Adidas is an example of a firm that operates in a monopolistic competitive market. The first characteristic is that the sportswear industry has many numbers of firms which compete with Adidas; the firms include puma and the Nike brands. In the year 2013 Nike held 31% of the global market share, Adidas had 16% of the market whereas puma, New balances and Rebook had 6% of the market shares (Fanaroff, 2013). Also, Adidas offers sports shoes that are similar to those of rival companies. However, Adidas products are never a perfect substitute for the other firms’ product as the physical appearance of the goods is differentiated (Colorado.edu, 2018). The product differentiation enables Adidas to invest heavily in advertising to attract new customers using the unique features of the product. Selective advertising empowers the company to mitigate considerable risks associated with high operating expenses which reduces the overall net income (Jayawardhana, 2016, p. 79). In 2016 the company spent over four million dollars in advertising across the United States. Thirdly, there is resource mobility which makes it easy for new entrants to enter the market. Therefore, Adidas has established brands across Europe and America. The British administration also allows franchising whereby rebook use the Adidas brand to market their products. Adidas Company generated revenue of 1.77 billion euros from the sale of Rebook product in 2016.
Short run analysis
In the short-run, the firm wants to maximise profits thus, continue production so long the marginal revenue exceeds the minimal cost. A monopolistic firm realises either abnormal gains or losses. When it is making abnormal profits, new firms fail to join the industry in the short- term. Also, the firm has maximum benefit in the short run and engages in innovation and product differentiation to continue earning profit. Also, the firm strives to ensure that its average total cost remains less than the market price to make an economic profit.
Figure.1. illustration of the short-run analysis of oligopolistic structure, Economic profit (Spaulding, 2018)
D is the Market Demand
ATC = Average Total Cost
MR = Marginal Revenue
MC = Marginal Cost
The profit = (Price- Average total cost)*quantity
Figure.2. illustration of the short-run analysis of oligopolistic structure, short run loss (Spaulding, 2018)
D is the Market Demand
ATC = Average Total Cost
MR = Marginal Revenue
MC = Marginal Cost
Short run loss= (ATC - Price) × Quantity
Long run analysis
The monopolist has time to use existing resources at any level that maximises profit. However, there are cases of underutilization of resources.
Figure.3. illustration of the long-run analysis of monopolistic market structure (Spaulding, 2018)
D is the Market Demand, ATC = Average Total Cost, MR = Marginal Revenue, and MC = Marginal Cost
At point 1 the MR = MC while at position 2 the market price= Marginal cost= Allocative efficiency, At point 3 Productive efficiency =minimum ATC (Spaulding, 2018).
New firms can also enter the market if they see that the already existing firms were making a profit in the short term thus, increasing the number of differentiated goods in the market hence the company demand curve shifts leftward. The demand figure shifts until its tangent to the average cost the quantity of output whose production translates to maximum profit. Once the demand curve is tangent to the profit-maximising level of output economic profit is equivalent to zero, and the new firms lack the motivation to come into the market. Therefore, in the long term, competition from an increased number of firms’ results in earns normal profits amongst the market players(Spaulding, 2018).
Analysis of Rolex market structure
Rolex operates under an oligopolistic market as it is under the watch industry. The company experiences minimal competition as there are few sellers of high-end watches in the market. Therefore, Rolex pays close attention to it significant competitors because whenever the firm changes it, policy other rival firms feel the effect of the policy. Consequently, rival firms tend to act fast by implementing policies which will undermine what companies like Rolex intend to introduce (Chand, 2018).
` Also, with the growth in living standards in nations like China and the Middle East people need to be aware of the Rolex watches so that they can purchase the commodity and counterfeit watches (Chand, 2018). Besides, research emphasises on how important advertising is for firm operating in an oligopolistic sector because failure to advertise can make customers drift their attention to the product of rival firms like Cartier. Also, the company controls the prices of its product whereby the firm decides when it is prudent to increase the cost of the product or reduce the rate. Rolex uses celebrities like movie actors to promote brand awareness amongst the consumers. Another difference between the monopolistic and oligopolistic market is that in oligopoly there are many barriers to market entry. The watch industry requires a significant amount of capital to start operations as the raw materials are expensive. Finally, Rolex produces its unique products and never undertakes franchise. Therefore, new firms fail to benefit from the brand's name.
