In the United States, CVS is the largest pharmacy retail organization. This company operates over 6100 retail stores and specialty stores countrywide and has employed over 170,000 workers. There is a necessity of offering a wider range of prescription medication options and selections system-wide in a struggle for serving the consumer base of CVS Pharmacy more consistently and effectively.
The purpose of this paper is to select a more realistic good or service for an existing industry. The paper will identify the market structure, along with elasticity of the product and will also include the way the pricing will relate to elasticity of the product. Furthermore, the paper will include the way the changes in the quantity supplied as a result of the pricing decisions will affect marginal cost and marginal revenue. Moreover, the paper will focus on the non-pricing strategies, and will explain the way the changes in the business operations could alter the mix of fixed and variable costs in line with the strategy.
The market structure of CVS Pharmacy is an oligopoly. It is a market structure in which a small number of organizations sell either differentiated or standardized products in which other organization’s entry is difficult. In this market structure, the control of the firm is limited over price of the product due to mutual interdependence (with the exception of when there is conspiracy surrounded by the organization) and in which there is a non-pricing rivalry (McConnell and Brue, 2004).
The oligopoly turn out is the most common structure of big -business as the establishment of trust was limited in the United States. Evasion of pricing rivalry has turned out to be nearly automatic with four or five larger firms accountable for most of the output of every industry.
If an organization were to drop the prices, it is expected that their competition will do the same and all will undergo a lower profit. Conversely, it is unsafe for any singular firm to increase their prices as the others will hold the prices with the intention of gaining a share of the market. “The safest strategy is to never lower prices and raise prices only when there is abundant evidence that the other firms will also raise prices. When business conditions permit, the price leader will raise their prices with the expectation that others will follow (McConnell and Brue, 2004).
“Price elasticity tells how much of an impact a change in price will have on the consumers’ willingness to buy that item. If the price rises, the law of demand states that the quantity demanded of that item will decrease” (Jennifer Tuck, Chron Small Business, 2013). Price elasticity of demand indicates the decrease in the quantity demanded. Elastic-demand indicates that the consumers of the goods or service are extremely sensitive to a change in prices. Generally, a product which has numerous substitutes or is not a necessity has demanded elasticity.
Elastic demand indicates that the customers of the product are not extremely sensitive to price alterations. Upon analysis of elasticity of pharmaceutical products, it is certain that pharmaceutical products cannot be considered as a necessity. Medication is considered to be a basic item, essential for the prevention and treatment of ailments and disease and, consequently, they have a particular, non-substitutive tenacity and thus are not a necessity. It indicates, consequently, that they cannot be considered as elastic.
(Tom Vander Beken, 2007). While it is factual for some branded goods with little rivalry, the demand for more crowded beneficial classifications where there are generic equivalents or rival satisfying substitutes can be highly elastic. It indicates that changes in price are met in relation to the quantity with larger changes demanded. For pharmaceutical makers, the primary goal is to realizing the degree of price elasticity. Pharmaceutical makers, for better understanding price elasticity, utilize a range of methods for assessing price elasticity, comprising quantitative research, qualitative research, and retrospective data analysis assessing the effects of a number of levels on prescription demand (Brent L. Rollins, Matthew Perri, 2013).
Marginal Cost & Revenue
A way to determine the quantity of profit maximization is to conclude where marginal revenue equals marginal costs. Rather than computing the profit for
all levels of sales; total revenue and total variable costs are considered. Marginal revenues and marginal costs are considered in a similar way like marginal profit, thus defining the amount of change for all sales’ levels (Huter, 2012, p.2).
Pricing & Non-Pricing Strategies
CVS needs to think through numerous elements impacting its’ business. Pricing strategies, rivals and their current products, consumer demands and suppliers are examples of these elements. For pricing strategies, CVS should consider closeouts, discounts, product bundle pricing, penetration pricing, geographical pricing, and membership or trade pricing.
For non-pricing strategies, options comprise: enhanced service quality, longer opening hours, advertising, and extended warranties (Kimmons, n.d.). By pricing similar products in a different way they must focus on regional demographics because geographic pricing enables the maximization of profit. For promoting unique or new products at provisional price drops, penetration pricing is the most effective. Finally, bundle pricing and closeouts can be engaged when several seasonal goods need to be sold off to avoid a loss (Kimmons, n.d.).
