Forms of Industiral Organization

Forms of Industrial Organizations

Introduction

Purchasing decisions essentially revolve around price. Price is affected through market competition. Therefore, manufacturers control pricing on products as well as the amount of production produced to meet market demands. These decisions are influenced by the type of industry in which these organizations operate. Economists divide the market into four distinct market structures: pure competition, monopoly, oligopoly and monopolistic competition. This paper will differentiate among the various market structures, while identifying pricing and non-pricing strategies within each market structure.

Pure Competition

According to McConnell & Brue, “pure competition involves a very large number of firms producing a standardized product” (McConnell & Brue, 2004). Within a pure competition, new firms may very easily enter and exit the industry. Pure competition is considered rare and its market model is highly pertinent. The markets for “agricultural goods, fish products, foreign exchange, basic metals and stock shares” are among the few industries which closely identify pure competition market structures (McConnell & Brue, 2004).

The fast food industry is a direct example of pure competition. Organizations such as Burger King, McDonalds, Jack in the Box and Carl’s JR. etc., all produce uniform products, such as fries, burgers and shakes. Most fast food restaurants place careful focus on pricing. These leading chains are competing in an unpredictable market. Smart pricing tactics are used, such as the 0.99 cent and dollar menus; and most popular, the supersizing of value meals. The fast food industry is always looking for ways to attract budget conscious consumers. “People buy fast food because it's cheap, easy to prepare, and heavily promoted” (Warsi & Nisa, 2005). Now with the growing trend of the health food market, most fast food restaurants, such as McDonald’s are coming up with new strategies on upgrading their menus to accommodate healthier selections, such as salads, gourmet yogurts and fresh fruits. The fast food industry is reliant on its consumers to spread their trends. The law of demand compliments this industries pricing strategy.

Monopoly

A monopoly “exists when a single firm is the sole producer of a product for which there are no close substitutes” (McConnell & Brue, 2004). A prime example of a monopoly is the popular company, Microsoft. Microsoft holds the latest updates on a computer’s software, hardware and operating system. Microsoft is one of the largest computer companies in the world, thus it retains large monopolistic power within the technology industry

Instead of price taking, Microsoft controls its price on products and supplies by creating a price making method. According to Nadeau, “An act of monopoly price-fixing intended to squeeze more money out of computer buyers by raising prices” (Nadeau, n.d.).

“As prices for personal computers, scanners, printers and other computing devices have fallen, Microsoft has been able to charge high prices for many of its products. For example, the OEM prices for Windows licenses have increased, making this license an ever larger share of the cost of a new computer, Nader, R., 1999).

Oligopoly

Kellogg is a breakfast cereal company that is part of an oligopoly. More specifically the breakfast cereal industry is a differentiated oligopoly. The “Big Four” cereal companies are Kellogg, General Mills, Post, and Quaker. They produce the majority of all the breakfast cereals offered to the public. Kellogg non-pricing strategy is to increase spending on advertising to boost demand for their brands. They announced recently that they are planning to expand their marketing budget beyond the $1 billion mark (York, 2008.) Kellogg’s pricing strategy Cereal prices have high levels of profitability. The average manufacturer gross margin is 44% and “strategic pricing interactions clearly are part of the reason for the high markups in the ready-to-eat cereal industry.” (Reimer, 2004)

Monopolistic Competition

Nike is a company that sells sportswear, and is most famous for selling athletic shoes. There are many producers of athletic shoes and many differentiations in the offering of athletic shoes. This situation is defined as a monopolistic competition. Nike’s non-pricing strategy is to differentiate its product line by constantly researching and developing new shoe styles. Because of its successful advertising campaign and