According to McConnell and Brue (2004), a monopoly occurs when a single firm is the sole producer of a product for which no close substitutes exist. Since the United States Postal Service (USPS, 2008) has no close substitutes, competition does not exist. The Postal Service’s universal service obligation (USO) is broadly outlined in multiple statutes and encompasses multiple dimensions: geographic scope, range of products, access to services and facilities, delivery frequency, affordable and uniform pricing, service quality, and security of the mail (USPS 2008).
When monopolists are not protected by law from competition, the companies may have to keep their prices low in order to keep competition from entering the market. However, USPS is considered a pure monopoly and barriers of entry are in place. USPS is the only federal operating system that sends and delivers mail. USPS has competition in the market with services such as package delivery. Now, the agency has to compete with major companies such as UPS and FedEx. United States Postal Services depends on operation funding from postage and fees.
Comparatively, the Postal Service provides a higher level of service and does so at low, affordable prices (USPS, 2008). The University of Phoenix (UOP) is an institution for profit and it operates in a market structure with pure competition. According to McConnell and Brue (2004), “pure competition involves a very large number of firms producing a standardized product (that is, a product identical to that of other producers, such as corn or cucumbers). New firms can enter or exit the industry very easily,” (University of Phoenix, 2004).
There are many universities, colleges, community colleges, and vocational schools for students to choose from. They offer education in the U. S. and overseas. Different educational institutions offer programs that are identical or similar to UOP. However, the tuition is not the same for all schools. UOP does not have a perfect substitute because of the many campus locations and varied degree programs. UOP does not have a significant control over the price of education. It can not change the market price; it can only adjust to it. University of Phoenix participates in Federal Student Aid grant and loan programs with attractive terms.
All students seeking federal financial aid benefits must be admitted to a financial aid eligible degree or certificate program in order to determine financial aid eligibility. In order to be eligible for tuition deferment under the Financial Aid Plan, at least 50% of student’s annual tuition must be funded through the federal financial aid benefits and there are extremely strict policies that the UOP must adhere to in order to be eligible for Title IV. University of Phoenix observes the federal regulations regarding student loan requirements, including pricing and non-pricing strategies.
The Arizona Student Loan Code of Conduct is designed to create and ensure uniform student loan practices that focus on the best interest of borrowers. In the Arizona Student Loan Code of Conduct, restrictions are defined to manage the relationships among school employees, learning institutions, lender advisory board members, and student loan organizations. In education, universities can freely enter and existing firms can freely leave purely competitive industries. According to McConnell and Brue (2004), “a few industries more closely approximate pure competition than any other market structure.
In particular, we can learn much about markets for agricultural goods, fish products, foreign exchange, basic metals, and stock shares by studying the pure-competition model. Also, pure competition is a meaningful starting point for any discussion of price and output determination. Moreover, the operation of a purely competitive economy provides a standard, or norm, for evaluating the efficiency of the real-world economy,” (University of Phoenix, 2004). Nike is an example of a monopolistic competition. This type of market structure has many sellers. Each firm in this market sells only a small share of the industry’s output.
The key to this is product differentiation. While there are many firms selling similar products, it’s the price and quality differentiation that makes the consumer choose one product over another. (Forgang & Einolf, 2006) These markets are extremely competitive and each manufacturer tries to appeal to the consumer on a different level of expert service or material. (University of Phoenix, 2004). The Nike swoosh has certainly become a brand mark that consumers are willing to pay a higher price for, however, Nike must also consider the current economy and the value offered for that higher price.
Their products must truly be manufactured with superior quality and materials. Nike must walk a fine line with their pricing strategy. Too high a price will cause the consumer to opt for a less expensive brand and too low a price will not offset the superior manufacturing or costs paid to athletes to endorse or assist with design on the product. Therefore, Nike continuously battles between a relative price for the average consumer and making an acceptable profit. Also, Nike must constantly put a new, trendy product on the market.
Styles must change frequently and certain quantities of the product must be produced without saturating the market with similar products. The niche Nike has chosen is to eliminate certain styles within a time frame therefore, causing the consumer to upgrade to the newest, latest, styles. The J. C. Penny Company, commonly known as “Pennies,” is an American department store aligned with the practice of oligopoly. The characteristics of oligopoly have commercial groups entwined in price collusion while refusing to compete on the basis of price.
It was noted by McConnell and Brue that commercial groups “share of the total market is typically determined through product development and advertisement,” (University of Phoenix, 2004). In short, oligopoly happens when a certain market is manipulated by small commercial groups. In most cases, there are two or more commercial groups controlling the market. Pennies is a retail store that carries a wide verity of health and beauty products, fine jewelry, electronics, clothing for infants, teenagers, men and women, and home decor.
