Introduction
Perfect competition, monopolistic competition, monopoly and oligopoly are different forms of markets, which consists of different features in terms of competitiveness, liquidity, efficiency. The competitiveness of each market type has an impact on the decisions made by the financial managers. Each market presents different challenges for firms operating in the markets and finance managers need to identify these challenges and counter with effective strategies. Finance managers operating in different forms of market competition need to consider different challenges that come along with the different market forces. This paper will analyze the biggest challenges faced by finance managers in different markets on the basis of scholarly resources.
Biggest Challenges
Perfect Competition
Many firms exist due to freedom on entry and exit, this means finance managers need to ensure their product is cost competitive. In case another competitor decides to offer discounted rates, finance managers need to ensure they have the capacity to offer their product at competitive rates or lose their potential customers to the low cost operator. All firms have homogeneous product, meaning finance managers are forced to become price takers. They are bound to follow the price determined by the perfectly inelastic demand curve. In a perfect competition market, companies offering homogeneous products cannot take the risk of choosing high price for their products, as it would mean they lose customers. Also, in a perfect competition markets, finance managers need to also take into consideration that the company would not make economic profit in the long run. Therefore, any company offering loss making rates to customers cannot sustain the price for the long-term (Mosca & Bradley, 2013).
Monopolistic Competition
In monopolistic competition, firms can make independent decisions such as output and price of its product and cost of production. This means finance managers need to give additional importance to necessary costs such as advertising used to differentiate product and the firm’s branded packing, etc. Under monopolistic competition, finance managers need to understand that small level of differentiation would not create utility, rather it can lead to unnecessary waste.
Also, advertising can also turn out to be wasteful for firm, and finance managers need to understand that advertising is mostly informative rather than customer winning. Finance managers also need to consider that there can be a tendency of their firm to develop excess capacity as firms can never exploit their fixed factors to the optimum as reaching mass production is complex. This means, in the short term and the long term, finance managers need to prepare their form to be productively inefficient (Nocco, Ottaviano, & Salto, 2014).
Oligopoly
Oligopoly means few firms dominate the market and firms are interdependent on each other. Each firm is affected by the actions of their competitor. Firms operating in an oligopoly can still be highly competitive on product’s price, especially when they are working to increase their market share. This means finance managers face challenge of managing the price of their products and managing output to ensure they remain competitive. For instance, a telecom company, reducing the price of their services would mean the competition would need to consider improving the product or match the decreased price to sustain their customers and market share. Collusion is another problem that finance managers need to overcome in oligopolistic markets as competitive firms can collude to set prices and output levels to manipulate demand in the market. In such scenarios, finance managers need to overcome challenges of tacit collusion and ensure they have a countering strategy to remain competitive (Corcoran, 2013).
Monopoly
There are many problems related to monopoly that finance managers need to understand such as a high barrier entry for firms. In some cases, when monopolies become too big, it can easily lead to diseconomies of scale. In such cases, finance managers face challenges of managing the increasing average costs. Monopoly exists in government concentrated markets and finance managers of monopolistic firms need to use their economic profit for influencing the political environment of the market to ensure competition is restricted and the company gets a free run. The challenge in such scenario for finance manager is paying government officials that diverts money from the firm to the government, but leads of inequity and inefficiency in the market. In case an innovation is made by a new competitor or foreign competitors, monopoly can be challenged and finance managers cannot sustain the monopoly only through only paying the government (Oner, 2013).
Conclusion
Each market provides different challenges to the finance managers due to difference in competitiveness, liquidity and efficiencies of different markets. In summary, in the perfect competition market, the challenge faced by finance managers is to ensure they keep their product cost competitive and reduce costs of their business. In case of monopolistic competition, finance managers need to overcome the problems of excess capacity and unnecessary waste. In markets with Oligopoly, finance managers need to overcome the challenge of managing price and output and collusion between competitors. In monopoly based market, finance managers face challenges in the form of diseconomies of scale and innovation.
References
Corcoran, T. (2013, Aug 02). Oligopolistic competition: Perfect. National Post Retrieved from https://search.proquest.com/docview/1417111571?accountid=32521
Mosca, M., & Bradley, M. E. (2013). PERFECT COMPETITION ACCORDING TO ENRICO BARONE/La concurrence parfaite selon enrico barone. Cahiers d'Économie Politique, 64, 9-44. Retrieved from https://search.proquest.com/docview/1449183652?accountid=32521
Nocco, A., Ottaviano, G. I. P., & Salto, M. (2014). Monopolistic competition and optimum product selection. The American Economic Review, 104(5), 304-309. doi:http://dx.doi.org/10.1257/aer.104.5.304
Oner, E. (2013). Simultaneous Effects of Supply and Demand Elasticity with Market Types on Tax Incidence: Graphical Analysis of Perfect Competition, Monopoly and Oligopoly Markets. International Journal Of Economics And Finance, 5(2), 46-55.