Figure.4. illustration of a kinked demand curve in the short run analysis ((Spaulding, 2018)
The profit maximisation level is at Q1.and the oligopolistic price is at point p1 that is where the demand curve is kinked. MC=marginal cost while MR=marginal revenue.D represents demand.
Long run analysis of oligopolistic market
The oligopolistic market has many barriers which prevent the new firm from entering the industry, but there is no stiff competition. Thus existing firms can make supernormal profits.
Similarities between the monopolistic and oligopolistic market structures
Both the monopolistic and oligopoly are market structures which offer the company control over the market as such they determine the price of their goods. The market structures also, operate in markets that are experiencing imperfect competition whereby, in oligopoly, the market has few sellers when compared to the buyers. On the other hand, the monopolistic market has many sellers when compared to the buyers. Also, the market structures are present in industries that can adequately sustain their operations. Lastly, the two market structures tend to have demand curves that are sloping downwards because of price elasticity and also, substitution alternatives.
Differences between oligopolistic and monopolistic market structures
Oligopolistic markets have a small number of relatively large companies offering similar products whereas the monopolistic markets have a significant number of businesses offering similar products that are differentiated. Secondly, the barriers to entry in an oligopolistic market are relatively high when compared to the obstacles entrepreneurs face when entering a monopolistic market. Also, in oligopoly, the decision making on prices of their product is profoundly affected by the competitors whereas in the monopolistic competitive environment a firm never considers the opinion of the competitors in decision making. Lastly, under the oligopoly market structure, the firms have perfect knowledge about their cost and demands (Guru, 2018). However, under monopolistic market, both the buyers and sellers lack ideal expertise on market demand.
The effect of a monopolistic market on business and consumers
A monopolistic firm enables enterprises to survive especially startups because it presents a minimal barrier to entry to the market. Secondly, such kinds of markets facilitate differentiation which helps businesses provide unique services and products. Finally, the market structure nurtures innovations amongst firms. For the monopolistic consumers, they get an opportunity to meet their tastes and preferences because the products are differentiated (Colorado.edu, 2018). However, the market structure is disadvantageous because occasionally differentiation results to resource wastage and also profit maximisation causes inefficiencies in the long run.
The effects of an oligopoly market structure on the business and the customers
Oligopoly benefits the firm enables a firm to reap huge profits due to the economies of scale. Also, the market structure encourages research and development which brings about new ideas that are profitable when exploited. Even the firms enjoy low costs emerging from technological improvement; a reduction in cost translates into higher profit which will enable a firm to withstand price wars. There are few sellers thus less competition, and also there is no monopoly which would adversely affect the firm. Consumers also spend little time making purchase decision because the products are almost similar (Tucker, 2010)
References
Chand, S. (2018). Pricing Determination under Oligopoly Market | Economics. Online Resource. Available at: http://www.yourarticlelibrary.com/economics/pricing-determination-under-oligopoly-market-economics/28916 [Accessed 16 May 2018].
Colorado.edu. (2018). CCEE Economics - Unit 8 Main. [online] Available at: https://www.colorado.edu/Economics/courses/econ2020/Unit8/Unit8-main.html [Accessed 16 May 2018].
.Fanaroff, H., 2013. Adidas vs Nike in Europe. [Online] (Updated 7 Feb. 2013).Retrieved from http://iesabroad2013.blogspot.co.ke/2013/02/nike-vs-Adidas-footwear-industry.html. [Accessed 15 Feb. 2018].
Guru, s. (2018). The Kinked Demand Curve Theory of Oligopoly. [online] Your Article Library. Available at: http://www.yourarticlelibrary.com/oligopoly-market/the-kinked-demand-curve-theory-of-oligopoly/37335 [Accessed 16 May 2018].
Jayawardhana, A., 2016. European Journal of Business and Management. Financial Performance Analysis of Adidas Ag. Vol.8 (11), Pp. 79-82
Spaulding, W. (2018). Monopolistic Competition: Short-Run Profits and Losses, and Long-Run Equilibrium. [online] Thismatter.com. Available at: https://thismatter.com/economics/monopolistic-competition-prices-output-profits.htm [Accessed 16 May 2018].
Tucker, I. (2010). Microeconomics for today. 6th ed. Boston: Cengage Learning.
