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The focus of this assignment will be to analyse the structure of the mass car i ndus?y in the LJK. This industry is structured in an oligopoly format which is where “few firm s dominate the market” (1 ) resulting in it being highly concentrated. A highly concentrated ma rket is identified through using ‘concentration ratios’. These measure the proportions of a total market share and identify which companies control each proportion. Since in an oligopoly market there are few sellers, each firm has the ability to influence the market price due to havi ng considerable market power.
This means that actions of one individual firm can have a signi ficant impact on the decisions of other firms regarding pricing and marketing strategies. Produ cts in an oligopoly are usually similar, so the way a company gains sales for their produ cts is down to the way they advertise and market them, especially in the mass car industry. However, product differentiation can occur giving companies a unique selling point (US P) on their product giving them a competitive advantage. Pricing methods in an oligopoly vary, although each method has an impact both negative and positive.
So by having cartels in place, rules are set that members bide to, reducing the risk of competition pricing. One way in which cartels be nefit companies in an oligopolistic structure is by allowing companies to raise their prices toge ther, thus increasing revenues but slightly decreasing price elasticity Of demand. Not Onl y do members of cartels negotiate on pricing methods, they can also put a limit on output on to the market as well as agreeing to not compete in eachothers ‘territory’.
In an oligopoly structure, the demand curve is ‘kinked’ this is where a competi tors response to a change in price by a rival depends on whether the price has been increas ed or decreased. If the price is increased by one firm, rivals aren’t likely to follow thi s as a rise In price would result in a fall in the total revenues of the business, meaning that demand is relatively elastic. Whereas if the price is decreased it is more likely for rivals to react to this by matching their prices to this change in an attempt to not lose market share. H owever, a variety of products are offered in the mass car industry.
Companies like VW, V auxhall and Ford offer more standardised products and sell them at reasonably the same price, so a kinked demand curve applies here. Whereas companies like Audi & BMW offe r more advanced’ products that are differentiated and can afford to charge a higher price based on their brand image and the I-ISP’s that their products offer, but a kinked deman d curve still occurs with Audi and BMW they just aren’t in the same division in the industry as companies like VW but still do adjust their prices according to each others actions.
An economic theory that attempts to explain a way in which companies in an oligopolistic industry can behave is called ‘Game Theory. This is when “each oligopolistic fi rm realizes both that its profit depends on what its competitor does and that it’s competit or’s profit on what t does” [5]. So this means that each firm understands that every decision ma de will affect the profits of the other firms within the industry, this is often referred to as a “situ ation of interdependence” [5].
One example of game theory being applied into the ma ss car industry would be if Audi decided to offer all the modern technological extras (Sat nav, cruise control, heated seats etc) on their latest car models as standard but charge the same price, their main rival BMW would have to make a decision on whether they should do the sam e. It would increase Audi’s total costs but would increase demand for their cars if BMW c ose to not react to this decision and still make customers pay for these extra features.
B ut if BMW chose to react to this new offer by doing the same, demand for both Audi’s and BM W’s latest cars would most likely increase fairly evenly as there would be no product differen tiation regarding optional extras on their cars. Paul Krugman and Robin Wells (2013). Economics . 3rd ed. New York. Worth Publishers. page 414 [5] Nonprice strategies are just as crucial as normal price strategies in an oligopol y industry. Most companies want to avoid price wars at all costs.
One nonprice Strategy u ed in this type of industry would be the quality of products and the factors involved with this . For example after sales servicing. Some companies in the mass car industry offer extensive warranties on their products with the aim to attract customers and gain a competitive advan tage. The market leader Ford uses ‘Ford Credit’ as it’s in house finance provider. This is one oft heir main advantages over competitors as they offer special finance plans tailored to cu stomers.
The success of this tactic is clear with “311 ,OOO new Ford cars sold to private consu mers in 2013″. 6] Improving economic conditions and the low interest rates offered have ma de car finance products more attractive to customers over the last few years. The way a com pany advertises its products is also crucial to the success of a product in this industry, compan ies spend heavily on this as its a way in which they can increase their brand awareness and display their product in a way in which they feel will attract customers the most. Bra nd building, marketing and advertising is largely undertaken by vehicle manufacturers. As such, should manufacturers suffer from poor brand image, sales at franchised dealers hav the potential to suffer”. http://academic. mintel. com/display/7D1 [6] https://www. keynate. co. uk/marketintelligence/view/product/10990/ cardealers/chapter/5/stren gthsweaknessesopportunitiesandthreats [7] In many oligopolies firms provide homogeneous products that are very simila r but not 100% identical.
Prices in each different segment of the market are kept at reasonabl y the same price but a E50 difference in price wouldn’t make Customers switch from BM W to Audi as most customers see purchasing a new car as a longterm investment. Therefore, co mpanies usually implement a strategy of product differentiation. A firm that tries to di fferentiate its products may do so by altering what it actually produces, adding ‘extras’ or ch ooslng a different design.
It may also use advertising and marketing campaigns to crea te a differentiation in the minds of consumers, even though its product is more or less identical to the product of rivals. ” [8] Companies in the car industry will attempt to differe ntiate their products in many ways. They can improve the quality of the cars they produc e by offering superior performance, reliability and durability or by developing superior pro duct features. Reliability and durability has become a key factor for customers when decidin g which cars to buy.