Marketing Structure and Pricing Decisions

Both potential and existing competitors influence average industry profitability. The threat of new entrants is usually based on the market entry barriers. They can take diverse forms and are used to prevent an influx of firms into an industry whenever profits, adjusted for the cost of capital, rise above zero. In contrast, entry barriers exist whenever it is difficult or not economically feasible for an outsider to replicate the incumbents’ position (Porter, 1980b; Sanderson, 1998) The most common forms of entry barriers, except intrinsic physical or legal obstacles, are as follows:

Loyalty programs include frequent flier miles or points systems associated with credit card offers that can be used only with the original company, creating a perceived loss or cost when switching to a competitor. Most programs are able to get consumers to spend more money just to get to free or bonus item.

This force analyzes the ease or difficulty of a new player entering an industry. Industries that are profitable but have minimal barriers to entry attract many players who make the profits to plummet. Profits decrease when a large number of firms compete for a limited market share (Hill & Jones, 2010). Therefore, existing players, particularly in a profitable industry, should create extensive barriers to entry to deter new firms from entering the industry.

Charles, R. Pricing problems in automobile insurance: an economic analysis. Journal of Risk and Insurance

Market Structure: Meaning, Characteristics and Forms | Economics. (2014). YourArticleLibrary.com: The Next Generation Library. Retrieved 25 April 2016, from http://www.yourarticlelibrary.com/economics/market/market-structure-meaning-characteristics-and-forms-economics/28736/

The threat of new entrants presents the possibility that new firms will enter the industry and diminish industry returns by passing along value to buyers in the form of lower prices and raising the cost of competition. (Dutta, 2010)

A monopoly exists when an organization produces and sells a good or services for which there are no close substitutes and other organizations are prevented by some type of entry barrier from entering the market (Thomas & Maurice, 2010). The entry or potential entry of a new organization into a market can gradually destroy the market power of existing organizations by increasing the number of substitutes (Thomas & Maurice, 2010). Therefore, an organization can have a high degree of market power only when strong barriers to the entry of new organizations exist (Thomas & Maurice, 2010). A strong barrier of entry exists when a new organization has difficulty entering a market were existing organizations are making a profit (Thomas & Maurice, 2010).

There are several different market structures in which organisations can operate. The type of structure will influence a company’s behaviour and the level of profits it can generate. The structure of a market refers to the number of businesses in a market, their market shares and other features which affect the level of competition in the market. Structures are classified in term of the presence or absence of competition. When there is no competition, the market is said to be concentrated. A scale from perfect competition to monopoly can be found below.

Entrants erode the market and rarely grow it enough to the incumbent’s advantage. New entrants have an impact on the industry business but at a moderate level. This is mainly because new firms will find it difficult to compete against the incumbents’ strong brand, like Starbucks and McDonalds, and because the market is saturated. However, the costs of entry are relatively low. Most of the raw materials are cheap and the distribution chain is not complicated. This makes it easy for new companies to enter the market. Also, established companies might leverage their brands as they enter the industry to compete against the incumbents.

Oligopoly Oligopoly is a market structure in which the number of sellers is small. Oligopoly requires strategic thinking, unlike perfect competition, monopoly, and monopolistic competition. • Under perfect competition, monopoly, and monopolistic competition, a seller faces a well defined demand curve for its output, and should choose the quantity where MR=MC. The seller does not worry about how other sellers will react, because either the seller is negligibly small, or already a monopoly. Under oligopoly, a seller is big enough to affect the market. You must respond to your rivals’ choices, but your rivals are responding to your choices.

The team will identify the four market structures, Pure Monopoly, Oligopoly, Monopolist Competition and Pure Competition in the forms of industrial organization.

Macy's is one of the premier retailer franchises within the United States. To begin, Macy's Inc. is one of the nation's largest and well known department store chains. Started over 150 years ago, Macy's has continually generated excellent returns for its shareholders and employees. Currently, in the midst of a global recession, Macy's has generated huge profits with same store sales increasing 5.3% year to date. In 2012 same store sales increased 4.6% in the month of February alone (Macy's Inc., 2012). In fact, throughout the duration of 2012, Macy's is projecting even larger profits for its underlying business operations. Even though Macy's has experienced success with both its assortments and brand, its competitors haven't faired so well. Sears, due in part to part to a lackluster holiday season, has been forced to close nearly 120 locations to generate excess liquidity in an effort to shore up its balance sheet (Isadora, 2011).Other competitors who cater specifically to the middle class consumer have also lost significant amounts of market share as consumers trade down due to the economy. Macy's, with its ride array of assortments and products continues to grow as it attempts to capture market share from failing competitors. Macy's is also unique as it operates in a unique market demographic. It is upscale, but not to the extent of Saks Fifth Avenue or a Nordstrom. It is also not as low scale as a JC Penny

Another quality of perfect competition that may be overlooked, but is vital to this industry is the ease of entry into the market. Start-up franchises within this market structure can begin operating with relatively low initial investments (compared to other industries). This is not the case where monopolies are concerned. There are numerous barriers to entry into monopolistic market structures, capital being one of the most prominent barriers.

If an industry is profitable, it will become a magnet to attract more competitors looking to do same business with us. If it is easy for these new entrants to enter the market, this poses a threat to the firms already competing in that market. Threat of new entrants is one of the forces that shape the competitive structure of an industry (Marc, 2014). A high threat of entry means new competitors are attracted by the profits of the industry and can enter the industry easily. New competitors entering the marketplace can make the market share and profitability of existing competitors more threaten cause the existing competitor to make some changes to existing product quality or price levels. A high threat of new entrance can make an industry more competitive and decrease profit potential for existing competitors whereas a low high threat of new entrance can make an industry less competitive and increases profit potential for the existing

Entry of firms into a market is an important mechanism in the economy. Entrants have an equilibrating function. Firms will enter the market if the profit level is above the long-run competitive level. As a result of entry, the profit level will decrease to the long run competitive level. Entrants are also important agents of change. Firms with new ideas or production processes will enter the market. Thus these two effects of entry contribute to allocative as well as to dynamic efficiency in the market. However, several mechanisms can prevent firms from entering the market. In other words, there can be barriers to entry that harm the allocative and dynamic efficiency and are therefore detrimental for industry dynamics and economic welfare. From this perspective, it is clear that lowering barriers to entry or preventing that these barriers are created is an important issue in competition policy. All the bright-eyed founders thought that rattling off a list of differentiating features was a good thing. But it was a terrible idea. Because focusing on a single thing a singular product feature, an outstanding experience, a particular service means you’re on the right track to standing out in the marketplace. Big companies differentiate by having multiple products. They win because they can offer a single solution and minimize customers’ pain of having to work with multiple companies. Big companies usually have lots of resources and mediocre products so it makes sense