In the introduction for this course, you were challenged to watch for three things you were curious about the economy. Use this curiosity as a springboard to preparing a 400 – 500 word exploration (roughly 1-2 pages) in which you pick an industry/market and develop an argument for what type of market structure that the industry must compete in. An example would be the bowling ball industry. The bowling ball industry includes all manufacturers of bowling balls. The company, Brunswick that makes bowling balls is not the industry, it is a member of the industry.
In your capstone write up, make sure you:
Compare and contrast your industry to each of the three characteristics of the market structure you chose and explain why the industry fits each of the characteristics of the market structure. In addition, explain why this industry is an example of market failure.
Then make a conclusion about which type of market structure your industry fits best.
Abstract
My capstone essay focuses on the Automotive Industry. The automotive industry falls in an oligopoly market structure. The oligopolistic market is dominated by a few firms competing for the biggest market share. The most powerful companies act as gatekeepers for all the raw materials, physical and financial resources, thus creating barriers for new companies. Blocking entry of new companies in the market gives the dominant industries the freedom to set their prices. However, if the prices are exaggerated, buyers will look for alternatives from new and upcoming small companies. Interestingly this is variably difficult in an oligopoly as companies face major setbacks launching substitute products since there are limited buyers to purchase the new products. This topic has been an eye-opener for me, and it has invigorated the need to appreciate economics and economics’ foundational principles. I feel that I have gained more knowledge of the market structures than I did at the beginning of the course.
For this essay, I will focus on the automotive industry. I choose this topic for my capstone essay because I am passionate about cars, and I like to stay updated on the industry’s latest technology and innovation.
The automotive industry falls in an oligopoly market structure. The oligopolistic market is dominated by a few firms competing for the biggest market share. Although it is relatively easy to enter the market, it is not easy to penetrate the market since they are already three to five well-established companies. While there is no fixed number of firms in an oligopolistic market, 3-5 is considered the norm.
The automotive industry manufactures homogeneous and monopolistic products. All companies in the automobile sector produce vehicles with similar components and functions to facilitate goods/people’s movement from one destination to another (Aurora University, 2017). On the other hand, automobiles are differentiated in terms of models and style, thus creating a differentiated product. The automobile industry has an extensive chain of products and services that serve millions across the world.
A new entrant in the automotive industry will face immense challenges because it is already saturated with the product. The most powerful companies act as gatekeepers for all the raw materials, physical and financial resources, thus creating new entry barriers. These barriers hinder the growth and development of new firms. Blocking entry of new companies in the market gives the dominant industries the freedom to set their prices. However, if the prices are exaggerated, buyers will look for alternatives from new and upcoming small companies.
Interestingly this is variably difficult in an oligopoly as companies face major setbacks launching substitute products since there are limited buyers to purchase the new products. As a result, oligopolistic markets accrue short-term profits and long-term profits if the entry companies are blocked, and the significant players continue dominating the market. Automotive industries allocate huge budgets for advertising, marketing after-sales services, guarantees, and discounts to increase non-competition in the market. If successfully implemented, these marketing techniques can maximize profits for the automobile industry. Similarly, these companies use these marketing companies to use these tactics to foster brand loyalty.
As stated earlier, the automotive industry is an oligopoly in which few firms dominate the market. The market share is shared between the major players. The industry is highly competitive, and small firms have limited access to the market. However, like all industries with commitment and perseverance, small companies can operate in the market. So, in this case, an oligopolistic market has more buyers than sellers. Companies in an oligopolistic market either collaborate or compete with another (Aurora University, 2017). When firms choose to collaborate, they agree to regulate pricing, production, and profits and production levels to suit sellers’ and buyers’ dynamic relationships. They leverage the market influence and collective market power to set favorable prices that increase capital investment to maximize their profits. In this market structure, the consumer is the price takers; thus, they do not necessarily influence the pricing.
Throughout this project, I have gained in-depth knowledge of the automotive industry and its market dynamics, market structure, and the factors influencing entry and exit. This topic has been an eye-opener for me, and it has invigorated the need to appreciate economics and economics’ foundational principles. I feel that I have gained more knowledge of the market structures than I did at the beginning of the course.
References
Aurora University. (2017, November 18). A Guide to Types of Market Structures. Retrieved from Aurora: https://online.aurora.edu/types-of-market-structures/
