Business Economics: Perfect Market Structure Essay

Question:

Discuss about the Business Economics for Perfect Market Structure.

Answer:

1. The companies invest on the product differentiation with the expectation of improving the quality and minimizing product cost. It is difficult for a company to remain in the competition without involvement in the product differentiation activities. Generally, the reason behind an appropriate expenditure on product differentiation is to enhance the market share and achieve the economic growth. Along with this, the purpose of this is also discovering the new materials and manufacturing techniques that bring down costs. The use of a new technology in the product directly leads to reduce the cost of the production and it also improves the profit of the firm (Christopher, 2016). Research and development (R&D) process is an important aspect in the product differentiation process. In this, it does not matter that the firm is related to which market structure.

The term product differentiation is related to the marketing of the product that represents the differences between different products. Differentiation process makes a product more attractive through the focusing on its unique qualities. A successful product differentiation provides a competitive advantage to the firms with a high customer base. It also allows the company to leads in the market with high price. For example, a chocolate business may differentiate its products from other brands in terms of test and quality (Estampe, et al., 2013). But, a car manufacturer may differentiate its products with focusing on cost saving and fuel efficient.

A perfect market structure focuses the differentiation strategy through the improvement in the quality and designs of the product that enables to achieve competitive advantage in the market without reducing its price. In the perfect competition, it is possible that differentiation strategy may imitate by the competitor because, it includes a large number of the supplier in the market (Bustinza, et al., 2013). Along with this, the business is uncertain and dynamic activity. One product does not run for a long period. After some time, the latest model takes the place of them.

In the perfect market competition, the once-off expenditure on product differentiation is significant in term of the achieving economic profit in the future. The situation of the profit can be seen only in the short run. It is because, after the sometimes, the differentiation strategy is adopted by the competitors and the opportunities of the profit are divided to all (Hines, 2014). In economic term, the successful product differentiation process is inconsistent with the situation of the market. It demands of the product remains according to the latest feature in the products.

On the other hand, in the monopoly market structure, product differentiation strategy provides the guarantee of the economic profit in the future. In this, the degree of the competition is very low. So that, chances of product imitate remain minimum. In the monopoly market, there is only one supplier of the particular product and the firm can also be called industry. In this, once-off expenditure on the product differentiation is required a lot of money but along with this, it provides an expectation of the high profit in the future (Baldwin and Scott, 2013). The demand for the product remains high due to the quality of the product is rare. Due to this, in the monopoly market, the supplier has full control on the price, which directly benefit can be seen as good profit in the future (Carraro, et al., 2013).

In the context of the oligopoly market structure, a few suppliers are presented in the market for a particular product. In this market structure, once-off expenditure on product differentiation affects the whole the completion in the market. It provides benefits in the monetary terms. Due to a few competitors in the market, the action of a firm’s product differentiation activities affects the others (Kumar and Siddharthan, 2013). The customer expectation changes with the time moving that companies cannot ignore. A firm’s obligation is that complete the customer expectation. That is why; companies take the action of the product differentiation to make the better product. It also enables the company to find a way of saving the cost of the production. Once off investment on the production differentiation provides the guarantee in the economic profit in the future but, it is not in the long term because, it is certain that the demand for the particular product always remained nil after some time (Chung, et al., 2013).

Product differentiation is a significant feature of the monopolistic market structure. It ensures both the customer and firm that product is different from another competitors’ product in the market. It provides better margin opportunities to the firms. A better quality product always offers high-profit margin opportunities compared to low quality and pricing strategy (Shao, 2015). But in this, it is essential that the potential customer should able to pay high amount against to better quality. A good margin makes easy to cover the total cost of the product for the manufacture. Along with this, once-off expenditure on the product differentiation is able to sustain the demand of the product in the market. It is because; the continuous development and appropriate price are able to retain the customers. The product differentiation strategy is better than to reduce the price of the product for attracting the customer because the low price includes the risk of creating the price orientation and reducing the goodwill of the product (Davcik and Sharma, 2015).

From the above discussion, it can be concluded that it is difficult to judge and analysis the flow of customer expectation in the market but customer expectation can be fulfilled through the product differentiation strategy. It provides opportunities to retain potential customers with the new customers. It is also able to reduce the cost of the production with the development of new techniques and material in the production. It benefit can be seen as profit maximization of the firm. But at the same time, dynamic activities in the business environment affect the demand for every product after some time (Ahlin and Ahlin, 2013). Hence, it can be said that once-off expenditure on the product differentiation provides the guarantee of the economic profit in the future but not for a long time.


