Economics
Everyday, new businesses emerge into various markets with the hope of getting a piece of the pie. However, being able to grab a share depends upon the nature and characteristic of the market in which the business is operating. A market can be structured in several ways according to the characteristics and the number of competitors, producers, and consumers within the market. At any given extremes, a perfect competition or oligopoly can be regarded a competitive market where a huge number of business are operating within a single industry and produces homogenous products and services. On the other hand, a monopolistic market encompasses a single business entity with little or no competition. In today’s modern economy, examples of true monopolistic market are often difficult to determine because almost every single markets are being shared by two or more businesses. Consequently, the Monopoly Index created by Forbes magazine provides a list of companies classified under the monopoly market with at least 50% of the market share. In terms of competitive market, companies under this category are in consistent battle with one another to dominate in their respective industries (24/7 Wall St., 2010).
Apparently, both market categories encompass both disadvantage and disadvantages, which will be highlighted in this discussion. Secondary data collected from research will define the characteristics of the two markets using real life examples, diagrams and other theoretical sources that illustrate a competitive and monopolistic market. An example of a competitive market is the smartphone industry where more than 150 brand manufacturers are competing for the global market share worth an average of $272 Billion as of 2015 (statista.com, 2015). Meanwhile, an example of a monopolistic market can be observed in the Internet industry, which in the span of more than a decade have amassed immense market power and a classic example is the search market. The search market and the realm of virtual industry it has dominated enabled it to acquire gross revenue of $70 Billion in 2013 (Ventureharbour.com, 2013). What makes the search market a monopolistic giant is because of the number of sub-industries integrated into the core business of its leading brands, which at any given extremes has very limited competition. The two markets mentioned herewith represent the classic examples of an oligopoly and monopoly markets, which will be highlighted further into the discussion.
Further understanding of the difference between the two markets can be drawn from citing examples of the industries involved in the two markets. The competitive market is a broad collected of industries that can be narrowed down for a more in-depth demonstration of its characteristics. The given example of a competitive market is the smartphone industry where several manufacturers and brands are competing for the larger market share. The “Rule of Three” for instance is a theoretical tool that will help explain the characteristics of a competitive smartphone market. This concept was introduced by Sheth (2002), which aims to demonstrate how the pattern of growth and development of the top three strongest market leaders affect the rest of the competitors in the market, which consequently sets the trend to the entire industry.
Figure 1 The Rule of Three (Sheth, 2002)
The diagram suggests that the rule of three in competitive market is composed of the generalist, the specialist, and the ditch. For example, the generalist would not be able to defend against the competition because the margins are very low to sustain itself given the possibility that the other generalist are selling more, thus resulting to the generalist to end up in the ditch. Meanwhile, the specialist cannot go very large or else it will not be able to defend itself against the competition for the reason that it will flounder and losses its special characteristic, and the only way to sustain advantage in the competition is to lower the sales margin (Baxter-Reynolds, 2013). To apply this concept towards the smartphone industry, the rule of three will be substituted with company/brand within the industry. In the generalist position, the big three in the smartphone competition are Apple, Samsung, and Nokia and Blackberry fighting for the third place. On the other hand, the specialist position will be substituted by the price of the aforementioned brands.
In the rule of three, Blackberry’s market share became too slow to compete with the rest of the top market contenders, which resulted to the company to flounder and fell into the ditch. In terms of price, the price of the Windows phones under the specialist position got so small as compared to Apple and Samsung, which resulted to the brand’s perception of value to decline and the characteristic that makes the product special, also diminishes. This assumption can be observed on the sales volume and profit performance of the big three in 2014 based on operating system iOS applies to Apple and Android on Samsung and other brands carrying the same operating system.
Figure 2 Smartphoen sales (Gartner, 2015)
One of the prominent characteristics of a competitive market is having a large number of players in the industry encompassed by more than 150 global brands and manufacturers, paired with a large global consumer demand. Although the barrier for entry is high because of the capital-intensive nature of the business, the resources and suppliers available for startup also highly available, which can easily enable an investor to enter the market. Despite the fact the Apple and Samsung holds the greater share of the smartphone consumer markets at nearly 64% (Husso, 2011), emerging brands and manufacturers are also thriving successfully the local markets. For example, Cherry Mobile is a homegrown smartphone maker in the Philippines with 24.3% market shares, which apparently whipped down the smartphone giant Samsung with only 13.3% as of the first quarter of 2015 (Balea, 2015). What contributes to the success of the local brand in the Philippines is the price point, which is at lest 50% less expensive as compared to more prominent brands, but the quality remains highly competitive.
Comparatively, the thriving and striving nature of the smartphone industry makes it a perfectly competitive market because not only that the global brands are able to experience growth, but also the local competitors. In contrast to the monopoly market, competition is non-existent, thus the power of consumer demand to influence price, quality, and consumer-specific needs were mostly disregarded (economicsonline.co.uk, 2013). As compared to a competitive market, a monopolistic market is composed of a single firm that takes up the entire market or if the gap between the other competitor is immensely large. For example, a local water utility company with 85% market share may not consider the other 15% as a competition because the company virtually owns the majority of the market. The formation of a monopoly market involves acquiring ownership of a scarce resource and gains exclusive power to exploit the resources. In addition, the barriers to entry in a monopoly market are incredibly high. The barrier is not only limited to the size of the capital required to start up, but also considers the natural, technological, sociological, and legal factors.
