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In this paper I will reflect the evolution of the monopolistically competitive market and by doing so guiding the concept with an insight of the Mp3 player market and its actors. One of the actors on the Mp3 market is the IPod created by the innovating company Apple. The IPod was realised in March 2004 and was immediately a success. Easy to manoeuvre and with its attractive and appealing look it took the profits from other existing firms and became the current market leader.
Looking at the concept and the dynamics of a monopolistically competitive market we can foresee the future for the IPod and other firms in the Mp3 player market.
By doing so we can predict losses by designing business strategies for monopolistically competitive industries. Characteristics of Monopolistically Competitive Market To be able to describe the Mp3 player market we firstly need to explain different market structures and the theory of monopolistically competitive markets. There are different market structures, perfect competitive market, such the supermarkets, where the market only determines price.
The opposite market structure monopoly, a single firms dominates the market, can determine both its price and output.
Finally there are imperfect markets like oligopoly, where a couple of firms have monopoly over a product, and then monopolistically competitive markets. As it implies it’s a mix of perfect competition and monopoly where the Mp3 player is operating in. “Monopolistic competition is the form of imperfect competition, in which the market has sufficient few firms that each one faces a downward sloping demand curve but enough that each can ignore the reaction of rivals to what it does,” stated by Joseph Stiglitz (1993 p.
Stiglitz description refers to a market where a few number of firms compete on product quality, price, marketing and branding. The products in the market are substitutes and serve the same purpose e. g. the Mp3 player serve portable music with Mp3 files. To separate their products from rivals in the market, firms differentiate its product’s features such as colour, size, brand and so forth. This is called product differentiation and is an important unique characteristic for the market among with advertising and branding.
Second important characteristic of monopolistically competitive market is, like perfect competitive markets, there are no entry barriers. In the absence of barriers to entry, firms can entry and exit the market. Concept of monopolistic competition Mentioning product differentiation in the market, firms try to differentiate their brand and products and make them imperfect substitutes. As a result the firm faces a downward sloping demand curve. Marginal revenue is associated with demand curve and also faces a downward sloping curve.
This leads to a firm gain market power, and similar to monopoly, can set its own prices in the short run. As for any market the goal is to maximize economic profit, by producing quantity at which its marginal revenue equals to its marginal cost the firm. When existing firms in the market are currently making profits, by charging a price above their average cost and MR, firms gain a profit. Economic profit in the Short run The firm set its own prices since the firm is facing a downward sloping demand line that is higher than the marginal revenue (MR) and average total cost (ATC).
Since no barriers to entry new firms with new differentiated products enters the market in an attempt to gain some profit and market share. As new firms enter the market, market share and demand of each existing firm reduces and it’s demand curve shifts leftward (as seen in the graph below). Since number of substitutes enters the market, demand line also turns falter and more elastic. Demand line shifts from D to D1 and sets new lower price equilibrium. Since this entry introduces lower prices and more substitutes in the market it eliminates economic profit.
As firms incur in the short run economic losses, its no longer profitable and exits the market. Economic loss in the short run Demand is lower that average cost and the firm is makes an economic loss. This process continues until each firm’s demand curve eventually becomes tangent to the firm’s average cost curve as the graph below describes. The dynamics of Monopolistic competition is whereby a firm’s demand curve continuously shifts leftward as new firms enter the market until in equilibrium, monopolistically competitive firms no longer make any economic profit. Long run equilibrium
The absence of barriers to entry implies zero economic profit in the long run. The Mp3 Player Market An analysis of the Mp3 player market shows it has a small number of large firms sharing some market share amongst many small firms. The market has two types of music players in the Mp3 market- branded Mp3 players such as IPod, which are heavily advertised, and then generic (non-branded) players such as the Sweex MP472. The industry is dominated currently by one market leader, Apple’s IPod with an advantageous market share above 70% according to NPD Group Inc (2009).
Few have actually managed to rub the leader from its position. Though, this increases the competitive pressures on the rivals of Apple, which are fighting to win a bigger stake in the growing market by winning new customers, expanding new regions and taking market shares from Apple. As monopolistic competition describes if no barriers exist, economic profits in the long run is zero. In reality, however, industries possess characteristics that protect the high profit level and inhibit additional rivals from entering the market by heavy branding and marketing.
