Product Differentiation and Market Structures
Discuss about the Products Differentiation and Wage Rates.
There are four types of markets structure. It is important for the investor to understand each and every of these structures before making investment decisions. The four structures include; competitive market, monopolistic markets, oligopoly markets and the monopoly. While in some like the competitive markets, the influence on prices is limited, in others, the investor has complete control over the prices. Bain (1962) in his discussion on the barriers to entry noted three major categories (ignoring the legal exclusions). These categories were; the advantages of economies of scale, advantages of product differentiation and the advantages of absolute costs. Product differentiation is a term used to refer to a situation where a product is same as the other, but it has been enhanced to make customers perceive it as different from the other. The products are however not perfect substitutes. Waterson noted that product differentiation is an economic distance between products. Differentiated products are perceived as unique and therefore are able to fetch higher prices in the market than in the initial form.
Wage rate is in the real sense supposed to be determined by the demand and supply forces. However, in order to solve some other economic issues such as poverty eradication, political forces from the government are exerted on the wage rates. For instance, in order to alleviate poverty, the government sets a wage floor below which any employer should not compensate their employees.
The field competition for brands is more crowded than ever. It becomes difficult for consumers to make a decision on what products to buy when they are faced with too many product choices. They become overwhelmed and ends up walking away. This poses the rationale for the need of investors to introduce new ways to make their products stand out by making them unique. Customers perceive a unique product to be of a greater value. The primary goal of all investors in the market is to make significant profits by maximizing their products or service sales. Product differentiation answers the question; why should the consumers by what am selling and not buy from my competitors? Customers need a clear image of what a business is offering and its comparison with what the competitors are offering.
Products that are not clearly defined poses some confusion to the customers and puts them off. If an investor goal of maximizing his wealth is to be achieved, a once-off expenditure on product differentiation is a necessary condition. If the differentiated products appeal to the target market, your brand gains a competitive advantage over all other closely related brands.
In most cases especially in the competitive markets, the sellers compete in terms of the price of goods and services they offer. Thus, in a competitive market where the sellers are many, and the products are the same, product differentiation may have very little or no value. Welker (2016) noted that this strategy of product differentiation is only applicable and profitable to the markets with imperfect competition. In our case here, we are considering the application of non-price competition. This is as observed in the oligopoly markets, where the products produced are homogeneous. George, Joll, and Lynk (1992) noted that oligopolistic markets could compete by varying their product’s characteristics rather than altering their prices. It is, therefore, an important sales strategy.
In an oligopolistic market, firms make decisions on the quality of the goods to be produced but is also faced with a challenge of competing firms providing a wide range of products that may limit its profit. However, successful migration to differentiated products induces a barrier to entry for new firms that may not be having the huge capital necessary to produce the differentiated products. It therefore raise the profits of the incumbent firm. It is also important for monopoly firms to keep new entrants completely out of the market. Barriers to entry places the industry in four general areas. First, is the blockaded entry, which allows the established firms to price at very high prices (monopoly prices) without allowing inducing new entrants into the market. Second, is the easy entry, which doesn’t allow firms to raise their prices even slightly as new entrants will join the market. Third, is the ineffectively impeded entry, where profits is lower when firm operates at a price that doesn’t induce entry; entry should be allowed if the firms were to maximize short term profits. Lastly, it’s the effectively impeded entry, where it is more profitable to operate at a price that doesn’t prompt entry than when entry is induced by maximizing short run profits.
The cost of production is bound to increase when firms are improving the quality of their products. The increase could either be on the fixed or the variable cost depending on the strategy taken for the improvement. If research and development is the picked strategy for improvement, it’s the fixed cost that will increase. However, if the improvement depends on highly priced raw materials, it’s the variable costs that will be raised. It is in the former group where natural oligopoly belongs where the increase in variable costs is slow with the product improvement.
Product differentiation allows for the direct association of products with their manufacturer by the consumers; a strategy that benefits both the producers and the consumers. The major benefits to the producers is that it builds up goodwill and brand loyalty among its consumers. Consumers benefit in that the producing firm has to protect its reputation and maintain the improved quality products. The advantages of product differentiation include; the establishment of brands, company gaining some reputation, superior product design control, and favored distribution control Bain (1956).
The BLS Occupational Employment Statistics (OES) survey defines wage as a straight-time gross pay. This includes any other incentive pay such as production bonuses, commissions and tips. The only pay not included in wage determination is premium pays and some other bonuses, for instance, profit-sharing payments. The variation in worker’s pay is shown by the percentile wages.
