econs+market+structure+(Electronics+industry)

http://productsunique.blogspot.com/ Electronics industry – Monopolistic competitive Features 1. Differentiated products a. Physical differences – Quality/Durability b. Product image – Brand 2. Large number of buyers and sellers (Panasonic, Sony, LG, Toshiba etc.) Behaviour 1. Price competition a. As electronics firms produce similar goods, such as printers and computers, they will try to increase market share by lowering its prices. Due to law of demand, as price decreases, the higher the quantity demanded. b. Since the demand curve for these firms are relatively price elastic, a decrease in price would cause a more than proportionate increase in the quantity demanded for their goods. 2. Non-price competition a. Product development i. Electronics firms will differentiate their products through differences in performances/quality 1. E.g. Apple inc. iPod vs. Sony MP3 player a. iPod has more functions than an MP3 player. Consumers who desire these additional functions may favour iPod over MP3 player. This would increase the demand for iPod and hence Apple would have more market share than Sony. ii. Brand loyalty 1. E.g. Apple inc. a. Huge consumer base. In many countries, there are “Apple fanatics” who only choose products from Apple rather than other firms. b. As a result, Apple’s market share would be larger. This would also cause their demand to be more price inelastic. b. Advertising i. Electronics firms engage in mostly persuasive advertising to attract consumers in buying their products. 1. Samsung galaxy phone series engaged in advertising when it was first released to portray its functions over a close substitute such as the iPhone 2. If the advertising campaign is successful, Samsung’s market share would be larger. This would also cause their demand to be more price inelastic. However, consumers may not be receptive to the advertisement.

Performance of firm (Profitability, efficiency level) 1. Objectives of the Electronics firms a. Profit maximization i. Firms produce at the point where their marginal cost equals to their marginal revenue (MC=MR) ii. Price is determined by the demand of the goods b. Sales volume maximization i. Firms produce at the point where their average cost equals to their average revenue (AR=AC) ii. This may be done by the retailers of the electronics firms where they choose to maximize their sales volume rather than profits. c. Revenue maximization i. MR=0 ii. This may be done by the retailers of the electronics firms where they choose to maximize their sales volume rather than profits. iii. High sales revenue allows the firms in the industry to raise loans from banks. They can use the loans to invest in R&D to produce better products. Based on economic theory, Electronic firms which operate in a Monopolistic competitive industry are static inefficient and they have product variety.

Allocative efficiency: From Fig.1, when the firm produces at MC=MR, P>MC at this level of output. Consumers value the additional unit of good more than it cost to produce an additional unit of the output. Hence there is an under-allocation of resources to produce the electronic goods. The goods are under-produced and hence the electronic firms are not allocative efficient. Productive efficiency: Electronic firms are not productive efficient as MC firms tend to produce on the falling portion of the LRAC curve, as shown in Fig.1. This shows that the firms are producing with excess capacity and are not producing at the optimum plant size. Resources used for persuasive advertisement is seen as wasteful as it does not produce the quality of the product. Thus electronic firms are productive inefficient. Dynamic efficient: Electronic firms are dynamic efficient as they have to constantly innovate and improve their products to maintain their market share as well as maintaining a competitive edge over their rival firms. Differentiated products have less close substitutes, thus they will have a less elastic demand for their products, which means for a change in price, there will be less than proportionate decrease in the quantity demanded for their electronic products.

In Summary The market for electronic good is a close example of a monopolistic competitive market due to the characteristics it exhibits, such as having a large number of buyers and sellers and selling differentiated goods. Of which, the characteristics affects the behaviour of the firms in the market for electronic goods, which is mainly the profits earned; supernormal, normal or subnormal profits. The actions taken by the firms such as price and non-price competition are also affected by the type of profits earned as each firm has its own objectives such as revenue maximisation, sales volume maximisation or profit maximisation. These results in the performance of the firms in the market which affects the various types of efficiency such as economic efficient and dynamic efficient. Hence, these show how the various features of the firms in the market are interlinked and affect one another

Hanchong, Ronnie, Vincent, Xin horng, Vernon []