In a competitive market, barriers to entry may only concern about the size of the capital, but being able to overcome such barrier will enable the company to gain opportunity to compete. Consequently, the monopoly market has more barriers to overcome in order to challenge the dominating firm. A classic example of a global monopoly market is the technology company Microsoft, the company has had its hands on almost all running computers in the entire planet, and the nearest competition is not even close to the size of the market share and resources that Microsoft have at the moment. However, for the sake of the discussion, the emerging monopoly market that will be examined is Google Inc. For some people, Google may only appear as a free web browsing search engine, but it is also a market of its own and Google Inc. dominates the industry behind the search market. It was made clear from the beginning that in the modern market economy, monopoly does not always mean owning the entire market, but monopoly can be also perceived in the gap between the dominating firm and that of the competition.
In order to understand the monopolistic nature of the search industry, it is important to see the gap in the competition. The search market is composed of the three main competitors namely Google, Yahoo, and Bing.
Figure 3 Revenue Gap between Google and competition (ventureharbour.com, 2013)
It is apparent that the gap in annual revenue is very large between the three search engines. The reason behind the gap is the volume of consumers using the services, but the real value in Google’s business is the amount of revenue it is amassing from advertising and paid search optimization. Normally, when a website wants to appear on top of the search results, there are several services that Google offers such as AdWords, and other key word search optimization services. This collection of services enabled the company to gain a strong foothold in the search market leaving the rest of the competition behind.
Figure 4 Search Market Share (ventureharbour.com, 2013)
As observed in Figure 4, Google has captured 67.3% of the US Market Share leaving Bing with a very modest 18.2% and Yahoo with 10.8% of shares. While other market experts speculates that Google Inc. was a success because of its effort to branch out to different industries such as the smartphone and other mobile technology. On the other hand, statistics obscure the claims of the company as being not a monopolistic firm. For one, the company owns more than 50% of the global search market, and this also includes 3% of the global advertising market and 0.24% of the global tech industry (Baer, 2014). All the three markets were combined in single business operations that dominate an entire industry. The way search market was dominated by Google is the lack new entrants to the market. Both markets encompasses advantage and disadvantage, but in order to understand the extent profits, revenue, or losses attributed to each market model. As for the perfect competitive market, advantages can be drawn from the opportunities that exist in terms of unconstrained growth.
For the perfect competitive market, the advantages include allocation of resources in the more efficient manner. The competitive market also encompasses no information failure because all knowledge is being spread out evenly. Lastly, consumers are able to maximize surplus that in return creates economic welfare. In terms of opportunities, competitive markets allow new entrants to take part in the playing field, which encompasses an opportunity for consumers to diversify their choice of products and services. On the other hand, the competitive market also has its downside in terms of lack of economic scope with a scale that can change the course of the economy. For example, the food industry can diversify its industry portfolio, but the economic implications of the spread are not sufficient to move economies to progress on a grander scale.
As for the monopoly market, the perceived advantages ranges from supernormal profits that can be allocate for larger capital investments. In return, large capital investments can create economic opportunities of scale. For example, the Google search market can allocate its investments to enhance other Internet industries. However, the monopolistic market hinders growth of competitions. With less competition comes a confident firm that in time may become insensitive to innovation. Most of the negative implications of monopoly market as perceived by the consumers are lack of quality and fixed-pricing. When an industry dictates the price of its commodity, it also gains control of the demand and the overall price of the products. One classic example is the De Beers diamond company who controls the diamond industry by holding stocks of precious stones out of the market in order to command the price of the polished stones. Competitive and monopoly markets present opportunities, which can be explored further.
References
Baer, D. (2014, September 16). Peter Thiel: Google is a monopoly. Retrieved from http://www.businessinsider.com/peter-thiel-google-monopoly-2014-9
Balea, J. (2015, March 25). Samsung beaten by local smartphone brand in the Philippines. Retrieved from https://www.techinasia.com/samsung-loses-top-spot-philippines-smartphone-market/
Baxter-Reynolds, M. (2013, August 15). The "Rule of Three" explains the smartphone market perfectly | ZDNet. Retrieved from http://www.zdnet.com/article/the-rule-of-three-explains-the-smartphone-market-perfectly/
Boundless.com. (2014). Market Differences Between Monopoly and Perfect Competition. Retrieved from https://www.boundless.com/economics/textbooks/boundless-economics-textbook/monopoly-11/monopoly-production-and-pricing-decisions-and-profit-outcome-71/market-differences-between-monopoly-and-perfect-competition-267-12364/
Economicsonline.co.uk. (2013). Monopoly. Retrieved from http://www.economicsonline.co.uk/Business_economics/Monopoly.html
Hof, R. (2014, March 16). Despite 19% Revenue Growth, Google Q1 Earnings Disappoint Investors - Forbes. Retrieved from http://www.forbes.com/sites/roberthof/2014/04/16/despite-revenue-growth-google-again-disappoints-investors-in-q1/
Husso, M. (2011). Analysis of Competition in the Mobile Phone Markets of the United States and Europe (Doctoral dissertation, Aalto University). Retrieved from http://epub.lib.aalto.fi/en/ethesis/pdf/12638/hse_ethesis_12638.pdf
Sheth, J. N. (2002). Competitive Markets and the Rule of Three. SwitchTrack, 1-7. Retrieved from http://www.researchgate.net/publication/242330850_Competitive_Markets_and_the_Rule_of_Three
Smartphonemarketresearch.com. (2014). Smartphone Sales Surpassed One Billion Units in 2014 | Smartphone Market Research. Retrieved from http://www.smartphonemarketresearch.com/smartphone-sales-surpassed-one-billion-units-in-2014/
Statista.com. (2013). Smartphones: global revenue 2008-2015. Retrieved from http://www.statista.com/statistics/237505/global-revenue-from-smartphones-since-2008/
Ventureharbour.com. (2013). A Visual Comparison of Google, Yahoo and Bing's Revenue, Profit, Market Share & More | Venture Harbour. Retrieved from https://www.ventureharbour.com/visualising-size-google-bing-yahoo/
