GM is in the form of an oligopoly market structure this is where the companies are controlled by a few firms. This make it difficult for other firms to penetrate the industry because of the market barriers put in place (Dwivedi, 2010). In this market buyers are perfectly aware of prices, but there exist seller’s entry barriers. GM had been selling cars with faulty doors for the last three years. This is a clear indication that, GM market structure is not competitive. The situation is made worse by not having a firm that could have replaced GM faulty models. There is no firm inexistent because of the market barriers and the differentiated products. Therefore, consumers continue to purchase GM cars well aware of their faulty condition because they do not have an alternative.
A change in the market is used in referring change in demand. It is occasioned by a change in consumer preferences and less or more entries into the market. A change in price is likely to affect the consumption of a certain product, either by increasing its demand or decreasing its demand (Bordley, 1985). Quantity demanded is a response to change in price of products while change in demand denotes changes in demand of commodities because of non-monetary influences.
The recall of GM cars would cause a change in demand. The causes for this change in demand are reduction in number of consumers, change in price of substitutes, and tastes and preferences of consumers. The number of GM cars demanded would reduce as a result of its faulty models. Consumers now prefer buying other models in the market, therefore, causing changes to demand of GM cars. The GM competitors have adjusted their prices to attract more consumers and to cover up on their weak areas. They may reduce their prices hence causing change in demand of GM cars. Lastly, tastes and preferences of consumers will now change as the recall situation would negatively affect GM cars. Majority of GM customers are likely to be affected in how they do their businesses since fixing the issue may take a long period than indicated. Majority of people are likely to find for an alternative from GM competitors and in the process lose business to them. All these factors will contribute to the change in demand of GM cars by the consumers.
Oligopoly market structure is characterized by dominance of a few sellers. The decisions made in this market structure are interdependent; a firm decision is likely to influence and also be influenced by others (Sexton, 2008). The few sellers in the market mean actions of other firms are being monitored closely by other oligopolistic. The recall situation would affect demand for its product adversely as quality of the product is important in GM market structure. The competition in prices is none existent, therefore; quality of the product becomes an important element of competition. The consumers will shy away from GM cars causing change in the demand. The few competitors will take advantage of the situation and brand their products as faulty free and guarantee the quality. Demand for GM products will go down as consumers will opt for other differentiated products in the market.
GM would recover the demand that existed before for its product because of the following reasons. The oligopoly market structure that GM is in often involves collusion of some sort. This is occasioned by uncertainty in the market. Competitors are likely to collude and set prices and output to be produced. (Mitnitzky, 1934) This is likely to have some effect and restore the company back to its glory. Another reason is that firms always react to the action others make in the market. It is likely the GM may lower its price this move is likely to woo consumers to buy their brands. The strategy team on the other side can decide to maintain high prices because of the goodwill the company has for years it has been known for quality.
References
Bordley, Robert. (1985). Relating Elasticity to Changes in Demand. Journal of Business and Economic statistics
Dwivedi, D. N.(2010). Principles of economics. New Delhi: Vikas Publishing House Pvt. Ltd.
Mitnitzky, M.(1934). Economic Effects of Changes in Consumers Demand. Social Research vol.1, No.2.
Sexton, R. L. (2008). Exploring economics. Mason, OH: Thomson/South-Western.
