Market Structures: QFinance

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There are four main market structures, in which the companies may operate, including monopoly, oligopoly, monopolistic competition, and perfect competition. Each market structure differs from others by variety indicators. In order to reach competitive advantage and generate a proper income the companies should apply competitive strategy, which would respond the market structure’s conditions. Coca-Cola is one of the most successful producers of beverages around the world. The core topic of the current paper is comparison of variety market structures and competitive strategies consistent with the market structure that best aligns with the market in which the organization competes.

Even though some markets seem to be similar, there are no identical markets. The entire range of market structures is different, since it falls under diverse conditions of market economy. They differ according to many indicators, such as quantity of firms, which produce a certain kind of product, types of products (standardized or differentiated), ease of entry (very easy, relatively easy, limited or blocked), price controls (absent, limited, full control), and non-price competition (absent, emphasis on advertising, trademarks, typed). Moreover, government also affects market structure through adopting economic laws.

Nowadays, there are four main market structures, including monopoly, oligopoly, monopolistic competition and perfect competition. These market structures fall under two groups: real and ideal. Real market structure involves monopolistic competition and oligopoly, while the ideal market structure includes perfect competition and monopoly. There are many real-existing structures, which belong to oligopoly or monopolistic competition. For example, telecommunications and production of automobiles and cigarettes fall under oligopoly. On the other hand, monopolistic competition involves production of clothes, medicine and household appliances, as well as banking services, publishing of magazines, newspapers etc.

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According to a definition provided by QFinance,

Monopoly is a situation in which a single company or group owns all or nearly all of the market for a given type of product or service. By definition, monopoly is characterized by an absence of competition, which often results in high prices and inferior products. (“Definition of market structure,” n. d.)

Therefore, the impact of trusts and monopolies on business is quite simple. Monopolies depress the competition within the industry what leads to supply restrictions and increased prices.

There are many manufacturers, suppliers and sellers in a perfectly competitive market. Moreover, each of them cannot significantly influence the market price by changing the quantity of output. Each manufacturer or vendor supplies a small quantity of a specific product as compared to the total output. Therefore, changes in the production of a single company do not affect the market price. In other words, individual producers cannot move the market supply curve and, consequently, change the equilibrium (“Perfect competition,” n. d.).

Manufacturer are unable to influence the market price. Under the perfect competition, the market price is determined by the changes of demand and supply. By and large, perfect competition requires consumers, producers, and resource owners to be fully aware of the relevant environmental and technological conditions. Consumers have access to all pricing information. Manufacturers also are able to evaluate information about current prices and technological innovations. Resource owners should know all about the potential of their resources. Therefore, everyone has an equal opportunity to participate in purchasing, selling, production, and marketing.

Under the perfect competition, all resources are fully mobile. In other words, each resource unit is free to enter the market or leave it, quickly switching from one type of use to another (Stapleford, 2009). That is why, such market structure as perfect competition is very efficient, since none of the producers or consumers is able to affect the market price. Beverage industry is not an example of perfectly competitive market, since the producers may affect the market prices. In addition, the products are not standardized, rather they are differentiated. Thus, Coca-Cola does not operate in perfectly competitive market.

As it has been mentioned before, the chosen organization is Coca-Cola. It is the major producer of soft drinks in the world. In order to identify the market structure in which the company operates, the market share of the company and its main competitors are considered.

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It should be noted that the Beverage Digest provides the activity results of the beverage industry every year. The outcomes of the U.S. carbonated soft drinks market are presented in Table 2. According to the data provided in Table 1, the Coca-Cola’s market share increased from 41.9% in 2009 to 42.4% in 2013. Additionally, it is evident from the data given in Table 1 that the Coca Cola’s market share has decreased because of the global financial crisis. For example, the company’s market share declined from 42.8% in 2007 to 41.9% in 2009. That is why the global financial crisis had a significant impact on the Coca Cola’s performance.

