Analysis Of Market Structure With Entry Of Peer To Peer Platforms

Analysis of Schmeckt Besser energy bar using supply and demand theory

Business ventures are profit oriented entities that seek to make profits from trading on marketable goods and services. The goal of business is to maximize revenue in the short-run and ultimately maximize shareholder wealth in the long-run. Shareholders, being the owners of the company have interest in the long term growth of the organization. The Board of Directors are appointed by shareholders to act as their agents in making critical decisions of the firm (Bos, 2014).The Board of directors monitor the managers who run the day to day operations of the business. These managers are expected by their principal to make rational decisions while aiding in the running of the company. Schmeck Gut is a food and Beverages Company that is run on a going concern basis. The company is planning on launching the Schmeckt Besser energy bar to be located in Atolia.

Market analysis is the process by which businesses assess their venture to ascertain market logistics. This process involves the collection, analysis, and interpretation of relevant data to establish the viability of a venture. During market analysis, researchers seek to establish a gap in the market that could be filled through the establishment of a business venture. The prospective market is analyzed with the aim of identifying prospective customers and establishing the variables that affect business in the industry. It is worth noting that business is affected by both microeconomic and macroeconomic variables. Inflation, changes in tariffs, and change in income levels are key factors that are discussed in this report. Inflation is the rise in consumer prices that lead to a decline in the purchasing power of customers (Bos, 2014). Additionally, this report scrutinizes the projections of the company’s research department on the impact of income, inflation, and changes in tariffs on demand of Schmeckt Besser energy bar products.

The demand of a product can be defined as the amount of a product or service that customers are willing to purchase at a certain price and time. Aggregate demand on the other hand is the total amount of a product that customers are willing to purchase at a certain price and time in an economy (Bos, 2014). The demand for Schmeckt Besser energy bar products is determined by a number of factors that include own price, the price of substitutes and complements, income levels, and taste and preferences. According to the law of demand, the demand of a normal good or service declines with an increase in price. However, the demand for some products respond differently to changes in price. The demand for luxury goods for instance tend to increase with an increase in price. Besser energy bar deals with alcoholic drinks whose demand exhibits a normal response to price changes.

The Demand curve

The demand curve is negatively slopping graph of quantity demanded and price. A high demand for energy drink products in Atollia is good for the company since good returns can be obtained once the business is launched. The diagram below is a sample demand curve.

Atollia region is has recorded an increase in demand for energy drink products for the last for years as indicated by the graph below. In the 1^st quarter of year 1, the demand was recorded at 260. The demand has increased to a record level of 446 in the fourth quarter of year 4. These measures of demand are aggregate measures since they are cumulative demands of the whole city of Atollin.

Projections of rates of income, inflation, and tariffs

Note: These developments are not necessarily matched to each other in the sequence shown above 

The income of individuals and economies determine their purchasing power and resultantly the demand for products and services. The research department projected a possible income growth of 1%, 3%, 5%, and 7%. When all other factors are held constant, demand for the new product is expected to rise when people’s income grow because their purchasing power would rise. Increased income among individuals results to an improvement in their life styles and a possible change in the products they consume. Normally, when income growth occur as a result of aggregate demand, whose increase is faster than the average productive capacity, inflation can occur (Ehrenberg & Smith, 2016). However, if an increase in productivity leads to increase in economic growth, then inflation might not occur as a result of growth sustainability. The projected 7% increase in income might result to inflation of either 2%, 3%, 4% or 5% if the income growth is unsustainable. It is however, difficult to match the inflation figures and income growth using the available data.

Inflation is the rise in prices of goods and services in an economy. It reduces the purchasing power of households and enterprises. Normally, in most countries, inflation is associated with unfavorable balance of payments, depreciation of local currencies, and an increase in production cost (Adam, Weber & Bundesbank, 2017). Schmeckt research department projected a rise in inflation of 2%, 3%, 4% or 5%. Rising inflation might neutralize the effect of the increase in income on consumption since individuals would pay more for less (Ehrenberg & Smith, 2016). For instance, the 5% increase in inflation could nullify the positive impact of the 1% and 3% increase in income. The weight of income and inflation changes vary, it is possible to record a 1% change in income that does not nullify a 5% increase in inflation and vice versa.

