive character.
Michael Porter created the five forces model to assist businesses in analyzing the level of competition present in a given market and formulating effective tactics to compete. Using the framework, a firm can pinpoint and examine the driving factors that impact prices and profits. Although this model is generic and can be adapted to any sector, it will be most useful if applied in a particular setting relevant to the evaluated business.
Using Porters five forces paradigm for managing change is questionable since it was not designed to do so. There is a subtle message in the concept that compels businesses to look for a fresh strategic vision, which allows them to address several significant strategic and competitive concerns (Bruijl & Gerard, 2018). Such as (a) how can businesses choose the best place to operate within a market to maximize profits? (b) what product or service is driving most of the industrys profits? (c) Which major changes will likely alter the competitive landscape in a particular market? Moreover, (d) when regulations are eased, what does it reveal about the market situation? These questions are essential for top managers to answer because the answers will shed light on how the various forces within each of the five categories influence the industrys profit levels (Bruijl & Gerard, 2018). Stronger forces are less profitable, whereas lesser forces are more profitable.
More importantly, Porter stressed the need to use this paradigm at the entry level of industries. A company with a presence in more than one industry must create a unique five-forces analysis for each market in which it competes. Thus, the model will be most beneficial when utilized in a specific context appropriate to a firms operations.
Product life cycle explains the life of a product in a given market. This is done in relation to sales measures and various business costs. Products have a life cycle because they pass through various stages. This is in relation to sales and it implies that a product has a limited life. Regal marine has continually introduced high quality and innovative new boats (Regal Marine, 2010, p. 9). As a matter of fact, the company designs new boats because every product has a life cycle.
The companys new boats have always gone through four phases of product life cycle. This is introduction, growth, maturity and decline. Product life cycle stages have an impact on costs, sales and profits over a given period of time. In the process of developing new boats, the company registers a negative cash flow. As the boat becomes successful in the market, these loses are recovered through good profits before decline. In addition, the companys successful boats in the market have had a product life cycle of 3 to 5 years (Regal Marine, 2010, p. 13).
Regal Marine is a global company and therefore needs good strategies to remain competitive. This is because strategies help the company to develop plans and policies that are used to achieve specific goals and objectives through effective and efficient allocation of resources. The company knows very well that its existence depends on goods (boats) that it offers to the market. To remain competitive, Regal Marine has continually differentiated its products for success.
Differentiation can be seen in its diverse and distinct product line (Regal Marine, 2010, p. 11). The company has always introduced high-quality and innovative new boats and this is reflected in its 22 models. Because of increased competition in boat business, the company has constantly designed new boats. This is meant to differentiate it from other competitors. Regal Marine has put in place good strategies to enhance the innovation of new products. This has been done by seeking design inputs from consultants, customers and dealers.
Regal Marine has continually developed innovative products by seeking design inputs from various stakeholders. These stakeholders include consultants, customers and dealers. Their ideas have always been absorbed into the companys styling studio. Regal Marines speeds up the development of new boats by using computer aided design technology. This technology is different from traditional drafting techniques. Design engineers start the development of new boats by coming up with a rough sketch.
This sketch can be an idea that will be put in the graphic display power. In the process, engineers are able to come up with a new geometry for the boat (Regal Marine, 2010, p. 17). Computer aided design technology is good because it helps engineers to determine engineering data. This data can be weight, strength and dimensions. In addition, it allows them to examine if parts will fit together. This has enabled the company to remain stylish and competitive by continually developing highly- innovative new boats.
Since boats have a short life cycle, CAD technology has enabled the company to maintain a steady stream of new products. Through computer aided design technology, Regal Marine has been able to redesign its products. Because of good models and innovations, its personnel and designers have responded quickly to pressure from the market. In a broad perspective, CAD technology makes its possible to involve key suppliers.
Reference List
Hard Rock. (2010). Hard rock information. Web.
Morris, R. (2009). The Fundamentals of Product Design. Lausanne: AVA Publishing.
Regal Marine. (2010). Marine products and services. Web.
Critically analyze the resources and competencies that a company in the video game consoles industry needs to possess to achieve a competitive advantage. Discuss and justify your arguments.
