Forms of Industrial Organization

FORMS OF INDUSTRIAL ORGANIZATION

Forms of Industrial Organization

Forms of Industrial Organization

Consumers are faced with making decisions about which product to buy every day. Unless consumers have a personal preference on which product to buy, they tend to base their buying decisions on price. Manufacturers control pricing based on supply and demand, but there are other factors which come into play when companies decide how much money to charge consumers. The presence of monopolies, oligopolies, monopolistic competitions, and perfect competitions allow manufacturers to manage pricing accordingly. This paper will provide an example of a company for each of the four market situations and how pricing is affected by a company’s status in these markets.

Pure Competition

Pure competition is defined as “the presence of a large number of firms producing a standardized product (that is, a product identical to that of other producers…). New firms can enter or exit the industry very easily.” (McConnell, p.413) Pure competition, although very rare will usually be found in markets that are selling agricultural goods, fish products, foreign exchange, basic metals, and stock shares (McConnell, p.415).

The fast food industry appears to fall inline with McConnell’s perspective. Examining this industry and in particular McDonald’s Corporation we find the presence of numerous organizations (Burger King, Jack in the Box, Hardees and Wendy’s) that are all producing standardized products (such as fries, hamburgers).

McDonald’s pays close attention to their pricing strategy because they are in such a volatile market (i.e. dollar menus, value meals, family meals). For instance, McDonald’s partnered with the Seminole County (Florida) School Board to establish a program amongst its 27,000 elementary-school children. For the 2007-2008 fiscal year the children into this program will bring home 4 report cards during that period. For “children who earn all A's and B's, have two or fewer absences or exhibit good behavior are entitled to a free Happy Meal at a local McDonald's-so long as they present their report cards.” (York, Emily Bryson) With the fast food industry being under constant pressure by health leaders, McDonald’s Corporation and their franchisees are in constant need to rethink their pricing and marketing strategy by upgrading menus (for instance, salads, fruits, milk). McDonald’s pricing strategy is closely tied with the law of demand, meaning that it is dependent of its customers’ spend trend.

Oligopoly

An oligopoly is “a market dominated by a few large producers of a homogeneous or differentiated product” (McConnell & Brue 2004). A prime example of a oligopoly would be Nike, Adidas, Rebook. Although all three companies have considerable control over the athletic shoe market, they are all priced similarly for consumers. Since the athletic shoe market has a small amount of players, these companies “have considerable control over their prices, but each must consider the possible reaction of rivals to its own pricing, output, and advertising decisions” (McConnell & Brue, 2004). Companies in an oligopoly base their prices on how they predict the competition will price their products. For example, Nike bases their pricing for shoes on how Adidas and Rebook will set pricing for their shoes. By keeping their prices competitive, these companies can “preclude the entry of new competitors through preemptive and retaliatory pricing and advertising strategies” (McConnell & Brue, 2004). The rivalries created by oligopolies help keep prices on products low and allow for an optimal buying market for consumers.

Monopoly

Microsoft Corporation is one of the world’s largest computer technology companies, with annual revenue of $51.12 billion as of the year 2007. This corporation holds more than 90% of the market share and continues to dominate the operating systems industry (Moore, 1999) which indicates a strong monopolistic power within the computer technology industry. However, because Brue and McConnell (2005) describe a pure monopoly as “when a single firm is the sole producer of a product for which there are no close substitutes,” Microsoft Corporation’s power can be regarded as a near monopoly since it is the sole provider of operating systems.

Microsoft controls the prices of products by using price-making strategies as opposed to price-taking. This can be seen when