Projections of rates of income, inflation, and tariffs

The Phillip’s curve theory is a popular economic theory that proposed that inflation and unemployment are inversely related. This implies that an increase in inflation results in a decrease in unemployment ceteris paribus. Phillips argued that, an increase in economic growth results to inflation (Ehrenberg & Smith, 2016). However, economic growth results to generation of employment opportunities leading to a decline in unemployment. The relationship between income and inflation can be explained using the Phillip’s curve. The rise in economic growth resulting from inflation, enables people to obtain sources of income through employment. Employment enables people to obtain income which they can use in purchasing products from Schmeckt.

Tax is a compulsory remittance of income by persons to the state in return for the provision of social services. Taxes also play a crucial role in the protection of local industries against competition from foreign companies (Bos, 2014). Tariffs are a kind of tax paid to the tax collection for import of foreign goods and services in to a country. Tariff changes might have a huge impact on the availability of Schmeckt Besser energy bar products in Atollia especially when raw materials or complete products are imported. Increased tariffs reduce income for businesses which import raw materials or complete products for sale locally. This s explained by the fact that tariffs increase production cost reducing profit margins. Arthur Laffer proposed the Laffer curve theory to explain the relationship between tax rates and amount of tax revenue collected by governments (Lundberg, 2017). The theory states that the more a product or service is taxed, the lesser the quantity generated. The theory is based on the assumption that people tend to get demotivated when they their net income is too low compared to the profit before tax. The government should critically check its tariffs to minimize decline in productivity. The point T in the figure below indicates a point where the government obtains optimum tax revenue.

Regression is a mathematical technique that illustrates the relationship between dependent and independent variables. A multiple linear regression occurs when more than one independent variables exist in an equation (Wooldridge, 2015). The company research department conducted a market analysis where they established that income, inflation, and tariffs were possible factors that affected the demand of its bar products. Five year quarterly predictions of demand, income, tariffs, and inflation rates were made. Below are a MS Excel output of the regression analysis. The demand for the company’s products were taken as the dependent variable and regressed against income, inflation, and tariffs which were independent variables. The dependent variable in our dataset is demand while independent variables are inflation, income, and tariffs.

The Phillips curve

Table 1: Multiple Regression analysis

The demand for Schmeckt Besser energy bar products is majorly affected by income growth and increase in tariffs. The p-value for income growth and tariffs are lower than 0.05 (level of significance) and therefore, the research rejects the null hypothesis of no significance and concludes that income growth and tariffs are statistically significant variables that affect demand. The P-value for inflation (0.07855) is greater than 0.05 and thus the study fails to reject the null hypothesis of in significance. Therefore, inflation is a statistically insignificant factor of demand at 0.05 level of significance.  R squared is a measure of how the regression equations fits on the data. It gives the percentage at which the independent variables explains the variation in the dependent variable (Brooks, 2015). In this case, the R- squared of 0.854949 implies that income, tariffs, and inflation explain the variation in demand for Schmeckt Besser energy bar products by 85.49%. Below is the equation for the three factors defining the change in demand by 85.49%.

Y= 82.95437+ 0.018099X₁ – 12.0488X₂– 14.287X3

Where; Y= Demand

             X₁= Income growth

             X₂= Tariffs change

X₃ = Inflation

The adjusted R- squared is measure of how much the significant independent variable explain the variation in the dependent variable (Ott & Longnecker, 2015). Below is the equation that only considers income growth and tariffs change which are the only significant factors among the three. The two independent variables define changes in demand by 82.78%.

Y= 82.95437+ 0.018099X₁ – 12.0488X₂

Where; Y= Demand

             X₁= Income growth

             X₂= Tariffs change

The regression analysis established that income growth and changes in tariffs significantly affect the demand. Inflation was found to be a statistically insignificant factor affecting demand. This implies that an increase in inflation causes a statistically negligible decline in the demand for Besser energy bar products. The company shall therefore not pay much attention to the impact of inflation on their business since customers demand an almost stable amount of product even with changes inflation. The rise in the income of individuals significantly leads to an increase in demand for Schmeckt Besser energy bar products. The higher the income of households, the higher their purchasing power. Higher Tariffs have a negative impact on demand of goods and services (Ball, 2014). When the government imposes tariffs on raw materials or complete products traded by the bar, the production cost increases. Increased production cost might force the company to price its products higher making consumers to shift to substitutes and hence the reduction in demand (Bernheim & Scheuer, 2014). Historically, from international finance, when one country imposes higher tariffs on the products imported from a trading partner, the affected country might also responds by effecting higher tariffs on goods exported from the other country.