To gain a competitive advantage in the video game console segment, a company needs to adopt strategies that will enable its devices to stand out and therefore appeal to a larger portion of the market. Current market analysis indicates that casual gamers prefer video consoles that are innovative, affordable, and simple to use. On the other hand, hardcore gamers prefer devices that are technologically advanced with high definition displays and affordable (Gamble & Thompson 2010).
First-time players prefer simple innovative devices that are less intimidating and also affordable. Therefore a company that wishes to achieve a competitive advantage in the video console segment must be able to adopt strategies that will ensure that its devices appeal to all three market segments, and should also appeal to both young and mature players in all the three segments. An analysis of the third generation consoles produced by Microsoft, Nintendo and Sony, shows that both the Xbox 360 and PS3, were powerful ad technologically advanced compared to Nintendos Wii.
However, Nintendo sold more units of the Wii even though it had poor graphics and had only a standard CD drive while its rivals had powerful devices with high definition graphics and HD blue-ray drives. The Wiis success can be attributed to its innovative controller, motion sensors, and affordability. This enabled it to appeal to first-time gamers, casual gamers, and hardcore gamers (Afuah 2011).
Question 2
Critically analyze the strengths and weaknesses of Sony in the video game consoles industry and identify any potential opportunities and threats for that company. Provide full support and justification for your arguments.
SWOT Analysis for Sony
Strengths
Sony has various strengths that enable it to command a considerable market share in the video gaming industry. First, Sonys video game devices and games are innovative, technologically advanced, and therefore attractive to gamers of all age groups. The devices are also suitable for hardcore gamers, and casual gamers to a lesser extent. Secondly, the company has an innovative team that has build devices that can turntables in the market through the adoption of the latest technologies and enhance the gaming experience.
Lastly, the company has a long-standing market reputation for producing quality electronic products. For instance, Sonys PlayStation 3 (PS3), has more advanced features compared to Microsofts Xbox 360, and Nintendos Wii that belonged to the same video game generation (Mulcaster 2009).
Weakness
Sonys major weakness is producing video game consoles that are too expensive. For instance, the PS3 was launched at a retail price of between $499 and $599, a price that was too high for many video game lovers. At the same time, the company was making losses as the cost of producing one unit of PS3 was around $800 and it had hoped to make up for the loss through software sales. Sony also produces advanced video game systems that target mainly target hardcore gamers market segment. The PS3 was largely avoided by casual and first-time gamers due to its advanced features and high cost.
Opportunities
Sonys first and second-generation video game consoles were wildly popular due to their innovative and advanced features that changed the gaming experience. The technology used then was not that expensive and so the devices were sold at fair prices. However, the PS3, though innovative and technologically superior, performed poorly when compared to other third-generation devices, particularly the Wii. Part of the problem was the global financial hardships that saw many families cutting their entertainment budgets. The company has an opportunity to build on its innovative advantage and develop video game systems that are affordable and able to satisfy the gaming needs of various categories of gamers.
Threats
A major threat to Sony comes from within the industry and notable from the other two major players, Nintendo and Microsoft. These companies, particularly Nintendo have already adopted innovative and cost-effective strategies that are already paying off. Another notable threat comes from the macro environment. Though the video gaming industry was not badly affected by the 2007-2008 recession, some ripple effects have been observed in the year 2008 (Jonson & Scholes 2008). The world economy has remained unbalanced due to several contributing factors such as rising oil prices. Many would-be customers are experiencing difficulties in meeting their basic needs and therefore they are likely to stay away from leisure activities such as video gaming.
The rising cost of fuel means that it will be more expensive to transport video game devices to retail outlets across the globe. The company has already registered a decline in sales volumes that can be linked to the recession, increased fuel costs, and the competitors (Mulcaster 2009).
Question 3
Prepare three different maps of strategic groups in the video game consoles industry, using different variables each time. Justify the selection of the variables, critically analyze the position of each competitor on the strategic groups map and identify future opportunities for these companies based on their position
Figures 1, 2, and 3 show the different maps of strategic groups that outline the competition between the three main players in the video game industry. The 3rd generation video game consoles have been chosen to identify the main variables in the video console segment. According to the case study provided by John Gamble, the video game industry is mainly control by technology advancement/quality, innovation, and price variables (Gamble & Thompson 2010). The variables have been benchmarked on the needs of consumers. By using the 3rd generation devices in the console segment each of the three competitors can be located on the three different maps of strategic groups.
