Week 2-LT Maximizing Profits within Markets
Week 2-LT Maximizing Profits within Markets
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Date Created: 11/17/15
Running head MAXIMIZING PROFITS WITHIN MARKETS Maximizing Profits Within Markets ECO415 September 13 2010 Patrick 039 Donnell MAXIMIZING PROFITS WITHIN MARKETS 2 Maximizing Profits within Markets PepsiCo Pepsi is a huge corporation bringing numerous products to various countries Many people look at Pepsi as a corporation that has to compete in possessing the best product with the best price With Pepsi uent in many countries Pepsi has to control their products by applying them to different markets Depending on the country and the product different markets may be the only way for Pepsi to control how they look at their product from a consumer s perspective This paper will discuss the differences in the four market types explain how a firm can maximize profits in the four market types identify Pepsi s market type discuss the affect of this market type of Pepsi s ability to maximize profits and the optimal profit maximizing strategy for Pepsi Differences between the Four Market Types When choosing a market type Pepsi has to look at the four market types and compare which would be better for their products With this comparison in mind Pepsi needs to decide what is beneficial to their consumers Not only does Pepsi want the consumer to enjoy the product but also Pepsi wants the consumer to prefer the Pepsi price The four market types will place Pepsi in the right arena so that the company can be competitive and become successful with their products The four market types are Perfect Competition Monopolistic Competition Oligopoly and Monopoly All of these market types are different but also similar so they can work together Perfect Competition is a market type that shows each company that sells a product that is identical that all companies are price takers all companies have a relatively small market MAXIMIZING PROFITS WITHIN MARKETS 3 share and the buyers know the product being sold and the prices that are charged by each company Investopedia 2010 The Monopolistic Competition is a market type that shows each company that sells a product that is similar but not substitutable products all companies enter the industry if the profits are attractive profit maximizes and all companies have market power Investopedia 2010 The Oligopoly is a market type that shows each company that sells a product that is a situation in which a particular market is controlled by a small group of firms Investopedia 2010 The Monopoly is a market type that shows each company that sells a product that 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 Investopedia 2010 Pro t Maximization in the Four Market Types Perfect Competition A firm maximizes profits by producing a volume of output at which marginal revenue equals marginal cost Benasko Dranove Shanley amp Schaefer 2007 p 199 A firm competing in a perfectly competitive market can maximize profits by charging the right price for the output the firm produces Charging too much for a product can translate into zero sales especially if another firm in the same market offers a similar product at a lower price Besanko et al p 200 2007 Maximizing profits in this market type is all about pricing Charge enough to cover costs but not too much A perfectly competitive firm must decide how much output to produce and sell to maximize profits Besanko et al p 200 2007 Monopoly MAXIMIZING PROFITS WITHIN MARKETS 4 Many think a monopoly can raise prices to any level the firm chooses thus maximizing profits This is not the case At some point even monopolies can lose customers Besanko et al p 202 2007 To maximize profits a monopolistic firm selects price so that the marginal revenue from the last unit sold equals the marginal cost of producing it Besanko et al p 202 2007 This means that the firm will maximize profits when the additional cost of producing the last unit is the same as the amount of additional revenue the firms looks to make on that unit are equal Monopolistic Competition A monopolistic competitive firm maximizes profits the same way as a monopoly but only in the shortrun Monopolists Profit maximization 2010 para 1 In the longrun in this type of market new firms can enter the market because the firms are attracted to the positive economic profits Monopolistic competition in the longrun 2010 para 1 As new firms enter the market the availability of differentiated products increases As this occurs demand shifts until a firm s economic profits are zero With the entry of new firms a firm in the monopolistic competitive market will earn normal profits similar to a perfectly competitive firm Monopolistic competition in the longrun 2010 para 2 Oligopoly An oligopoly will maximize profits in comparison to the few competitors in the same market The author s of Economics of Strategy describe an oligopolistic firm as maximizing profits when the firm chooses the level of production that maximizes its own profits given the level of production it guesses its competitors will choose and vice versa Besanko et al p MAXIMIZING PROFITS WITHIN MARKETS 5 209 2007 One oligopolistic firm s profit maximization is dependent upon the firm s ability t forecast a competitor s production output PepsiCola Company s Market Type PepsiCo operates in an oligopolistic market Three conditions are required that must be met in an oligopolistic market including containing only a few large firms high barriers to entry and producing a differentiated or homogeneous product Condidtions for an oligopolistic market 2010 para 1 For Pepsi all three conditions are met Only a few large firms exist in the market like CocaCola 7Up and Dr Pepper High barriers exist in entering the carbonated beverage market as the four large beverage firms carry much of the market share and have obtained customer loyalty to keep all or most of that share Pepsi has a homogeneous product line to CocaCola and differentiates some of that product line from Coke and the other two large competitors in the market Affect on PepsiCola s Ability to Maximize Pro ts Companies conducting business in an oligopoly providing products with virtually no differentiation acquire high risk in pricing However PepsiCola Company s products are different from the competition s products and nonprice competition is essential to compete effectively with CocaCola SevenUp and Dr Pepper Apart from advertising and marketing strategies to persuade consumers the soft drink industry offers horizontally differentiated products A product is horizontally differentiated when only some consumers prefer it to competing products Besanko et al 2007 p 204 Therefore Pepsi s loyal client base maintains a certain percentage of demand for Pepsi over the competition regardless of