ECO 550_WEEK 8_Assignment 3_MARKET MODEL PATTERNS OF CHANGE_FINAL_1
ECO 550_WEEK 8_Assignment 3_MARKET MODEL PATTERNS OF CHANGE_FINAL_1
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Date Created: 11/15/15
Running Head: MARKET MODEL PATTERNS OF CHANGE 1 Market Model Patterns of Change June Chase, Anielli de Padua Guimaraes, & Jaye Jones Professor Gil Ramos ECO 550: Managerial Economics June 09, 2013 MARKET MODEL PATTERNS OF CHANGE 2 Describe the business and explain the general pattern of change of the particular market model indicating how this change is likely to impact business operations. From 1984 until 1996 AT&T was an integrated telecommunications services and equipment company succeeding in a newly competitive environment (AT&T.com, 2013). Today, AT&T is a global networking leader, focused on delivering IPbased solutions to enterprise and government customers. Additionally as AT&T pivots away from traditional consumer services. The company continues to offer consumers and small businesses a breakthrough alternative to traditional services such as Voice over IP. The telecommunication market in the United States has evolved into an oligopoly. The telecommunication market structure consists of few sellers who are highly sensitive to each other’s pricing and marketing strategies. There are few sellers in the market and it is difficult for new sellers to enter the market as there is a high barrier to entry. Each seller is alert to the competitors’ strategic moves. Verizon decided to demand that all new Smartphone buyers pay for unlimited voice and unlimited texting, AT&T simply followed suit, copying the Verizon pricing strategy. AT&T utilized pricing, managing cash flows, and the impact of changes in competitors’ prices to manage the price elasticity. Since demand is elastic, a reduction in price increased quantity demanded by a greater percentage than the price decline, resulting in more revenues for AT&T. Neither company appears to have any real interest in competing via creating contrasts in their monthly plans or trying out different pricing models. Mimicking your largest rival’s pricing MARKET MODEL PATTERNS OF CHANGE 3 model is not an emblem of healthy competition. This is a strategy pursued in an Oligopolistic market structure (Kuttinen, 2012). Hypothesize the basic shortrun and longrun behaviors of the model in the business you have chosen in a “market economy.” Provide support for your assumptions and conclusions. In the short run, the firms work together in a way so that collectively they behave like a monopoly. That is, the companies behave as a cartel to maximize their joint profits. Cartels are agreements between most or all of the major producers of a good to either limit their production and/or fix prices (about.com, 2013). Cartels are generally illegal in the United States. Thus the cartel referenced here is of the unspoken kind .However, at this level of output every firm has an incentive to “game the system” and produce a little more to increase their individual profits, at the expense of the other firms, since producing more lowers the market price. This behavior pushes the output level above the monopoly level, to a new equilibrium. At this equilibrium, firms are still maximizing their individual profits. However, they are doing so by taking on the behavior of the other firms and taking advantage of the usual churn of market share as consumers become more and more dependent on wireless communication and look for the right fit, based on real and perceived benefits. In an oligopolistic market like telecommunications where there are a few heavily concentrated master players engaged in the masterful art of market gaming. There is room for long run profits. These profits are managed via product and resource allocation efficiencies that drive profit maximizing output that in turn keeps price and revenues above marginal and average total costs. For longevity, to supplement all of the above, is the breadth and depth of reach of MARKET MODEL PATTERNS OF CHANGE 4 integration via (1) the phased ending of the copper wire era and extending the internetbased broadband service to the tune of $14 million investment (Troianovski, 2012), and (2) acquisition of retail operations such as Atlantic TeleNetwork, Inc to the tune of $780 million (Business News, 2013), and (3) continuous launching of new services, like Aio Wireless (Gryta, 2013) in new locations. Explain the major factors that affect the degree of competitiveness in your business. Use the data to develop at least three (3) measures (e.g., productivity measures) to show how the industry is evolving. Provide evidence supporting your rationale. The power of the buyers in terms of consumer demands and desires around choice in product and price is a factor. The threat of substitutes must also be considered. Unless a new entrant can come with a highly innovative and/or newly patented offering, the big players are set to do titfortat around offerings. Because of this awareness, the major players engage in ultimate competitive game of price, product, service and advertising. AT&T and Verizon are the two biggest companies