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Forms of Market Structure and Pricing Strategies

Discuss about the Reflective Analysis for Disruption and Public Policy.

Production refers to the transformation of an input into a desirable service or product (output), through the addition of economic value. It can take three major forms, depending on technique (Kalirajan & Obwona, 2014). The first type is through separation, which takes the raw materials and extracts or separates them to get the desired output. A prime example is the extraction or separation of crude oil into different petroleum products. The second type is production by improvement and modification. Here, the mechanical and chemical parameters of raw materials are changed, without altering the physical attributes of the material. An excellent is the annealing process, which heats the raw material at high temperature, before cooling it. The final type of production is of assembly, where the raw materials are brought together and assembled as in the case of car manufacturing.

There are three measures of production. Total product or total output is the overall output produced. To get it, we divide the total cost (TC) by the number of products the firm produces (Q) or the Average Total Cost (ATC) with per unit cost of output. Average product, on the other hand, measures the output per work head, or output per unit of capital employed. Finally, the marginal product measures the change in production by increasing labor by one unit or capital by a single unit (Meng, 2013). We can also have constant returns to scale, increasing returns to scale and decreasing returns to scale.

The cost function of a firm specifies the cost to produce given units of outputs. Total cost refers to the full cost of producing a given level of production. It is divided into Total Fixed Cost (TFC); the part of the total cost that doesn’t vary with the number of outputs, and Total Variable Cost (TVF); the part of the total cost that varies with the level of production. If w is the cost per unit of labor and r the cost per unit of capital, with the input Capital (K), and Labor (L) the production cost will be w × L + r × K.

A cost function C (q) is a function of q, which tells us the minimum price is for the production of q units of output. Total cost can also be split into variable cost and fixed cost as follows: C (q) = FC + V C (q). Fixed cost is not a function of the quantity, while variable cost is dependent on quantity. In the short-run, production entities cannot adjust to capital, simply stated, K x r is a constant. In the long-run, however, both L and K are variable.

Impacts of various forms of government intervention in the economy

Market structure refers to particular organization existing between buyers and sellers of goods or a service in a given market. Understanding the various types of market structure is critical in understanding the strategies that the firm(s) will employ. The number of firms in the market will determine a given firm’s pricing and output decision. When there are a large number of firms in the market, a single firm will have minimal impact on the price of the product.

Similar products, with an at least large number of firms, make the firm be a price taker. Any attempt to increase the price results in a dramatic decline in sales. The more the products are differentiated, the more the price power. The cost of information plays a significant role in determining when a competition or a collision will occur. There will be fewer opportunities for having price and quality distinctions when the cost of information is less. Barriers to entry will determine whether economic profits will exist in the long run or not. With low barriers to entry, we anticipate the entry of sellers, a rise in supply and a consequent reduction in price until a point where all firms in the market are earning zero economic profit (normal profit).

Based on above characteristics, we have four main types of market structure: perfectly competitive market structures, monopolies, monopolistic competition, and oligopoly. A perfectly competitive structure is where there are many sellers, no exit or entry barriers, homogenous goods, among other characteristics. With many vendors, no costs of information, and identical products, each seller will have to charge the same price (Heidhues & Riedel, 2013). Market power is negligible in the absence of a collision, and firms will be price takers. They will take prices as given and fix the level of their production to profit maximizing situation.

Monopoly, unlike perfectly competitive markets, has a single firm setting its price, no competition, unique product/ no close substitutes, and barriers to entry in the form of technological, cost, managerial, government, and natural barriers (Malina, 2013). The profit maximizing output for a monopoly occurs where marginal revenues equal marginal costs. Since a monopolist is a price setter, he should operate at a place where price is greater than marginal costs, implying that he is earning an economic profit.

Monopolistic competition is an intermediary between perfectly competitive market structure and monopoly ("Monopolistic Competition: Beyond the Constant Elasticity of Substitution", 2012). Sellers are large to create a competitive condition but though products are close to each other, are not identical. Differentiated products give firms price power, and make them price makers.  The profit maximization price for the monopolistic competition is greater than the marginal costs. Firms earn an economic profit in the short run. Since price wars tend to characterize this market structure, firms should agree on the price they should be charging.

The final type of market structure is an oligopoly, which is characterized by very few sellers, so few that, the action of one seller has a perceptible influence upon the rival(s). Relations among firms in an oligopoly are interdependent. The policy action of a single firm, regarding the price, advertisement, and output affects the action of the other firm(s). Oligopolists are price makers and tend to collude, and set the price and output (Hwang, 2015). A good example is OPEC in the global production of oil. A change in price in oligopoly will initiate a chain reaction, and in the absence of collusion; an oligopolist should take the prices the other firms as given and compete on non-price criteria such as warranties, gifts and certificates, and advertisement.

