What Happens When The Market Conditions Change?

Basic analysis of the firm characteristics

Mention the main objectives of this research and the reasons you chose this firm. You may cite any relevant literature to explain the importance of your research.

This research aims to undertake a marketing analysis of the presence of Pepsi in Australia. Pepsi is a brand of a carbonated soft drink manufactured by Pepsico. In Australia the product is manufactured and distributed by Schweppes Australia under licence. Pepsi is one of the leading soft drink products consumed in Australia and therefore operates in a diverse market. This study will help in the evaluation of the market the product operates in and the key competitors of the brand. It will also provide insight on the effect of market changes on the price and output of the product. This study will be useful to the producers of the brand and other stakeholders of the brand who will be able to make informed choices concerning the brand positioning and anticipate any market changes due to the structure of the market in which it operates (Price, 2017).

What kind of a market is this firm competing in – perfect competition, monopoly, oligopoly etc.? Justify your answer using real-time market data (e.g. market share, profits, sales etc.) for this industry in recent years. Which firms are the main competitors? How do the competitors influence the pricing decision of this firm? Comment on the overall industry.

The firm operates in an oligopolistic market where there are few dominant firms in operation. The few dominant firms obtain their market position through the use of barriers of entry including patents, financial and physical human resources management as well as brand name. The firms can sell both homogeneous or differentiated products. As much as the oligopoly has the potential of being a price setter, the value of the product does not allow the company to set prices which are too high otherwise the buyer will find product substitutes in the market. In Australia there are few dominating firms in the soft drink industry and they include Coca cola, Pepsi and other firms. Coca cola and Pepsi are most dominant with Coca Cola accounting for 60% of the market share, Pepsi, 20% and 10% to others. While the market has other brands of soft drinks, they are not as dominant compared to Coca cola and Pepsi (Colciago,2016). Other firms include, mountain dew, phoenix organics, solo and sunkisd.

In this market, the players closely watch each other’s moves before making price changes. For example, if coca cola raises its prices and Pepsi maintains its price. Consumers may be more inclined to switch to Pepsi products since they are homogeneous to some level. On the other hand, if Pepsi decides to reduce its prices further, it may fail to attract the customers it seeks to since Coca cola will maintain its brand position. The only way in which both companies can successfully raise prices is if both collude. Also lowered prices may not be favourable to either company since it may reduce the profits which may accrue. Also, the marketing and advertising trends are closely observed between the competitors in the market and more often than not they will use similar forms of advertising (Czarnitzk and Kraft, 2007).

Change in market conditions

In this market, it may be difficult to detect collusion in the market since there might be presence of covert agreements. However, collusion may not be easy to execute in the market. One is difficult to execute because of the differences in demand and cost. If the firms serve different markets, they might have different levels of demand, also, they might have different efficient levels and generally will have different production costs. Also if there are steep economies of scale in the industry, it makes sense for smaller firms to compete on price to gain market share making it difficult for the firms to agree on the prices they should charge to ensure profitability. Also, the smaller firms will be forced to cheat more than the more efficient firms.

In addition, in the case of a recession, the demand levels decline which shifts the marginal costs of the firm as well as the demand curve to the left. Firms are likely to respond by reducing prices in order to better use the production capacity and also gain market share from the other firms in the market. Another factor that affects collusion is the number of firms in the market. More than 3 firms can make it difficult to collude. Also, if collusion makes the prices to be maintained too high, it may create room for substitute competition or the emergence of smaller firms to cut prices and increase their market share. Further, there are government laws which act as barriers to collusion (McManus, 2007).

The price leadership model however makes it possible for implicit price collusion since when the dominant firm sets prices, the other smaller firms will also set similar prices. On the other hand being a dominant firm may give the firm the opportunity the ability to limit the price increases in order to discourage the entrance of new competitors (Mazzeo,2007).

Oligopolies are therefore likely to thwart competition and only produce where marginal cost is equal to marginal revenues. An oligopoly market is therefore more susceptible to produce under capacity because when the marginal cost curve intersects the marginal revenue curve before it intersects the total cost curve. The marginal cost curve also never intersects the market demand curve hence producing less product than desired by the market (Nishimori and Ogawa, 2002).

You can use diagrams, charts, and tables to explain your findings.

In an oligopoly market, when prices change, the firms move in the same direction in terms of the magnitude of the price changes.

Conclusions

In the case one firm wants to change the price in an oligopoly, the firms will be best placed if they match the price changes or ignore them. Altogether the decision to make a price change depends on the direction and magnitude of the change (Feng and Li, 2014).

If one of the firms increases the price, the other firms may not follow with the hope of clinching the market share. The demand curve becomes more elastic and the customers will purchase the goods from the other firms which lowers the revenues of the firm which increased its price.

In the case the firm lowers the price, the other firms may follow in order to prevent loss of marketing share. This makes the demand curve inelastic.

The change between a very elastic demand curve to an inelastic demand curve makes the overall demand curve of the market kinked since the higher prices have elastic demand compared to owe prices (Kalleberg,2018). It also leads to a kinked marginal revenue curve. When the prices are lower, the marginal revenue curve drops further downward creating a gap. There is no changes in the quantity produced when the prices are lowered given that the change in marginal costs is within the marginal revenue gap. For this reason, firms in oligopoly change prices less often compared to firms operating in other market models. In the event of inflation however, the prices may change to account for the change in economic condition. Overall, competing on basis of price may not be a useful strategy for oligopolies (Carlton and Perloff, 2015).

Conclusions

Overall, the structure of the oligopoly ensures that the prices are kept within reason and that the consumers are protected from high prices. Few firms producing homogeneous products may not compete on price but on the nature of market share in the region on country. In this market, there is risks of consumer exploitation in the event that the firms chose to collide in price setting. The government should therefore have a watchdog role in this type of market and observe any sudden market price changes or movements which may be exploitative to the consumer.

References

Carlton, D.W. and Perloff, J.M., 2015. Modern industrial organization. Pearson Higher Ed.

Colciago, A., 2016. Endogenous market structures and optimal taxation. The Economic Journal, 126(594), pp.1441-1483.

Czarnitzki, D., Etro, F. and Kraft, K., 2014. Endogenous market structures and innovation by leaders: an empirical test. Economica, 81(321), pp.117-139.

Feng, Y., Li, B. and Li, B., 2014. Price competition in an oligopoly market with multiple iaas cloud providers. IEEE Transactions on Computers, 63(1), pp.59-73.

Kalleberg, A.L., 2018. Changing contexts of careers: Trends in labor market structures and some implications for labor force outcomes. In Generating social stratification: Toward a new research agenda (pp. 343-358). Taylor and Francis.

Mazzeo, M.J., 2002. Product choice and oligopoly market structure. RAND Journal of Economics, pp.221-242.

McManus, B., 2007. Nonlinear pricing in an oligopoly marketing: The case of specialty coffee. The RAND Journal of Economics, 38(2), pp.512-532.

Nishimori, A. and Ogawa, H., 2002. Public monopoly, mixed oligopoly and productive efficiency. Australian Economic Papers, 41(2), pp.185-190.

Price, R., 2017. The modernization of rural France: communications networks and agricultural market structures in nineteenth-century France. Routledge.