2. In labor market structure, employment and wages vary across countries. Decentralized labor markets are set in countries where flexible wages can be noticed such as the United Kingdom, United States. However, Germany, France, and Italy have inflexible wages which put centralized labor markets for these countries (Jorgenson, Gollop, and Fraumeni, 2016). Wage rates for individuals may differ across occupations and industries and within occupations and industries due to various factors namely industrial geographic location, size, unionization, and ownership such as private or government own company. Market imperfection also results in wage differentiation.

Along with the knowledge and skills of the employee, performance, and passion is to be considered for setting wages. Single occupational wages can also be dissimilar. As illustrated, earning of 10 percent computer programmers was $17.19 per hour or less in 2004, while total earning was noted $42.07 per hour or more for top 10 percent computer programmers (Ehrenberg, and Smith, 2016). A person who has many years of experience is seen as good, high productivity and skill level of an employee. Experienced and in-demand skill workers earn more in comparison to the lack of experience and skill worker in a similar occupation.

Inter-firm differentials include worker’s different wages in the same area as well as occupation. Some of the factors like labor employed quality differences by different firms, labor market imper­fections and equipment efficiency differences and supervision results in wage differences among inter-firm (Holley, Ross, and Wolters, 2016). Technological advancement differences, financial capacity of the firm along with its size and raw material availability, managerial efficiency, transport and power facilities also results in wage differences among firms. Moreover, some of the occupations or employers pay high as compared to other due to differences in educational and training requirements, professional degree, and a certificate is defined as the human capital of the firm. Because education and training limit the labor supply which results in a time-consuming process in order to have accomplished and necessitate skill at a certain level (Forssbaeck, and Oxelheim, 2014).

Additionally, regional differences refer to the different working condition of workers in similar occupation at the different geographical region. For instance, employees of central government involved in distributed and remote areas of North Eastern States of India are benefited by Remote Area Allowance as additional remuneration. This wage differential is used as a strategy to serve in particular regions as to attract people (Mann, 2012). Inter-Industry differences refer as working of workers in the similar occupation in the same area with industries differences. The unstable requirement of skill, unionization level, product market nature, industry’s development stage and the ability of payment results in these differences.

Determining the worker's demand for particular services and product is one of the factors that differentiate wage rates. For example, if highly desirable services are provided by a worker then one will be paid higher as compared to low service providers (De Grauwe, 2016). Sometimes, skills and ability significantly affect wage potential of an individual. For instance, one who is producing best music is preferred more than one who is producing average music. Personal wage differences arise due to various characteristics of a person in the same occupation. Many times, in spite provision of ‘equal pay for equal work’, women are paid lesser as compared to men. Employer or industry is another factor responsible for workers wage differences.

In addition to this, dominance in market, employer success, business culture, and customers are all some of the cause which influences willing pay power towards its employees (Cosar, Guner, and Tybout, 2016). A less income is paid to commercial wealth manager in comparison of wealth manager working with the organization that only focuses on customers of high net worth. Job performance and success of a person may also responsible for wage differentiation (high or low) in the occupation. As illustrated, successful salesperson of a company can earn $1, 50,000 yearly as compared with a less successful salesperson who only earn $95,000. Besides this, trade unions and their shared bargaining power greatly offset the employer power in an organization to set a desired and markup wages for the employees in comparison to the non-union members (Asplund, 2013).

Government intervention includes economic stability, allocation of resources, monopolies regulation, income and wealth distribution, monopolies and oligopolies regulation, and externalities. Government intervention influences greater equality to improve opportunity and outcomes equality in redistribution of wealth as well as income within the society which seems to be fairer for all (Hirsch, Kaufman, and Zelenska, 2015). Intervention can result in the promotion of competition along with monopolies regulations. The growth of monopoly power cannot be seen without government intervention for an economy.

Governments intervene can have a combination of social welfare maximization, macro, and social economic factors. If there is no regulation, negative externalities can be practiced by a business which will result in minimized trade, limited innovation, and diminished resources. At the time of inflation, and recession government intervenes by money supply manipulation helps to minimize the impact of economic forces (De Grauwe, 2016). Additionally, employment law for protecting public and to ensure issues related to health for the customers are socio-economic factors taken care by the government.

Also, various macroeconomic interventions are implemented to reduce unemployment and recession from the country. Inherited wealth can be practiced by the help of wealth tax as this will help to reduce richest wealth and revenue and will contribute in educating poor people of society which results in positive externality (Moscarini, and Postel-Vinay, 2016). Government intervene takes place in the form of taxation and money to negate the dangerous effects of negative externality in the society. This is for those people who do not bear the full cost in an economical transaction. Large-scale endeavors are anticipated by a government to ensure cost reduction and economies of scale (Ehrenberg, and Smith, 2016). Also, it ensures that development of projects will not result in damaging social costs such as pollution and monopoly for the society.

References

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