30 May M2 (TM) RESPONSE
Assignment 1: Discussion—Market Structures
Industries can be classified under different market structures and this classification strongly dictates decisions made by managers within the market. For example, in an industry classified under perfect competition, or in a perfectly competitive market, many competitors offer the same product and entry into the industry is easy. In this market, the pressure to maintain the same prices as the competitors is high, which characterizes this market.On the other extreme, some industries are classified as monopolies and some fall under monopolistic competition. In a monopoly, there is only one provider of a product or a service, which has an inelastic demand. In this case, there is little incentive for the monopoly to be efficient or price competitive. In a monopolistically competitive market, there are many firms selling a product or service that is only slightly differentiated from one another, and in the long term, these firms start showing characteristics of a perfectly competitive market.
Tasks:
Find an article about an industry in the United States, such as the pharmaceutical industry. You can consult sources such as the Wall Street Journal, Financial Times,Bloomberg Markets, the Economist, US News and World Report, and other publications for your reference.After reading the article, respond to the following:
- Identify the market structure that best characterizes the industry described in the article.
- Explain the factors you considered when identifying the market structure for this industry.
- Analyze whether this industry will work better if it changes its market strategy and starts showing characteristics of another market structure.
- Critically analyze the advantages and disadvantages of the market structures that you studied in the readings.
STUDENT RESPONSE:
I decided to look into the Recorded Music Industry (RMI) and analyze its market structure. The RMI operates in an oligopoly type of market structure. Oligopoly is a market structure in which a small number of firms has the large majority of market share. An oligopoly is similar to a monopoly, except instead of just one firm controlling everything, two or more firms dominate the market. (Investopedia. (2018, February 27))
There are just a few firms, (EMI, Warner Music Group, Universal Music Group and Sony) in the RMI that dominates the industry and owns more than 40% of the industry’s market share. These firms not only have a strong existence when it comes to market shares, but they also set prices, cause the obstacles to enter the industry to be high, and the products that they sell are fundamentally the same. (The Music Business Network. (2010, May 08)).
The RMI has been running as an oligopoly for more than 50 years. However, recent technological advances such as digital downloads, subscription, streaming, and mobile service have created a lot of change within the industry in the past few years. (The Music Business Network. (2010, May 08)). All of the four previously mentioned firms have reported losses and have begun to downsize, reduce the amount of music being put out each year, and cut costs in other areas as well. Because of the unavoidable changes, thanks to technology, it may be time for the RMI to look into a different type of market structure. With all these changes, it may be best for the industry to stop running as an oligopoly.
Instead of having four major firms controlling the business, it may be time for the industry to take a chance and run as a perfect competition market structure. In this type of arrangement, many competitors offer the same product and getting started in the industry is easy. Happenings within the market are already starting to shift. Musicians can become famous now through YouTube, so the need for an artist to release a CD or record in a fancy studio have become obsolete. It is starting to seem as if individual artists have more power in their own success than the big companies do these days.
It is hard to say which type of structure would be best for the RMI. In an oligopoly structure, the firms within the RMI understand that they are interdependent upon one another and create processes that would allow them all to be successful. This is great for the four large firms but horrible for smaller labels or unsigned artists. In a perfect competition structure, although this would give more opportunity to the “little guys”, there would also be no type of agreement between companies leaving very little to no control of the cost of things. Competition within the industry would be through the roof.
Just a personal observation, in the past few years, it somewhat appears that people have taken notice of the RMI being dominated thus leading to the creation of shows like American Idol, the Voice and the X Factor. However, unless these artists end up signing with one of the main four labels, we rarely hear of them.
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