In an economy, different types of market structures and strategies exist. They include perfect competition, oligopoly, monopolistic competition, and monopoly. Each of these structures has distinct characteristics that determine its efficiency, competitiveness, and fairness.
In a perfect competition market structure, numerous small firms provide a wide variety of goods and services. The companies have balanced market power because a single organization does not control the industry. This type of structure promotes fairness because all entities get equal opportunities to sell their merchandise. Businesses sell homogeneous products, and entry into and exit from the market is free (Hayek, 2016).
Theoretically, this market type attains productive efficiency because it can result in a socially optimal level of output due to the absence of rivalry. The price of commodities is even because production occurs at the least possible average cost (Hayek, 2016). Allocative efficiency results from the sale of products that are made within a set range of the marginal cost. Moreover, a large number of buyers and sellers, the ideal mobility of goods and factors, and the perfect knowledge of market conditions increase market efficiency (Hayek, 2016).
This market structure is characterized by the presence of a large number of firms that sell differentiated products and the absence of productive and allocative efficiency. Businesses compete against each other and possess the freedom to charge higher prices for their merchandise within a specific range (Cowan, 2018). Fairness is slightly lower than in perfect competition because firms can influence market prices to a certain degree. In that regard, consumers may choose certain products over others. The structure is efficient because of a large number of sellers, product differentiation, and the freedom of entry and exit of businesses (Cowan, 2018). Policy changes by one seller do not influence the sales of others.
Perfect competition is characterized by productive inefficiency because prices lie on the downward-sloping segment of the average cost (AC) curve rather than on the bottom end (Cowan, 2018). In monopolistic competition, price is higher than the marginal revenue since the demand curve slopes downward, and the number of goods produced is low and the prices are high. Monopolies are inefficient because, at the optimal output, the prices of goods exceed production costs (Cowan, 2018). Besides, the firms operate with excess capacity, and therefore, they are unproductive. The profit maximization production is less than the minimum average cost.
This type of market structure exhibits limited competition because only a small number of businesses control the market. The firms can either compete or collaborate to adjust prices and earn higher profits (Head & Barbara, 2017). Concerning efficiency, oligopolies are unproductive the prices of goods and services usually exceed marginal costs as the firms fail to carry out production in the least cost style. For that reason, the minimum average-cost output is very high (Ovodenko, 2016).
Fairness is non-existent because few firms control the market and prices. Besides, there are many barriers to entry and new entrants find it difficult to operate because of the harsh business environment created by the dominant corporations (Head & Barbara, 2017). Collusion among dominant firms is one of the major sources of unfairness as it prevents smaller companies from competing effectively (Ovodenko, 2016).
A monopoly involves the domination of an industry by a single firm that determines the prices of products. Profit maximization is achieved through the reduction of production quantities (Pethokoukis, 2018). In many economies, monopolies are undesirable because they are usually characterized by limited choices and expensive goods compared to other types of market structures. Monopolies do not achieve efficiency because of insufficient merchandise and higher prices (Pethokoukis, 2018).
A lack of competitive pressure leads to a disregard for the importance of supplying enough merchandise and cutting expenses. The price of goods is higher than their marginal cost (Pethokoukis, 2018). Fairness is absent in monopolistic markets because prices are determined by the dominant company, which makes it difficult for smaller firms to operate.
Coca Cola’s Market Type
Coca Cola New Zealand operates in an oligopolistic market. As mentioned earlier, an oligopoly involves a small number of firms producing or selling a certain product within a specific industry (Head & Barbara, 2017). The soft drinks market in New Zealand has three main players, namely, Coca Cola, Frucor, and Fonterra. These companies compete with each other to sell different types of beverages. In an oligopolistic market structure, interdependence exists between firms.
The profit that an organization earns is dependent on the price of its commodities as well as the decisions of its competitors. For example, if Coca Cola lowers the price of a product, it will attract customers from Frucor and Fonterra, and both companies will act to counter the new price. A decrease by one firm results in a downward adjustment by its competitors to avoid the migration of customers to firms that offer cheaper products (Canadean Limited, 2016). The three corporations engage in strategic behavior because the decisions made by one of them affect the profitability of the others.