The market of Mp3 players can therefore be better described just as an imperfect competition. Impact of New Entries and Brand Loyalty Among branded firms in the market are Microsoft with its Mp3 player Zune, market share 2 % NPD Group Inc (2009), SanDisk with Sansa Clip, market share 11% (2009) and Creative’s Zen has a 2% market share (2009). Considering IPod’s leading advantage comparatively with its rivals, it questions a too high market power, which may not be disturbed by non-generic entries in the market.
To analyse whether new entries affects IPod’s market share or prices, we reflect the concept of cross price elasticity of demand (CED). It measures the sensitivity of the demand for a product (IPod) to changes in the price of another product (generic Mp3), implying the closer substitutes are, the higher (positive) cross price elasticity of demand will be. Therefore the cross price elasticity of two branded MP3 players will be higher than generic and branded mp3 player. If a branded Mp3 player enters the market, lets say Prada; it will have much more impact on the demands for IPods, since it’s a closer substitute.
But with the introduction of mobile phones with built-in Mp3 player as a generic entry, the Mp3 is thought to be in danger of replacement. According to Michael Porter (1986) the competition engendered from substitutes can also emerge from products outside the industry. These mobile phones are substitutes yet they are not rivals in the same industry. The IPod will then have to innovate its way out of becoming a replacement market. The impact of new entries and shifting demand can be reduce “with the effect of brand name on competition” suggested by Clement G. Krouse (1984, p. 495).
This emphasizes with a strong brand loyalty, developed by heavy advertising, well-planed marketing and successful differentiation it can persuade consumer to repetitively buy their products, which small competitors can’t match. Business Strategies Firms in a monopolistically competitive market can pursue several strategies to slow down the evolution of monopolistic competitive market and the erosion of their products. To discuss future strategies within the Mp3 market and the IPod, we need to define its weaknesses before rivals do. IPods weakest point is that has been referred as a trend.
The trend will in the long run decrease, which means branded firms with better design and with more fashionable features are a threat to the IPod. If Apple can continuously differentiate its product by ensuring that it possesses desired features that other products in the market lack, the firm can retain its market demand, charge higher prices and continue to make economic profit. The foremost business strategy in a monopolistic competitive market is continuous product differentiation. Differentiated services or location are also vital aspects of a firm’s differentiation.
Apple is a master to create complete solution, setting up competition package with the IPod, like ITunes and the ITunesMusicStore and almost creates a barrier for competitors to develop a competitor set. Even opening stores, Apple Store, round the globe is a genius strategy to strengthen ties with consumers. Being the market leader Apple does not only differentiates product but also doing so in a quick pace, preventing rivals to launch products in advance. As an example of Apple’s rapid launches is the new innovation Apple’s IPad (portable touch- screen).
Just after launching its first edition in Marsh 2010, the second edition was realised only 9 months after the first model. This creates extreme expectations of the brand Apple and is the main force to keep the trend alive. Strong brand loyalty and the products expectations make rival’s demands curve shift leftward, creating market power and share for Apple. Apple’s strategies can be discussed to a market that does not exits, and want to create so called blue ocean, and “make the competition irrelevant” (Kim & Mauborgne, 2005), by prohibiting new rivals to compete. Blue oceans strategy challenges companies to break out of Red Ocean of bloody competition by creating uncontested market space, that makes the competition irrelevant” (p. preface. x). Conclusion As long as consumers view a firm’s product as different, the firm can retain its market share and make profit. The key for firms in monopolistically competition is continuous product differentiation, otherwise products becomes to close substitutes and loses its market power. The Mp3 Player market is a good description of imperfect market structure, with imperfect products that needs to compete for consumption.
The market of iPod accessories is lucrative and increasing and there no doubt it can consider itself as strong market leader with its 70% market share. However, the IPod cannot operate as a monopoly as its wants, even by starting creating low barriers to entry. To set a high price in the market, there will have to be no Mp3 substitutes, and if Apple would start doing so it will lose a high number of potential buyers. And since we cannot predict that the IPod will always be the market leader, the Mp3 player market is monopolistic competitive market.
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