Facing Monopolistic Competition And Identifying The Distinguishing Characteristics Of Monopolistic Competition. Research Paper Sample
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Nike operates in the global sports apparel industry. It is one of the market leaders in the sports apparel market and its market share has increased from 3.9% in 2007 to 4.9% in 2012 and it is expected to grow to a 6.5% which shows that the pace of the growth of the company exceeds the industry average, especially in the period mentioned above. The world sports apparel market has an expected value of $126 billion in the current year i.e. 2015. The market trends in this industry are driven by health and more active lifestyles with the older age group and females becoming more active. The market is very disjointed as there are a lot of brands competing like Adidas and Reebok etc that are the high end brands while there are also a lot of discount brands too. Sports apparel companies operate with fashion designers and with renowned sport stars to widen their product lines. There are a lot of issues faced by sports apparel industry which range from the varying trends in fashion, tough competition as well as the consciousness in price by buyers. A lot of sports companies save their costs by establishing their companies in developing countries like Nike have factories in various countries which can result in problems from different host countries and can also result in challenges in logistics.
Product differentiation or more simply termed as differentiation in economic and marketing terms merely means the process by which the product or service offered is different from the other products and services in the market. Companies differentiate their products to add a more attractive approach towards their target audience. The process also comprises of differentiation in terms of making the product vary from the products offered by the competitors and also the product should be different from the other products offered by the same company. Nike is a market leader operating in this sector and thus it takes these customer insights very seriously and thus continuously manufactures goods which are totally separate from the rest of the market’s product range. There are a lot of attributes through which a company can differentiate their products and Nike pays attention to two very important attributes which are the clever features introduced in the products and the perfect timing at which the products are introduced to the target market. Nike ensures that it is responsible for the creation of new and updated technology in not just the design of the product but also the material utilized to manufacture them and is also responsible for continuously updating its technology to mirror the preferences and likes and dislikes of the target market. This has helped Nike achieve a niche market status and most of the other competitors strive hard to reach this phase but cannot match the pace of Nike’s continuous updates. Nike is very sensitive to customer preferences as well as identifying gaps in customers’ demands and the supply by the companies and hence Nike always remains in front of its other competitors as it introduces new and updated product ranges at a time when the market even hasn’t started to demand it, thus creating market need by their own creation. Flyknit shoes is a new product range by Nike which is an instance of how the company creates the perfect blend of new knitted design of yarn along with the fabric to create a light in weight final product which is a breathable pair of shoes for running. And Nike introduces this range as soon as summer began so this shoes range is an example of Nike’s ability to creep into the minds of its customers as well.
Price and Product Quality
The sports apparel market is very competitive and also faces rapid changes. Nevertheless, the market has reached maturity as far as the product lifecycle is concerned. If conditions like this prevail then the survival of any company is a difficult task and it is tough to maintain the company’s competitor advantage thus it is important that the companies continually produce new products with higher quality as compared to their competitors. Nike invests a lot of money, time and effort, on a regular basis, to make sure it offers creative products so as to sustain its market leadership and maintain its top brand image in front of the customers. A company like Nike can accomplish the goal of making profits higher than that of its competitors through two ways: it can either offer products which are identical to its competitor but at a lower price or it can make products which are different from the competitors in such a manner that the customer agrees to pay a premium cost for the ownership of the brand. Nike’s corporate strategy of product differentiation helps it price its products towards the premium end because of the innovative design and the exceptional quality of the product. Nike has achieved great levels of customer retention as well as satisfaction because of the exceptional quality of the products which justifies the high price charged for the goods. Nike’s competitors offer products which are lower in price but they cannot match the quality offered by Nike. The company invests heavily in research laboratories and the scientist there perform different techniques to gauge the products strength and viability and to assure that they are at par with the high standards of quality established by Nike.
Barriers to entry and exit
Monopolistic competition has limited barriers to entry and exit unlike monopoly or oligopoly where there are strong barriers due to power or cartels. In monopolistic competition there are no costs of exit or entry. Any firm offering a unique product with a positive profit aspect can join the market. Any firm which is unable to meet its cost will have to leave the market. The assumption for monopolistic competition is that it has no startup costs, sunk costs and exit costs, which may different in reality. In reality the costs for startups are far higher. But there are no implied barriers by the rival firms or the market system.
Monopolistic firms have an independent frame of mind and the products are designed with an independent opinion. They do not give consideration to what effect the product or decisions will have on competition. According to theory this is because monopolistic competition firm’s acts have negligible effect on overall market condition and therefore, can act without having a fear for heightening competition.
For Nike, we can see that there are a number of firms operating in sportswear and apparel industry. They only barriers we see for entry are that the leaders in that industry are highly cost effective and huge and have strong brand images around the world like Reebok or Adidas which are the major players. Any new entrant has the barrier of breaking through the strong market, but if it decides to operate on low scale and charge lower price then there are no barriers to entry for that firm. Any independent firm can come and provide sportswear and apparels for men and women.
Monopolistic competition firms have a certain degree of market power. It means the firms operating in the monopolistic competition can control the terms and conditions of exchange and can be the price makers, like in the case of Nike, where Nike decides the price. It can easily raise its price without losing its customers. They can also lower its prices without triggering a price war with Reebok or Adidas. Monopolistic competitors have fewer rivals and usually they sell differentiated products.
Influence of product development
Monopolistic firms sell products which have either perceived or real price different. The cross price elasticity of demand between their goods is positive in the market. The products by the firms can be described as imperfect substitutes. Their goods are developed in a way that they have same basic functions but the qualities like style, type, reputation, appearance or location may differ. For example, the industry under discussion is sportswear. Nike and Adidas may be perfect substitutes for each other with basic functions of sportsmanship and athletic, but they have different designs and appearance and that is how they distinguish their brands. A basic function of any motor vehicle may be the same, but there may be hundreds of different kind under the product development with features like comfort, safety, affordability and many others.
The companies in monopolistic competition develop on four basic divisions. Physical differentiation, marketing differentiation, distribution differentiation and human capital differentiation are the divisions through which the products are developed. For physical differentiation a firm may develop by differentiating on size, color, design, shape of some features. By marketing differentiation they can use different promotional techniques to attract customers.
Influence of advertising and branding
Ad discussed before, a firm in monopolistic competition has to differentiate its products and advertising and branding plays a key role in doing so. It is a major characteristic of monopolistic market that each firm has to differentiate its products. Advertising and cultivating a brand are two ways to do so. Advertising is communicating with the audience and the target market to tell them about the product while brand is a company’s image or reputation in relation to the product. Reputation and image among the customers is highly important for monopolistically competitive firms because as the features are similar, it is the only way for them to differentiate. To maintain a brand, the name has to be of highest quality like Nike or Reebok. They must maintain a standard of quality to achieve brand equity and if a consumer has on bad experience, it will ruin the value of that brand and they will shift to the substitute products. Brands and advertising guarantee quality to customers.
Advertising is also valuable because it keeps the customers informed and since customers have a number of options to choose from in monopolistic competition, then it is better to keep a constant reminder for customers.
Nike believes in creating a strong brand. It has a brand presence all around the globe with its famous swoosh sign and the slogan of “Just Do It”. This is a world famous brand and a true example of monopolistic competition. If Nike stops advertising or stop putting high emphasis on its branding then it can easily be overtaken by Adidas or Reebok and Nike would be left with a smaller consumer base. The consumers buy Nike for its brand association.
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