In many oligopolistic markets, businesses replace price cuts with the non-price competition. In that regard, they invest a lot of money marketing their products to differentiate them from the rest and increase sales (Canadean Limited, 2016). For example, Coca Cola advertises Coke as containing less sugar and calories compared to other products (Canadean Limited, 2016). Coke, Frucor, and Fonterra have created numerous barriers to entry in the soft drink industry in New Zealand. It is difficult for new entrants to compete with the established firms.
In an oligopolistic market, new companies encounter barriers to entry because few firms control the industry. Coca Cola New Zealand is the dominant company, and together with the other two, they control the entire market (Canadean Limited, 2016). The dominance originates from the application of advanced technologies, aggressive marketing, and advertisement, availability of products, low cost of production, and quality customer service (Canadean Limited, 2016). Its distribution channels, bottlers, and suppliers are highly effective. Brand loyalty is one of the reasons that prevent new firms from succeeding. Coca Cola’s strong brand and wide recognition provide competitive advantages that new entrants find difficult to beat (Canadean Limited, 2016).
The Effectiveness of Coca Cola’s Operation Mode
Coca Cola’s mode of operation is ineffective because of several reasons. First, the company invests a lot of resources in product differentiation as competitors sell similar merchandise (Canadean Limited, 2016). Its global positioning is enhanced by factors that include the communication of product strength based on user perception, the company’s reputation for quality and innovation, and the presentation of the corporation as a fun brand.
Coca Cola is famous for spending billions of dollars on advertising its various products. It presents itself as a company whose products bring joy and happiness to customers (Canadean Limited, 2016). Its different brands include Lemon Coke, Diet Coke, Vanilla Coke, and Cherry (Canadean Limited, 2016). Unique packaging is also an effective differentiation strategy that the firm uses. For instance, classic Coke and diet Coke are sold in red and black packages respectively.
Second, the corporation channels a large portion of its revenue to marketing initiatives. Its competitors sell comparable products that have a similar appearance and taste. As a result, Coca-Cola uses advertising to convince customers that its products are the best. This marketing strategy facilitates the introduction of new products into the market, enhances brand awareness, and increases sales (Canadean Limited, 2016). Moreover, it has ensured that the company has developed a comprehensive product and brand portfolio. Despite the corporation’s ineffective mode of operation, it is fair. Its wide range of products meets the various needs of customers (Canadean Limited, 2016).
The situation can be improved by improving the quality of products and lowering prices. Innovation is an effective strategy to create a competitive advantage, attract more customers, and improve brand loyalty.
Market structures can be divided into four classes, namely, perfect competition, oligopoly, monopolistic competition, and monopoly. They differ concerning fairness, effectiveness, and competitiveness. In perfect competition markets, all firms have equal power and compete with each other. In a monopolistic market, several companies that offer differentiated products determine the prices of goods and rely on innovation to increase sales. Oligopolistic markets are typified by a few businesses that dominate the market. Monopolies involve single corporations that control industries and create inefficiency. Coca-Cola New Zealand is an oligopoly because it operates in an industry with few firms that compete with each other.
Canadean Limited. (2016). Coca-Cola Amatil Limited: Consumer packaged goods, company profile, SWOT & financial analysis. ProQuest. Web.
Cowan, S. (2018). Regulating monopoly price discrimination. Journal of Regulatory Economics, 54(1), 1-13.
Hayek, F. A. (2016). The meaning of competition. Econ Journal Watch 13(2), 359-372.
Head, K., & Barbara, S. J. (2017). Oligopoly in international trade: Rise, fall, and resurgence. Canadian Journal of Economics, 50(5), 1414-1444.
Ovodenko, A. (2016). Governing oligopolies: Global regimes and market structure. Global Environmental Politics, 16(3), 106-126.
Pethokoukis, J. (2018). A Schumpeterian look at monopoly and big business. ProQuest. Web.