The Laffer curve

Market structure defines the organizational features of a market. Competition is the basic factor that informs the classification of markets in to various market structures. The structure of the market influence decision making since they have unique assumptions and features. Additionally, market structures influence marketing strategies and profits recorded by companies.  Market structures are classified as monopoly, oligopoly, and perfect competition (Hong& Li, 2017).  Perfectly competitive markets consist of small companies that compete actively against each other. In this environment, no single company possesses significant market power to disadvantage other companies. In this kind of market, firms sell almost identical products and aim to maximize profits ( Farronato & Fradkin, 2015). New entrants also do not face much challenges in coping with the market since it is relatively free.

Monopolistic competition market structure occurs where many small companies compete. What makes a monopolistic market distinct from a perfectly competitive market is that firms tend to sell slightly differentiated products. Through the slight differentiation, they are able to charge competitive prices although within some range. The characteristics of this market is similar to that of a perfectly competitive market although customers have tend to prefer some firms over others due to the slight differentiation (Hong& Li, 2017). Limited competition exists in an oligopoly. The market is dominated by a few firms which have the ability to choose to either collaborate or compete. Firms under this market structure maximize profits and set their own prices. The difference between this market structure and a perfectly competitive market is that barriers to entry exist. Finally, a monopolistic market structure is characterized by a single company that controls the whole market. The company has the strongest level of market power such that consumers have no choices to select from since alternatives do not exist.

Schmeckt Besser energy bar shall operate in a monopolistic competitive market since the drinks offered in most bars are of same brands although slight differentiation exist. Bars source for the drinks from established manufactures who produce and sell their products to willing wholesalers and consumers. Atolia city like other cities, have many bars which offer alcoholic drinks and energy drinks. However, Schmeckt Besser energy bar offers energy drinks only which differentiates it from other sellers in the market. The differentiation strategy allows the company to set itself aside from other companies in the industry (Phaneuf & Requate, 2016). Differentiation as a business strategy, has the advantage of allowing the company to stay distinct form the rest at the same time providing an opportunity for a different pricing model.

Investment is the allocation of money to a business venture in expectation of returns in future. Investments are made in accordance with the risk tolerance of the investor and the expected returns. The risk- return trade off theory states that risk and return are directly proportional (Hopkin, 2018). This implies that high risks attract higher returns, although investors have to be the board has to act in due diligence to ensure that investments are within the expected rates of return and risk tolerance level (Phaneuf & Requate, 2016). Income growth increases the quantity demanded of Schmeckt Besser energy bar products. It results from sustainable economic growth favors the demand for the product since inflation will be kept low. The lower inflation implies that prices of goods and services are manageable. At lower inflation and increased income growth, the aggregate demand is high and thus rational for the company to launch its product in the market. The company is highly likely to make more revenue under this scenario.

The board of directors should take note of tariff changes while making investment decisions. It is evident that the demand for the company’s products is highly affected by changes in tariffs. The higher the tariffs of trade, the lower the demand for the company’s products. Tariffs impede the exportation of the company’s products to restricted regions while at the same time increasing the cost of raw materials. The increase in production cost leads to an increase in the selling prices of Schmeckt Besser energy bar products. Schmeckt board should therefore implement a model that ensures that irrespective of an increase in tariffs, demand for the company’s products remain stable. Such initiatives include diversification that allows the company to spread its risk among a number of investments. Diversification beyond one market ensures that in case of a decline in production in one industry, the other investments remain productive (Heizer, 2017). The profits and losses in the different industries off-set each other and thus enabling the company to remain in good financial health (Phaneuf & Requate, 2016). Schmeckt Besser operates in the food and beverage industry. To adequately diversify, Schmeckt should consider investing in other industries such as the insurance industry, transport sector, and the health sector.

The impact of inflation on demand of Schmeckt Besser is statistically insignificant. A normal degree of inflation has little impact on the demand of the products. However, hyperinflation might result to considerable changes in demand since is economic effect is tremendous. In such situations where hyperinflation is predicted, the company can hedge itself against risks arising from hyperinflation using financial derivatives such as options, futures, and forward contracts.