Nintendo has sold more units of the Wii due to its lower price, innovative controller, and advanced motion sensors that enhanced the gaming experience. Therefore, in as much as the Wii was less advanced in comparison to other devices in the same generation, it appealed to a bigger market due to the proper use of innovative and pricing strategies. According to the information provided by the maps of strategic groups, Nintendo is likely to forge ahead with its pricing and innovative strategies as they have worked well for it.
Microsofts Xbox 360 was an advanced third-generation console that came with a DVD optical drive, enhanced storage capacity, and excellent display. The device provided the quality desired by hardcore gamers but was a bit expensive compared to Nintendos Wii. The maps of strategic groups show that Microsoft used both quality and pricing strategies in the development of the Xbox 360. The company is likely to adopt an innovative strategy in its future video game consoles.
According to the maps of strategic groups, Sony seems to have mainly used the quality strategy in the development of the PS3. The video game console came with a blue ray optical drive, enhanced computing capacity among other specifications. The device was however too expensive, retailing between $499 and $599 (Jonson & Scholes 2008). Sony is likely to continue with its quality strategy but may additionally adopt the innovation strategy.
Question 4
Discuss the differences between the Planning and Emergent Schools of Strategy.
Discuss the importance of emergent strategy in fast-changing environments.
The strategic planning process often goes through several stages that aim to facilitate the achievement of an organizations objectives. The typical planning process often includes the analysis of the external and internal environments; definition of the business and the mission; setting the objectives; formulation of strategies; and developing procedures for monitoring and controlling (Mulcaster 2009). On the other hand, an emergent strategy describes a pattern of action that forms over time in an organization that lacks a definite mission and goals or despite an organizations missions and goals (Gamble & Thompson 2010).
Emergent strategies are effective in fast-changing environments as they are based on what works for an organization. By learning to do what works in actual practice organizations can maintain a purposeful direction even after deviating from their original strategies (Afuah 2011).
Question 5
Using relevant strategic analysis at the macro, industry, and micro levels, critically discuss the key strategic issues that Nintendo is currently facing.
The video gaming industry is dominated by Sony, Microsoft, and Nintendo. The three firms are fiercely competing to outdo each other. Their strategies mainly revolve around innovation, pricing, and adoption of the latest technologies. Nintendo has been the market leader for a long time but was outdone with the entry of Sonys Playstation which produced more advanced gaming consoles and thus extending the gaming age bracket.
Since the entry of Sony, the companies have relied much on new technology to build their customer numbers. The Wii produced in 2006 and 2007 were completely sold off and the cumulative sales by 2008 were much higher compared to the other two major firms in the video gaming industry. However, overall company sales began to fall in the second quarter of 2008 (Mulcaster 2009). The decline was in both handheld devices such as the Nintendo DS and also in the console segment.
Analysts attributed the fall to decreased spending by households due to the ripple effects of global recession and rising fuel prices. The recession and rising fuel costs adversely affected the US and other developed nations that were the main markets for video gaming devices. Nintendo however decided to proceed on with its innovative strategies to consolidate its presence in the market.
Nintendo also over depends on third-party providers who account for approximately 90% of Nintendos video game releases. The company sometimes finds itself in conflict with these third party providers. For instance, between 1996 and 2005 the company had an issue with third-party providers for trying to cab video game-related violence. Many of the issues have since been sorted out but their potentiality remains a big threat to the company.
Question 6
Based on your preceding analysis in Question 2, specify three possible options that Nintendo should consider and justify the most suitable option using SAF criteria*.
SAF criteria
Nintendo can decide to pursue pricing, quality, or innovative strategy to enhance its competitive advantage.
Figure 4: pricing strategy.
Pricing Strategy
Suitability
The pricing strategy will address the key opportunities and constraints Nintendo faces. A lower price can be achieved by utilizing less expensive components and the end product will be affordable to a wide range of customers
Acceptability
The proposed strategy will be able to meet the expectations of stakeholders due to its ability to achieve increased sales.
The level of risk is acceptable
The likely returns are also acceptable
Feasibility
This strategy has worked in practice and can work again for Nintendo
The components required to achieve this strategy are widely available.