In most cases, oligopolies would avoid using price cutting methods. Oligopolistic commercial groups are highlighted by the existence of several commercial groups having significant portions of the market. Those commercial groups buy into calculated behavior and they have a hard time existing without each other. Consequently, the actions of one commercial group can be directly affected by the moves of rival groups and the products they produce may virtually be nearly uniform or meaningful. Another example of an oligopoly (overt) is the OPEC cartel.
According to Kaplan (1999), an oligopoly is an industry that is dominated by a few firms that display highly coordinated behavior and examples of oligopoly include the auto and oil industries. Concerning the oil industry, the oil cartel OPEC (Organization of the Petroleum Exporting Countries) is a pure example of an oligopoly. OPEC is the alliance of thirteen countries that have significant influence on the price of international oil and “creating a balance between oil supply and demand” (Iran, 2008). Generally, oligopolies operate in collusion or employ price leadership.
OPEC relies on these secret agreements (collusion) to govern oil in the international market. Additionally, these countries can unify and offer prices “in response to changes in costs or demands”, making other firms react quickly (Kaplan, 1999). “It is not uncommon to see several gas stations on the same block with identical prices even though they appear to be in a very competitive environment. If one stations cuts the price per gallon, the others must quickly follow of they will rapidly lose market share as consumers switch to the lower priced station” (Kaplan, 1999).
This uniformity still does not have the power to ignore consumer taste. When examining the dynamic history between OPEC and consumers, it is clear that there is a cause-and-effect for OPEC’s decision. For example, OPEC has famously used oil as a leverage tool to importer nations. In 1973, OPEC and a supplementary organization decided to place an embargo on oil and subsequently raised the price of crude oil. However, Western nations transitioned creatively as they found new oil markets in other countries. Thus, the price hike did not have much bearing on the Western nations. The monopolist seeks maximum total profit, not maximum price. The monopolist shuns higher price because they yield a smaller-than-maximum total profit. Some high prices that could be charge would reduce total sales and total revenue too severely to offset any decrease in total cost” (McConnell & Brue, 2004). Moreover, OPEC miscalculated production and consumer demand for oil, which resulted in too much oil production in the world market. Thus, prices began to decline due to surplus while OPEC lost much revenue and division because of competing opinions on oil prices and arguments about oil production.
Recently, the 9/11 attacks and the Iraqi invasion prompted world oil prices to rise higher than OPEC quotas, which severely impacted the purchase price to Western consumers. Yet, automobile firms began vehicles with alternative fuel options, hybrid models, and decreasing the retail prices of vehicles during the economic recession. Additionally, many consumers have reacted to price hikes by using public transportation, carpooling, purchasing hybrid or alternative fuel vehicles, and/or moving closer to the city. Lastly, Western importer nations are discovering new oil markets separate from OPEC.
Still, collusion allows OPEC to “reach agreements to fix prices, divide up the market, and otherwise restrict competition amongst themselves. By controlling price through collusion, oligopolists may be able to reduce uncertainty, increase profits, and perhaps even prohibit the entry of new rivals” (McConnell & Brue, 2004). In respect to today’s global economic condition, a recession can severely disable a cartel’s ability to manipulate output and increase profits. “Long-lasting recession usually serves as an enemy of collusion because slumping markets increase average total cost.
Firms find that they have substantial excess production capacity, sales are down, unit costs are up, and profits are being squeezed. Under such conditions, businesses may feel they can avoid serious profit reductions by cutting price and thus gaining sales at the expense of rivals” (McConnell & Brue, 2004). As recently as November 2008, OPEC is considering reducing oil output. “But if crude prices continue to fall, then an additional OPEC cut may be needed. “The producer group agreed to cut output from November 1 by 1. million barrels per day (bpd) after oil prices dived from a July record of $147 a barrel to less than that. Venezuela said on Tuesday it will propose another cut of 1 million bpd at the cartel’s next meeting” (Iran, 2008). Thus, “investor concerns over further declines in crude oil demand under the impact of the global financial crisis have kept pressing recent oil prices lower” (Iran, 2008). With the drop in gas prices, consumers are able to purchase more gas based on oil price reduction, income, and inelasticity of gas as a resource.
In the Market Structures Simulation, Quasar starts as a leader in the industry with its technology. Quasar has the monopoly on the market at the start of the scenario. After the initial surge of manufacturing and selling the products, Quasar realizes it must invest in advertising and upgrades to production to keep the edge. Orion begins to produce a similar product at a lower price. Quasar must understand that stabilizing the price at this time will create an oligopoly market structure and stabilize the industry.
As Quasar adjusts its price accordingly, profits stay steady and Quasar is able to invest in its own branding and innovation once again. As time goes on, we see Quasar move to a perfect competition where inventory is reduced, manufacturing processes are improved, and prices are stable. At this point, Quasar needs to maintain its market share by staying on top while continuing to increase the efficiency of its processes to maximize profits.