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Monopolistically competitive markets can be characterised as having few barriers to entry and exit, producers influencing market prices with no firm having control over the market price, and brand loyalty that allows companies to increase prices without losing all customers (Anold, 2010). A connection between brand loyalty, price competition and market entry barriers could be illustrated with an example of the monopolistically competitive MP3 player market.
Technology standards and popularisation of MP3 players have already been completed. Taking the lead in compatibility with various contents, extension of devices related to product design and MP3 players based on high-tech function, miniaturisation and mass storage are the main factors dominating the market.
With regard to the compatibility of devices with various contents related to MP3 players, companies are executing joining hands strategies. Accordingly, the most important is the issue of design that is based on miniaturisation, mass storage and high-tech functions (Electronic parts institute, 2006).
The total annual market value of portable music players is almost ï¿½ 500 million (Mintel 2005).
According to the recent In-Stat report, the Hard Disk Drive (HDD)-based and Flash-based players market should grow from 140 million units in 2005 to 286 million units in 2010 (In-Stat, 2006). The major factors that will drive the growth of the MP3 player market over the next five years include the availability of legitimate subscription, falling price points and pay-per-download online music sites as well as increasing Flash memory capacities and enhanced functionality of MP3 players (In-Stat, 2006).
Throughout the assignment, the link between brand loyalty, price competition and barriers to entry will be developed further.
Moreover, it will be demonstrated with an example of the fast growing MP3 player industry. Finally, factors affecting brand loyalty, market entry barriers and price competition will be illustrated.
Brand loyalty has consistently been connected to profitability (Hoch, 1993). It seems clear that the expenses of attracting a new customer have been found to be much higher than the costs of retaining old ones. Moreover, loyal customers are generally less price susceptible and the existence of a loyal customer base provides an organisation with sufficient time to react to competitors’ actions. A significant number of loyal clients is a competitive asset for a brand as well as a main determinant of its power (Hoch, 1993).
Advertising could potentially induce brand loyalty in customers that would otherwise buy the cheapest alternative available on the market ((hioveanu, 2007). However, according to the Kaldor’s opinion, advertising is not considered a key determinant of brand loyalty (Kaldor, 1949). In contrast, Lambin found that brand loyalty and its empirical counterpart, buyer “inertia”, seriously suffered from product qualities and were not necessarily affected by advertising. Lambin concluded that advertising influences brand loyalty only to the extent that it provides product information (Lambin, 1976). Massey and Frank provided strong evidence that the price of an advertisement and price elasticities are the same for loyal and non-loyal consumers (Massey, 1965).
One of the most complicated parts of entering the MP3 player market would be to overcome Apple’s reputation. There are numerous consumers who have an established brand loyalty with Apple products, in general, and iPod, in particular, and therefore would not switch easily to anyone other brand. Accordingly, in order for a new MP3 player to be successful in the current market, it should have a better design, be cheaper and should have an absolutely new look to the MP3 industry. Therefore, there are no major technological barriers to enter the existing MP3 player market (AppleInsider Staff, 2006).
Barriers to entry
Considering barriers to entry to the MP3 player market, the cost of entry is comparatively low. In addition, Apple, the market leader, has constantly made high profits and is extremely successful in the MP3 industry. High industry profits attract an ever-growing number of potential rivals that are trying to enter this lucrative market.
Moreover, there are no major legal barriers to enter the market. This could be exemplified by Apple that does not have any patents on the MP3 technology (Barney, 2008). Consequently, potential new entrants are open to use any available technology. Hence, if competitors could create an MP3 player, they are welcome to try and sell their products on the relatively open market. Furthermore, companies could examine economies of scale that should lead to constant minimisation of product costs. This could be a significant barrier for new entrants. Therefore, for a new entrant the first start up costs are high, but not impossible (Barney, 2008).
One of the ways to raise the profit margin is to charge a higher price to consumers. However, companies could only be successful when their products have a perceived value for customers.
Overall, the static analysis of Bain suggested three types of barriers: economies of scale, absolute cost advantages and product differentiation (Bain, 1956). In contrast, Stigler suggested that “a cost of production must be borne by a firm which seeks to enter an industry, but not by firms already in the industry” (Stigler, 1968).
Currently, Apple had contracted with Samsung, the first flash memory creator, to buy 40% of Samsung’s flash memory production (Apple, 2010). As a result, Apple had a considerably low price on this important element of an MP3 player. Having flash memory production with reasonable prices allowed Apple to produce an iPod Nano which uses flash memory rather than hard drive (Apple, 2010). The new deal with Samsung allowed Apple to produce more advanced and innovative products. In contrast, rivals lacking this technology found it difficult to compete with Apple in this segment.
Not only due to various advantages as a result of the Apple and Samsung contract, but also owing to economies of scale, Apple managed to obtain nearly 80% of the market share for its iPod. Furthermore, since the iPod Nano market launch, some competitors such as Rio and Olympus stopped their production and left the market even having high-quality products (Skee, 2009).
New competitors could not offer such a wide and good range of products as Apple. This activity coupled with the iTunes Music Store allowed Apple to be the only profitable online music trader (Crawford, 2007). Accordingly, Apple’s iPod and iTunes along with iTunes Music Store help the company to become the market leader (Evans,2005).
iTunes Music Store accessories became highly important since they use its own dock connector, so effectively an iPod could only use iTunes Music Store accessories. Moreover, iPod accessories cannot work with other MP3 players. In addition, these accessories are typically quite expensive. These two factors forces consumers to stick to an Apple’s iPod when changing their MP3 players. The major reaction from the competitors’ side was to develop an industry standard for a common portable device connector (Evans, 2005).
Apple has numerous advantages owing to it is large size and historic leadership in this market. However, a particularity of Apple is that it strongly protects its own technologies such as format and connector, to name a few. This adds additional barriers to entry the MP3 player market.
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