the competitor s price MAXIMIZING PROFITS WITHIN MARKETS 6 A monopoly structure enables a firm to increase prices without any competitors to respond and a perfect competition structure creates standardized products at equal prices across an industry In contrast companies in an oligopoly are reactive to the competition especially with product differentiation Besanko et al 2007 Because the soft drink industry is an oligopolistic structure and the effects of horizontal differentiation in regard to the few firms in the industry each company carries its share of devoted consumers The outcome an oligopoly provides for Pepsi s profit maximization strategy restricts the probability for the company to gain an additional number of new loyal consumers Therefore Pepsi must only compete with the competition and fair pricing to preserve its percentage of market share while generating enough revenue to pay the marginal expenses accumulated through operations PepsiCola s Optimal Pro t Maximizing Strategy Operating in an oligopoly market structure PepsiCola competes with CocaCola Seven Up and Dr Pepper as mentioned For PepsiCola to build a profit maximizing strategy the company must gain an understanding of the market conditions regarding the quantities and the prices of the competition According to Besanko et al 2007 in an oligopoly market structure it is more reasonable to expect that the pricing and production strategies of any one firm will affect rivals pricing and output decisions p 209 For the reason that consumer preference among soft drinks is subjective e g Pepsi is sweet CocaCola is bitter products are not equal and illustrate differentiation by each corporation Furthermore horizontal differentiation in an oligopoly becomes improved through brand loyalty As suggested by Besanko et al 2007 the competition in the soda industry compete using price aggressive strategies p 209 Both Pepsi and Coke aim to destabilize one another s sales with aggressive pricing MAXIMIZING PROFITS WITHIN MARKETS 7 The Bertrand model is an oligopoly model that allows firms to calculate an equilibrium price or the price of the merchandise that causes equivalent sales for the firms involved in the oligopoly To maximize profits if Coke reduces the price of its products Pepsi will also reduce the price of its goods to generate an equilibrium price If the equilibrium price is greater than or equal to the marginal costs of Pepsi the company is maximizing its profits Besanko et al 2007 p 211 Therefore the optimal profit maximizing strategy for Pepsi in the oligopoly structure is to develop an equilibrium price with the competition The equilibrium price is achieved by adjusting to the actions of the competition s output Use of the Pro t Maximizing Strategy Employing aggressive pricing enhanced through brand loyalty Pepsi has leveraged an extensive distribution network to create profit in an environment where only the big names can compete Even the smaller names such as Sierra Mist a Pepsi Product are owned or distributed by the big two Smaller beverage companies such as Sobe will try to operate at a higher price point though the advantage of a larger bottling and distribution network meant that it and most others is eventually acquired by the large corporations The margins expected in the market segment that Pepsi occupies means gaining a profit is done by cutting costs and operating efficiently at production distribution and tapping into new markets Investors expect the company to increase its value and in a saturated market this can be tricky but Pepsi has managed to do this consistently Observing the difference in price between independent and large bottlers and the large bottlers such as Pepsi can purchase the smaller companies illustrates that even though oligopolies are generally considered a disadvantage to consumers Fierce competition between MAXIMIZING PROFITS WITHIN MARKETS 8 Coke and Pepsi provides a market that smaller companies with sufficient capital could threaten market share The result is a positive for consumers because a very efficient and competitive market develops despite the few players currently involved Pepsi also increased its effectiveness by purchasing other companies not directly beverage related though can either promote and sell Pepsi products or benefit from their current resources One example of this is Taco Bell Taco Bell sells exclusively Pepsi products but will often try out new products at their stores allowing not only a guaranteed market but also a place to conduct market research Developing excitement through exclusive products and promotions that the beverage arm can provide such subsidiaries create a synergy between the two Conclusion Each market is unique although they share certain characteristics with other similar markets The beverage market including Pepsi Co appears to be a largely oligopolistic market characterized by a few big players The complexity of the distribution network brand loyalty and razor thin margins make this a difficult market to enter so the large players have little challenge with the exception of each other Pepsi is a household name that like any intelligent company uses anything it can to gain a competitive advantage Using acquisitions and clever advertising Pepsi has proven to be any major corporation s rival Dealing with a saturated market means reinvesting wisely and Pepsi s investments have turned it from an upstart Coke rival to a multinational holding company with a wide range of investments and products Pepsi requires constant attention and innovation but beverages remain the core of its business MAXIMIZING PROFITS WITHIN MARKETS References Besanko D Dranove D amp Shanley M Schaefer S 2007 Economics of strategy 4th ed Hoboken NJ John Wiley amp Sons Inc C1iffsNotescom 2010 Conditions for an oligopolistic market Retrieved from httpWWWcliffsnotescomstudyguideConditionsforanOligopolistic MarkettopicArticleId9789articleId9777htm1 C1iffsNotescom 2010 Monopolistic competition in the longrun Retrieved from httpWWWcliffsnotescomstudyguideMonop01isticCompetitioninthe longruntopicArticleId9789articleId9776htm1 C1iffsNotescom 2010 Monopolists Pro t maximization Retrieved from httpWWWcliffsnotescomstudyguideMonopolistsProfit MaximizationtopicArticleId9789articleId9775html Investopedia 2010 Monopoly Investopedia Retrieved September 12 2010 from httpWWWinvestopediacomtermsmmonopolyasp Investopedia 2010 Oligopoly Investopedia Retrieved September 12 2010 from httpWWWinvestopediacomtermsooligopolyasp Investopedia 2010 Monopolistic Competition Investopedia Retrieved September 11 2010 from httpwwwinvestopediacomtermsmmonopolisticmarketasp Investopedia 2010 Perfect Competition Investopedia Retrieved September 11 2010 from httpWWWinvestopediacomtermspperfectcompetitionasp
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