Fig: Illustration of Percentile Wages and Wage Difference
As shown in the illustration above, at the 10th percentile point, 10 % of the workers made less than $ 35,250, while 90 % made more than this. The median percentile is the point where half of the workers earned below $75,620, whereas the other half earned more than that. At the 90th percentile, 90 % of the workers earned below $ 141,210, whereas 10 % earned more than that. The wage difference is the difference between the low earners and the high earners.
Torper noted that jobs are different from each other and that the skills brought to a job, and the abilities of the workers are unique. In the same occupation, these variations are responsible for the pay variations. The wage difference becomes bigger as these variations become more pronounced.
The wage paid to workers in the same industry varies greatly. This is because their ability to work and their working effort varies. Some of the workers have spent many years in training institutions earning the skills they hold today. Most employers request for credentials before they offer someone a job opportunity. Those who lacks the credentials are considered fit for such a position. However, some job vacancies in many firms require people with fewer skills and are able to provide hard labor. Although these are the people who do the biggest proportion of the production activities, they receive the lowest wage rates. Wage differential also exists across occupations because of the supply and demand forces. In economies where the education level for its citizens is low, it means that the highest population won’t be able to perform skilled tasks. Therefore, these people seek to be employed in the same areas. This raises their supply for labor, consequently enabling their employers to lower the wage rate.
Experience is a major factor in wage differences. Workers who have been in the job for long are considered to have gained more experience and are thus more productive than the beginners. Beginners, therefore, earn less as compared to these experienced workers. Occupational wages vary by employer and industry. The reason why wages differ from one employment to the other is the training requirements, clientele, and diverse working conditions, among other reasons.
Similar position descriptions are present in specific occupations. In every business, there ranks in the business operations. The heads of each business operation will earn more than those under his/her command. Also, workers could be holding similar positions, but the job assigned to them is different. Those in more complex jobs earn more. Geographical location also contributes to wage differential. Job occupation in some areas pays well than similar jobs in other areas. For instance, jobs in urban areas pays well than in the rural areas.
There exist extreme competition for job occupations. It’s only those who succeed and performs better earns more. This is especially when the pay is performance based. The type of institution also matters. For instance, teachers in private schools are said to earn more compared to those in public schools.
Most human occupations are industrial specific. Industry specific experience does not attract wage gains (Sullivan, 2008). Occupational specific occupations attract a percentage increase in wages after the experience is gain within some given years. The major challenge facing the explanation of wage rate differential is that of categorizing the human capital skills accumulation process. Sullivan noted that skills are either transferable across all jobs or are firm specific, but not industry or occupation specific, arguing that it’s the overall labor market experience and employer tenure that determine wages. Kambourov and Manovskii (2007) posed a recent challenge by arguing that it’s the occupation tenure responsible for wage differential; controlling it leaves the firm and industry tenure with less effect. The empirical result of Sullivan estimation of the wage equation using instrumental variable approach tends to approve of the findings by Kambourov and Manovskii.
According to Sunday and Pfuntner (2008), the other challenge in the explanation of wage differentials is that the conduciveness of data sources to studies within establishments is generally low. The unavailability of individual wage records to researchers makes it difficult for individual wage rates examination within occupations, establishments.
The most important area where most economists rely on in the determination of wage differentials is the forces of supply and demand. However, this is contradicted with the presence of government intervention.
Fig: Minimum Wage Legislation
Implementation of a minimum wage legislation above the equilibrium prices benefits the low-income earners. This does, however, have an influence on the demand for labor. Employer’s willingness to employ is reduced with a minimum wage being set above equilibrium. Therefore, it can be noted that minimum wage distorts the functioning of the supply and demand forces.
Most consumers always consider a differentiated product to be more desirable. The increase in their desirability perception raises their demand for that product. Hence the business makes huge sales resulting in greater profits. Improvement on a product requires capital investment. Therefore, considering the potential benefits that would accrue from product differentiation, a once –off expenditure is necessary as it will maximize the firm’s future profits. From all the information cited from various economists, it can be concluded that product differentiation is not profitable in any market structure. Its profitability is felt in the imperfectly competitive markets. Competitive markets thus have no need to implement this strategy.
Wage differentials exist across and within occupations. In every occupation, there exist a great wage difference between its top and bottom earners. In order to carry out an effective comparison of the wage differentials, only the employed persons should be considered, since the wages of the self-employed vary greatly. In some occupations, human capital is primarily occupational specific while in others it is industry specific.
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