Figure 5: Quality strategy.
Quality Strategy
Suitability
The quality strategy will not address the key opportunities and constraints Nintendo faces. Higher quality will only mean that the final product is expensive and therefore not affordable to the majority
Acceptability
The proposed strategy will not be able to meet the expectations of stakeholders because of its likelihood to reduce sales.
The level of risk is not acceptable as the company does not have other divisions that can make up for losses
The likely returns are also acceptable owing to the nature of competition
Feasibility
This strategy has worked less for other companies such as Sony and may not work for Nintendo
The components required to achieve this strategy are too expensive
Figure 6: Innovative strategy.
Innovative Strategy
Suitability
This strategy will address the key opportunities and constraints Nintendo faces. Higher sales can be achieved by utilizing less expensive but attractive components
Acceptability
The proposed strategy will be able to meet the expectations of stakeholders due to its ability to achieve increased sales.
The level of risk is acceptable
The likely returns are also acceptable
Feasibility
This strategy has worked in practice and can work again for Nintendo
The components required to achieve this strategy need to be carefully developed
According to the analysis above, the best strategy that Nintendo should pursue is the innovative strategy as it may incorporate the pricing strategy.
Question 7
Using both SWOT and value chain analysis, critically discuss the core competencies that Nintendo possesses relative to its competitors.
SWOT Analysis
Strengths
Nintendo has various strengths that enable it to command a considerable market share in the video gaming industry. First, Nintendos video game devices and games are innovative and simple to use and are therefore attractive to the targeted market (Gamble & Thompson, 2010). Secondly, the company has a variety of video gaming products that are tailored to the gaming needs of people from diverse backgrounds and age groups. Most of the video gaming products are affordable and thus can be purchased by people from different economic classes and this has enabled the company to make huge profits even in times of financial hardships.
Weakness
Nintendos major weakness is the reliance on third-party providers.
Another weakness is the development of low-quality products. The Wii was installed with a 64MB DDR3 graphics card which was way too low compared to the Sony Playstation 3s 256 MB DDR3 (Jonson & Scholes 2008).
Opportunities
The company has an opportunity to penetrate the casual video gamers segment with its innovative technologies and pricing strategy.
Threats
A major threat to Nintendo comes from within the industry and notable from the other two major players, Sony and Microsoft. Additionally, the world economy has remained unbalanced due to several contributing factors such as rising oil prices. The rising cost of fuel means that it will be more expensive to transport video game devices to retail outlets across the globe.
Already the company has registered a decline in sales volumes that can be linked to the recession, increased fuel costs, and the competitors (Afuah 2011).
Value chain analysis
Nintendo uses successful primary and secondary activities to stay ahead of the competition. The company manufactures quality products that are marketed effectively, for instance, by giving free games for every console purchased. The company also develops leading technological innovations that it protects for its benefit.
Question 8
The rate of technological innovation has a huge impact on all high-tech industries including Video Game Consoles. What recommendations would you make for Nintendo to cope with these changes in the future?
First, the company should adopt technologies that are less costly so as not to follow in Sonys footsteps of producing each gaming device at an estimated $ 805 and selling it between $ 499 and $ 599 (Gamble & Thompson 2010). Secondly, the company should adopt technologies that will ensure that its products stand out just as it happened with the motion sensors and the innovative controller. Thirdly, the company should adopt technologies that match the needs of its consumers. For instance, casual gamers and first-time gamers will prefer simpler technologies compared to hardcore gamers.
The company should also adopt technologies that will show a progression in terms of quality. For instance, the use of better display properties in comparison to the previous systems to allow for a natural progression. Finally, the company should experiment with a variety of technologies available and select one that will work best for it.
References
Afuah, 2011. Strategic innovation: New Game Strategies for Competitive Advantage, University of Michigan, Michigan.
Gamble, J & Thompson, A 2010. Essentials of Strategic Management, University of Alabama, Alabama.
Jonson, G & Scholes, K 2008. Explorig Corporate Strategy, Prentice Hall, Essex.
Mulcaster, W 2009. Three Strategic Frameworks, Business Strategy Series , Vol.10 no.1, pp. 68-78.