The primary aim of government intervention is to reduce market inefficiencies. In efficient markets, resources are perfectly allocated; those who need them have them in sufficient amounts. However, this is not the case with inefficient markets, where some individuals have too much of the resource and others have none. The government intervenes to promote greater equality, correct market failure and reduce unemployment and overcome extended periods of recession (Mahrin, 2015). Intervention can take various forms. Among them includes regulation, provision of subsidies to competitors, and taxation.

The provision of subsidies to either the consumer or the producer increases the amount of a product to a level which maximizes the economic welfare. The negative impact of the subsidy is that the amount can become too large, and be captured by the producers, thereby failing to maximize economic well-being. Regulation can take various forms. It can be in the form of law, such as that which requires motorists to buy car insurance, or take the form of price ceilings and price floors (Mahrin, 2015). When there is a price floor such as in farm products, the government imposes how low the price can be charged, and this leads to the transfer of consumer surplus to producers. Price ceilings; on the other hand, refers to the government’s imposition of how high the price should be charged such as control of rental prices, and this leads to the transfer of producer surplus to consumers.

Deregulation refers to the act of removing laws, legislation, and barriers to competition in a particular market. As a result of deregulation, more firms can enter individual market, and this helps to remove the monopoly power of the previously state-owned markets (Lin, 2010). The positive impact of deregulation is that it results in greater economic efficiency, opens up the market to competition, and leads to lower prices for consumers. The downside is that it can be difficult to create effective competition in a market with a natural monopoly. Any attempt to deregulate may create a monopolistic private firm.

Social networks in the preindustrial era were mainly restricted to geographic regions. Without a telephone, a car or an e-mail account, relationships were majorly formed with people living in one’s town or areas. As communication and transportation technology enhanced, social networks became bigger and bigger. The internet, e-mail, and instant messaging are some of the most influential technologies for establishing and maintaining larger social networks. Keeping in touch with a vast network of both robust and weak ties is now possible in this era of instant communication.

Social networking refers to the interconnection of organizations, individuals, other social entities and nodes through social links such as professional relationship, friendship, and family ties (Bartell & Sullivan, 2011). Though social networks have existed in other spaces and times, a new paradigm provides the material basis for its vastness and spread across the entire social structure. The interconnection of communication devices, development of appropriate software, and the establishment of information technologies has led to the emergence of more social networks (Suwaidi, 2013). People with unique or shared political, cultural, religious, emotional, and financial characteristics have been brought together at astonishing speed and in an unprecedented manner.

 For the first time in history, two-way, many-to-many communication has become a reality. The once imaginary societies have become real, contributing to a societal shift from tribal mentality to that of social network (Suwaidi, 2013). Virtual worlds have continued to expand and instill a desire to their users to establish and reinforce their shared interests, which has played a central role in influencing public opinions and subjective attitudes around various issues in numerous fields. 

Technology has changed the way we relate to one another. Cross-over between personal and business is now greater than ever; there is a more blurred line between our personal selves and professional lives. The way of communicating and relating to one another has significantly changed. Some years ago, communication, on average, lasted for 2.5 minutes. Today, the average communication lasts for 15 seconds as people tend to go more direct to the point (Russell, 2012). As people speak less, they seek to derive as much information as possible. The social network has become new work. 

A new form of capitalism- informational capitalism- has emerged, which is associated with a new technological paradigm and characterized by information generation, processing, and transmission as a fundamental source of power and productivity (Adner, 2012). Global networks have been facilitated by the new mode of development, leading to the transformation of transnational service firms, multinational producers, and financial players, where individuals, communities, groups, and nations are incorporated or excluded from networks based on their usefulness.

Disruptive technologies are those that introduce a different package from mainstream technologies. For technologies to be disruptive they need not be radical from a technical point of view; they can be inferior to mainstream technologies along performance dimensions and other areas critical to mainstream customers (Megill, 2012). Disruption can also be said to occur at the intersection of performance demanded, and performance provided trajectories for various market segments.

Three main facets describe the disruptive technology. The first aspect includes technologies that underperform mainstream technologies on the leading performance dimensions critical to mainstream customers yet displace mainstream technologies from the market (Franco & Echambadi, 2013). The other facet includes consumers who shift their purchase to the invading technology-based products even though these goods have inferior performance on critical dimensions, and the third includes incumbent firms failing to react to disruptive technologies on time (Kulkarni, 2014).