in the wireless market in the United States. These two companies decide every year the amount of money they want to spend on advertisement in order to increase the number of customers. Both of the companies know that there is an amount of customers that switch from their original providers to another in order to get a better bundle of services. Basically, AT&T and Verizon, not only spend money in advertisement to promote their new bundle deals, but also to gain more and more customers. MARKET MODEL PATTERNS OF CHANGE 5 Research two (2) of the business’s closest competitors to determine the pricing strategy for each business indicating how knowledge of this information may influence pricing decisions in your business. Provide support for your rationale. Verizon and T Mobile stand as close competitors to AT&T. Verizon has a higher pricing strategy than AT&T while Tmobile's price is lower. The Verizon Wireless Company launched a new pricing strategy plan on June 28, 2012. This plan unfolded to shake up the United States wireless market with long anticipated shared data plans restructuring pricing and bundling of voice, text and data. Existing customers are not required to switch from their current plans. However, those customers with multiple phones and devices, use a lot of data, such as watching videos, may find cheaper prices under Share Everything (Gelles, 2012). On the other hand, consumers with lowercost plans that limit texting and voice minutes may find the Share Everything plan costlier. TMobile’s endeavor in the Pricing Strategy is in price penetration tactics to capture more customers (thus, more wireless market share). TMobile bluntly advertises prices at an average of $28 dollars cheaper than their top competitors (Verizon and AT&T). They tout lower prices at equal par quality, giving the consumer more for their dollar. They do this very well. As a MARKET MODEL PATTERNS OF CHANGE 6 telecommunication service owner TMobile’s pricing strategy decision could be one to watch. T Mobile offers a multiplerange of products, from hotspot capable devices to @Home VoIP services, to WiFi for laptops with seemingly great plans for lower rates. T Mobile’s found it wise not to go too far with price slashing. The company must stand firm as a worthy competitor. It is important not lowering so as to subordinate TMobile's positioning in consumer's view which could prove detrimental overall to TMobile's business and image (EuroAsianism, 2009) Recommend a pricing policy for the business you chose. Assess how your pricing policy maximizes profits for the business. Provide support for your rationale. There are several types of pricing strategies when combined, or used in various measure at appropriate times to develop the pricing policy. First, is cost based pricing, second value based pricing; third, is demandbased pricing; and fourth, is competition based pricing. The best case scenario is to use a combination the four pricing strategies (enotes.com, 2013). This enables the company to reap maximizing profits and increase or defend their market shares. Maximizing profit is the goal of all businesses, it must be inherent in the strategic plan to be nimble in responding to market conditions. For example, there are two ways to increase profits from any product: increase sales of the product, or increase the price of each product sold. However, nearly all products are pricesensitive: increasing sales of the product tends to require lower pricing. The key to maximizing the profitability of any product is altering the price to test how this affects sales, and then choosing the price with the highest returns, and covering all costs (Business News, 2013, p 44). MARKET MODEL PATTERNS OF CHANGE 7 References AT&T.com (2013). The history of AT&T. Retrieved on May 29, 2013 from: http://www.corp.att.com/history/ Business News (2013). Telecommunication Reports, 79(3), p.44. Retrieved June 8, 2013 from: GeneralOneFile.Web Economics.about.com (2013). Definition of cartel. Retrieved June 6, 2013 from http://economics.about.com/od/termsbeginningwithc/g/cartel.htm Enotes.com, (2013). Pricing Policy and strategy. Retrieved on May 29, 2013 from http://www.enotes.com/pricingpolicystrategyreference/pricingpolicystrategy EuroAsianism (2009). TMobile‘s distribution and pricing strategy. Retrieved on May 29, 2013 from http://whoseintmosfaves.blogspot.com/2009/04/pricingstrategyoftmo.html MARKET MODEL PATTERNS OF CHANGE 8 Gelles, J. (2013). Verizon Wireless' new and more rational pricing plans. Retrieved on May 29, 2013 from http://www.philly.com/philly/blogs/consumer/VerizonWirelessnew andrationalpricingplans.html Gryta, T. (2013, May 10), AT&T launches new prepaid venture. Wall Street journalEastern Edition, p.B2. Retrieved June 8, 2013 from: http://online.wsj.com Kuttinen, T. (2012). Are AT&T And Verizon Finally Going Too Far? Retrieved on May 29, 2012 from http://www.forbes.com/sites/terokuittinen/2012/08/24/areattandverizon finallygoingtoofar/ Troianovski, A. (2012, November 8). AT&T move signals end of copper wire era. Wall Street JournalEastern Edition. pp. B1B4
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