Table 1

Companies Ranked by CSD Market Share

2013 2012 2011 2010 2009 2008 2007
Coca-Cola Co. 42,4 42 41,9 42 41,9 42,7 42,8
PepsiCo 27,7 28,1 28,5 29,3 29,9 30,8 31,1
Dr Pepper Snapple 16,9 16,8 16,7 16,7 16,4 15,3 15
Cott Corp. 4,5 4,7 5,2 4,8 4,9 4,7 4,8
National Beverage 2,9 2,9 2,8 2,8 2,7 2,8 2,5
Monster Beverage Co 1,6 1,4 1,2 1 0,9 0,6 0,8
Red Bull 1,3 1,1 1 0,8 0,7 0,7 0,6
Rockstar 0,7 0,7 0,6 0,5 0,5 0,4 0,4
Big Red 0,7 0,6 0,6 0,5 0,4 0,4 0,4
Private label/other 1,3 1,7 1,5 1,6 1,7 1,6 1,6
Total CSD 100 100 100 100 100 100 100

According to the results provided in Table 1, it can be concluded that three biggest producers of carbonated soft drinks controlled approximately 87% of the U.S. soft drinks market. There are several methods used in order to measure the company’s market power. One of them is the Herfindahl-Hirschman Index, which “is a measure of market power that is defined as the sum of the squares of the market share of each firm in an industry” (Farnham, 2014, p. 215). Based on the data provided in the report, it was calculated that the HHI decreased from 2975.28 in 2009 to 2874.1 in 2012. Furthermore, the HHI decreased from 3112 in 2004 to 3039.68 in 2008 and 2886.24 in 2013. Since the market’s HHI reduced, the level of monopolization of the soft drinks’ market weakened during the analyzed period.

The maximal HHI of 100 happens when one company controls 100% of the market. Thus, the market of carbonated soft drinks can be identified as oligopoly, since three producers control over 85% of the market.

It is also worth mentioning that companies face different levels of competition in each market structure. Perfect competition is the most competitive market, since there are many buyers and sellers and no one can influence the market price. Different producers manufacture a standardized product and, that is why, there is only a price competition in the perfectly competitive market. Monopolistic competition is characterized by low competition, since producers may manufacture either standardized or differentiated goods. That is why non-pricing competition is possible in the monopolistic market. Oligopolistic market is characterized by the restrictive competition, since several producers share the control over the whole market. In turn, there is no competition in monopoly, since one company keeps under control the whole market.

There are three competitive strategies that the Cola-Cola company can apply to maximize its income in a long run. Competitive strategy is defined as a method used by the company to achieve any competitive advantage against other rivals in the market. There are three common types of competitive strategies, including cost leadership, differentiation, and focus strategy. Taking into account that the Coca-Cola Company provides products for practically all social groups, the best strategies for the company to undertake will be cost leadership and differentiation. Based on the company’s scales of activity, Coca-Cola should use the cost leadership generic strategy. This strategy is often applied to gain higher profitability, or to increase company’s market share.

The Coca-Cola Company applies the grand strategy that helps it to become a successful provider of beverages worldwide. This strategy is to provide such products that is can satisfy as many people as possible.

It is worth mentioning that because the U.S. economy is recovering, it can be expected that demand for beverages will increase. However, the price elasticity of demand should be also taken into account when choosing the best competitive strategy. Due to a high number of substitutes, the demand for soft drinks is elastic, since the buyers can easily replace the demanded products. That is why the best competitive strategy that can be used by Coca-Cola is cost leadership. However, the company may also use differentiation to achieve competitive advantage under the conditions of elastic demand. Such strategy is related to the conditions of oligopolistic market in which the company operates. The company may also apply such strategy as focus strategy, which indicates the company’s marketing efforts on several target market segments and usage of marketing mix to attract customers on that segments.

It is also worth emphasizing that the considered strategies do not have serious ethical issues. Many companies around the world use these strategies. In addition, these strategies are related to the company’s current value and they can be used to maintain the company’s market share.

To conclude, many indicators, including non-price competition, conditions of entering on the market, control over prices, type of product, etc. form different market structures, such as monopoly, oligopoly, monopolistic competition and perfect competition. The Coca-Cola Company operates in the oligopolistic market. Taking into account the conditions of the market, the company should use such strategies as cost leadership and differentiation.