The Board of directors should utilize government subsidies. Government subsidies help companies recover the cost of production hence promoting production which leads to increased supply. Government subsidies include access to cheaper loans, tax waivers among others. The utilization of such opportunities lowers production cost increasing prospects for profit.

The Board of Directors should also exploit tax avoidance opportunities. Tax avoidance is the utilization of legally acceptable techniques that eventually reduces the tax burden of the company (Miller & Benjamin, 2017). Tax avoidance should however be differentiated from tax evasion that involves breaching the provisions of the law so as to reduce tax. There are a number of methods that companies can utilize for successful avoidance of tax. Strategic incorporation involves the acquisition or creation of subsidiaries in countries whose tax regime is low. Profits are then siphoned to those countries hence leading to reduced tax burden. Tax burdens can also be reduced by offering workers stock options. Tax breaks provided by governments should also be exploited whenever they arise.

Marketing is the process of promoting products and services with the aim of making sales. Successful marketing involves activities such as advertising and market research (Miller & Benjamin, 2017).  The Board of directors should launch advertising campaigns aimed at identifying potential customers and selling the company’s brand. The impact of successful marketing campaigns is increase in sales volumes. However, is worth noting that Schmeckt Besser energy bar should ensure that customers get the best customer service. In business, customers should be treated as kings. They should differentiate themselves from other businesses in the food and drinks industry. The differentiation business strategy occurs when the products and services offered by a company vary from those offered by other players in the industry. Through this strategy, the company gains the power to price its offerings competitively.

In conclusion, the economic concepts of demand and supply are crucial in business decision making. They form a ground for effective solving of organizational problems since businesses are concerned with minimizing costs while maximizing returns on investment. Schmeckt Besser energy bar’s market launch as a startup would have to run market campaigns and offer excellent service to customers. This would enable it to penetrate the competitive industry where some companies have already established themselves. Multiple linear regression is an appropriate technique used to forecast trends. In this analysis, the technique indicated that tariffs and income growth are the major determinants of product demand.Market structures determine the marketing strategies and decisions made by the management. Schmeckt Besser energy bar can market itself a differentiated bar that deals with energy drinks only. Through this, the company attracts customers who are interested in consuming non-alcoholic drinks. The company can also seek other methods of establishing itself as a leader in the energy drink bar business by providing its customers with extraordinary customer service.

References

Adam, K., Weber, C. H., & Bundesbank, D. (2017). The Optimal Inflation Rate with Heterogeneous Firms.

Ball, L. M. (2014). The case for a long-run inflation target of four percent (No. 14-92). International Monetary Fund.

Bernheim, B. D., & Scheuer, F. (2014). Econ 242: public finance and taxation ii.

Bös, D. (2014). Public enterprise economics: theory and application (Vol. 23). Elsevier.

Brooks, C. (2014). Introductory econometrics for finance. Cambridge university press.

Ehrenberg, R. G., & Smith, R. S. (2016). Modern labor economics: Theory and public policy. Routledge.

Farronato, C., & Fradkin, A. (2015). Market structure with the entry of peer-to-peer platforms: The case of hotels and Airbnb. Work. Pap., Stanford Univ.

Heizer, J. (2017). Principles of Operations Management Plus Myomlab with Pearson Etext. Pearson/Education.

Hong, G. H., & Li, N. (2017). Market structure and cost pass-through in retail. Review of Economics and Statistics, 99(1), 151-166.

Hopkin, P. (2018). Fundamentals of risk management: understanding, evaluating and implementing effective risk management. Kogan Page Publishers.

Lundberg, J. (2017). The Laffer curve for high incomes.

Miller, R. L., & Benjamin, D. K. (2017). Economics of macro issues. Pearson.

Ott, R. L., & Longnecker, M. T. (2015). An introduction to statistical methods and data analysis. Nelson Education.

Phaneuf, D. J., & Requate, T. (2016). A course in environmental economics: theory, policy, and practice. Cambridge University Press.

Wooldridge, J. M. (2015). Introductory econometrics: A modern approach. Nelson Education.

Order an Essay Now & Get These Features For Free:

Turnitin Report

Formatting

Title Page

Citation

Outline

Place an Order