Enhanced service quality, longer hours and advertising needs to be included in the non-pricing strategies. Advertising grabs the attention of the consumer to the brand and engages them, making them conscious of promotions and sales. Longer hours enables the organization the opportunity to service more clients—“the fisherman with the biggest net catches the most fish”. In the end, the automated verification and dispensing systems’ implementation will boost the quality of the service, particularly in the pharmacy to enable more pharmacists to be able to counsel the patient and provide better customer service.
Barriers to Entry
In the retail pharmacy industry, cost is the main barrier to entry. Economies of scale, as an incumbent, enable CVS to purchase larger quantities at lower rates due to a longer relationship with suppliers because they are purchasing in bulk. These advantages allow CVS to lower prices while maintaining profit. New entrants would not be capable of adequately competing with the old firms and do not enjoy these same benefits (Anonymous, 2012).
Current Global Economic Conditions
In the past six months, global economic conditions have developed. Policymakers of advanced economy effectively resolved two of the major short-term threats to global activities—the threat of a sharp monetary reduction in the United States and a euro area breakup. In response, according to the latest World Economic Outlook of IMF, financial markets have rallied, and financial constancy has developed. In 2013, the report predicts real global growth of Gross Domestic Product of 3.3% on a basis of yearly average, almost the similar as the 3.2% growth perceived in 2012, and the International Monetary Fund anticipates the growth to increase to 4% in 2014 (Thomas Helbling, 2013).
The Pharmaceutical Industry of United States is one of the supporters of the US Economy. It has been perceived that the Pharmaceutical Industry of the United States is developing quickly and is demonstrating no indications of slowing down. The growth of the pharmaceutical industry in the U.S. is also recognized as playing a very important part in the pharmaceutical industries around the world. Some experts have said that in the development of the United States’ pharmaceutical industries, media has played a key role. Experts have seen the major influence in the way the media has provoked health awareness among the people.
Current Business Cycle’s Stage of the U.S. Economy Currently, the economy of the United States is in a stage of mid-cycle expansion. As indications of economic development seem to be gaining momentum, equity markets have solidly performed this year. In recent times, a boom in domestic energy and an increase in the housing market have been seen; while employment carries on to develop and grow.
Early this year, the fiscal cliff’s resolution stopped a self-inflicted damage to the economy, letting development force to endure. “The index of US Leading Indicators—made up of 10 economic components that historically have had strong predictive power on GDP growth—also appears to confirm that growth remains intact.” (Matthew Rubin, 2013). However, current indications are becoming a reason for concern. The overdue impacts of payroll tax modification and monetary reduction through repossession has seemed to surprise financiers. Current Credit Market Conditions
For consumers and for business loans, interest rates are lower this year compared to any other year. Credit exchange of U.S. government like discount, FFR and Prime rate are much lower. For example, there is a Prime rate of 3.25% and 10% more consumer loans are being given by the financial institutions. Still, loans for business are restricted and not given as easily as in the previous years. (“Beige book,” 2013) All these signs demonstrate that the market is starting to move and customers are beginning to buy and are content with the existing economy. CVS Pharmaceutical can invest in the market on this uptick by marketing with intention of attracting more customers. Conclusion
The market structure of the CVS Pharmacy is an oligopoly. It is a market structure in which a small number of organizations sell either differentiated or standardized products in which other organization’s entry is difficult. Price elasticity of demand indicates the decrease in the quantity demanded. Elastic-demand indicates that the customers of the service or good are extremely sensitive to change in prices.
CVS needs to think through numerous elements impacting its’ business so they may run smoothly. If CVS modifies the way they do business, they can impact their bottom line in many ways. In the past six months, global economic conditions have developed. Policymakers of advanced economy effectively resolved two of the major short-term threats to global activities—the threat of a sharp monetary reduction in the United States and a euro area breakup. The Pharmaceutical Industry of United States is one of the supporters of the US Economy.
It has been perceived that the Pharmaceutical Industry of United States is developing speedily and is demonstrating no indications of lowering down. Currently, the economy of United States is in a stage of mid-cycle expansion. As indications of economic development seem to be gaining momentum, equity markets have solidly performed this year.
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Board of Governors of the Federal Reserve, Twelfth District–San Francisco. (2013). Beige book. Retrieved from website: http://www.federalreserve.gov/monetarypolicy/beigebook/beigebook201304.htm?san_francisco
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