The issue of price does not matter at the infant of technological advancement. Performance is not adequate to fulfill customers’ needs. However, consumers’ needs are well fulfilled at later stages, and their readiness to compensate more for added performance gains diminishes. Performance gain and competitive actions lose their efficiency. Performance/price factor is important at this part of development.

Technology disruptions mostly occur at a later stage, where consumers are ready to accept an inferior performance/value offer if the cost is low. The development, driven by marginal returns from performance improvements, explains the growing significance of price as technologies exceed customer’s needs (Adner, 2012).

There are two classes of disruptive technologies in the day to day life. One class displaces the conventional technology in phase transition, where consumers accept the new technology after a period. A good example is an automobile replacing a horse. The second class creates a new capability or market where none previously existed. A prime example is a personal computer and a smartphone. Before the invention of the personal computer, computation was limited to large government organizations, institutions, and large businesses (Lu & Tu, 2013). The situation has, however, changed. Most households now have computers. People have seen the need for computation beyond that of a simple calculator.

Disruptive technologies can further be divided into enablers, morphers, superseders, enhancers, catalysts, and breakthroughs. Enablers are the technologies that make use (enables) one or more technology, applications, and processes. Examples of enablers include cellular technology, integrated circuit, transistors, and gene splicing. Morphers are those when enjoined with another technology, create more technologies. Examples include microprocessors and wireless technology.

Superseders are the most common types of disruptive technologies. They make the current technology obsolete and create a cheaper, better, more capable and faster technology. Examples include a digital camera, LCD, jet engine, automobile, personal computer, and compact digital media. Enhancers, on the other hand, modifies (or enhances) existing technologies, and allow them to cross a critical threshold. Examples of such include; nanotechnologies, fuel cells, and stealth.

As the name suggests, catalysts alter the rate of change of technical improvement or extend the applicability of one or more technologies. A good example is cloud computing and PCR techniques for DNA sequence amplification in biology. Finally, a breakthrough enables what was initially seen as impossible. Examples of such include quantum computing and fusion power.

The 21st technology is different from earlier technologies because they have impacted labor, tax revenues, and several aspects of the aggregate economy in a big way. Economists have always looked to history to find that the economy has in most cases improved due to improvements in technology (Van, 2012). If setbacks occur, the economy readjusts to put us back to the path of prosperity. However, with globalization and digital technology, this may change in future. The economy may fail to adjust for the better due to several reasons. As more and more jobs in the future become replaced by machines and computers, efficiency and production will go up, thereby increasing the national output. However, the ability to tax labor will substantially reduce in the long run, and we will likely experience social costs of lost taxes such as lost employment and reduced output. Taxes will probably be more costly, yield lower revenues, and create negative social effects to the society.

As technology becomes more and more part of our lives, there will be the need to track the impact of innovation on the GDP. Today, the very essence of digital goods makes them difficult to quantify, but an appropriate metric is likely to be developed in the future (Jong, 2011). The new metrics will help governments and policy makers balance between the need to look into public welfare (as technologies shape lives), and the need to grow the economy.

Work is, by and large, done on the industrial level. People go to work and have a job assigned by the management. The work is spread out and divided, as management coordinates the tasks to achieve organization’s goals.  The future will see a replacement of the inefficient, industrial model of work with collaborative, space-saving, integrated digital environment.

A new work culture, built on information sharing rather than information hoarding will likely develop. Knowledge work will become paramount (Megill, 2012). The structures of organizations will be, repositioned, tested, and compressed. Outsourced networks will replace the typically integrated infrastructure, and innovations will start to commoditize the existing technologies. The level of big data will increase, and this will make the role of a middle manager will become less and less relevant. Organizational efficiencies will increase as a result of automation, and redundant employment and service will, consequently, be reduced. Increased visibility and customer reviews through social networks and rating agencies will render organizations less able to hide inferior products (Neubert, 2013). Organizations which will have superior products and those that will incorporate reputation management will be able to survive at the expense of those that will have inferior products and poor reputation management. Increased visibility will also quicken the Organizational life cycle, and this will reduce the number of medium-sized organizations.  

The future workforce will be more diverse than ever, multiple cultures, ethnicities, and generations will work side by side. The workforce will be progressively more diverse regarding not only old and young, but sighted/not sighted, and individuals with disabilities (Salkowitz, 2008). Advanced robotics will make it possible the carrying out of tasks that were once thought too uneconomical or too sensitive to conduct. Policy makers will increasingly use technology in performing their duties, for example, they will use the Internet of Things to improve infrastructural management (Russell, 2013). The nature of work will require high retraining and educational programs. To address the challenges that new technologies will bring, there will be the need to use the very technologies to learn, educate, and train with mobile internet, which will help to deliver services effectively and efficiently, and blend well with diverse cultures.


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