The Nature of Competition in Industry

Outline

• Abstract
• Introduction
• The nature of competition in the tobacco industry
• The nature of competition in the restaurant trade
• The nature of competition in the world oil market
• The nature of competition in the foreign exchange market for Australian dollars
• Conclusion

Abstract

Different industries are characterized by different structures and as such, the nature of competition in one industry could differ significantly from that of another industry. This essay is an attempt to explore that nature of competition in the tobacco industry, the restaurant trade, the world oil market and finally, the foreign exchange market for Australian dollars. The essay further explores the unique characteristics with regard to the aforementioned industries.

Introduction

In order to better understand the nature of competition in a given industry, there is the need to explore the various structures that characterize the firms in a given market in question. In this case, elements of perfect competition, oligopolistic competition, monopolistic competition and duopolistic competition, and their associated unique characteristics need to be studied extensively. The essay seeks to compare the nature of competition in diverse markets.

To start with, the tobacco industry is explored in terms of the industry structure and the associated characteristics. Secondly, the essay assesses the restaurant industry in terms of the nature of its competition. Further, the global oil market is examined. In this case, its structure and the ensuing issues of demand and supply of the resource are examined. Finally, the foreign exchange market for Australian dollars is also explored.

The nature of competition in the tobacco industry

From a historical context, competition in the tobacco industry has been oligopolistic in nature. In this case, the firms in the industry are normally fully aware of the existing mutual interdependence on one another. Even as evidence regarding explicit collusion is yet to be unearthed, nevertheless, according to economic histories, tobacco companies have endeavored to fix the price of cigarettes above competitive levels, in spite of the few and far between episodes of product innovation and intense price competition (Baker 1997). Since the number of firm dealing in the manufacture of tobacco is few, they have the necessary leverage to dictate the prices of their products.

At the moment, only five of these firms may be regarded as significant players in the market. Of these, three of them (Philip Morris, R. J. Reynolds, and Brown & Williamson) have a collective share of the cigarette market of nearly 90 percent. In addition, there appears to be a comparatively insensitivity with regard to one the one hand, overall demand for cigarette by the adult population and on the other hand, the ensuing changes in the prices of cigarettes (Baker 1997).

The 1990s and 2000s were characterized by mergers and acquisition in the tobacco industry and as a result, five firms dominated the international markets. They include British American Tobacco (with its 42 % controlling stake in the US-based Reynolds American Inc.,), Imperial Tobacco, Philip Morris International, Altria, and Japan Tobacco.

The entry barrier into the tobacco industry appears somewhat high so that overall, the possibility of new firms entering the industry looks quite remote, thereby insulating the industry and the few firms already in existence. Even so, a number of the smaller firms have entered into the industry but none of them is yet to amass a significant share of the tobacco market to warrant a sound recognition of its competitive presence. Finally, in the tobacco industry, the existing opportunities that would otherwise enable companies to implicitly coordinate increases in price is enhanced since price changes may be matched by the competitors with relative ease. Accordingly, reducing the price of cigarettes is not only an unprofitable strategy, but a short-lived one as well.

At the moment, although the tobacco industry may not be regarded as having attained the status of perfect competition, nonetheless, the pricing strategy of cigarettes is somewhat less than that which the industry would have chosen in the event that the firms in the industry were to assume the behavior of a perfect cartel. Companies in favor of comparatively low prices for instance, could effectively limit any desire by competitors to collectively increase the prices of cigarettes.

The nature of competition in the restaurant trade

By and large, a perfectly competitive market is said to exist if all the participants are “price takers”. Therefore, no single participants in the market is said to have an influence on the prices of products on offer. The restaurant trade is characterized by an infinite number of buyers and sellers (Goodman & Ackerman 2009, p. 289). In this case, the buyers have the ability and are willing to purchase the products on offer at a given price.

On the other hand, there is also an infinite number of producers with the ability and willingness to supply the product that the buyers seek at a specific price. Owing to the very low entry and exit barriers, this has ensured that an increasingly higher number of businesses have entered the restaurant trade even as a high number of other have also left the sector when they are unable to contain the prevailing condition. Furthermore, in a perfect competition, the assumption is that both the sellers and the buyers are aware of the quality and the prices of the products (Jin-zhao & Jing 2009, p. 4).

The existing competition among the various restaurant brands and types is quite complicated as a result of the high levels of differentiation that characterizes the individual competing units; in as far as the issues of location and menu are concerned. Accordingly, it becomes quite hard to really establish a set of competitors in a given segment of the market. From a wider context, the idea of restaurants offering meals to guests away from home means that they are effectively competing with such other players as the supermarkets , seeing that a majority of them have in recent years started offering customers take-out meals (Stassen 2005, p. 4).

In addition, it is also important to view the households that are near the market as potential competitors to the restaurants as well. In another twist of events, restaurants that boasts of complimentary menus, and which are based at a single location have the potential to increase the overall demand at that particular location to the extent that neighboring establishments could also be regarded as mutually beneficial, as opposed to competing firms.

The nature of competition in the world oil market

The structure that characterizes the global oil market can at best be described as oligopolistic because of the apparent dominance of a few suppliers. In order that an industry may be categorized as oligopolistic, there is the need to ensure that there are a few large firms that boasts of not only a large market share of the supply of the commodity in question, but also, such firms also needs to be characterized by a certain level of interdependence. At the same time, the oil industry is characterized by very high entry barrier. This is especially the case because the number of oil suppliers is limited to only those countries that have potential oil reserves.

The issue of the prevailing oligopolistic market is one of the extensively accepted hypothetical approaches in as far as oil economics are concerned. Adelman (1993) asserts that the long-term marginal cost often associated with the oil as a commodity is just but a tiny fraction of the actual price of oil. This is the case even when we take into account the estimated future value of the commodity. In an effort to justify the high oil prices, an oil cartel exists to ensure that excess supplies of oil are restricted. In terms of the oil market operations, high cost producers of oil are able to sell virtually every volume of oil that they are in a position to produce.

On the other hand, the remainder of the oil demand is often satisfied by the low-cost producers, usually at the prevailing prices. In addition, the low-cost producers may at times be required to cut back on their production levels. This assertion may very well be confirmed by econometric evidence that relates to the oil industry in Saudi Arabia, by way of confirming the asymmetric behavior often exhibited by the low-cost suppliers of petroleum. In Saudi Arabia, the production of oil is usually restricted in response to ‘negative demand shocks’. However, the production of oil is not expanded in the event of the occurrence of positive demand shocks. This is often with a view to sustaining the high oil prices (Dees et al 2003).

There are several experimental studies that have also endeavored to support the oligopolistic structure that is a characteristic of the global oil market or more specifically, the dominance of such large producers of oil in the world as Saudi Arabia (Alhajji & Huettner 2000; Dees et al., 2003). As the largest oil producing country in the world, Saudi Arabia enjoys between 900 and 144,000 barrels of surplus oil production every day. This represents nearly 13% of the cumulative production capacity of the global oil production, per day (EIA, 2005b). As a result of the enormous capacity for oil production, Saudi Arabia therefore plays a significant role in as far as the issue of “swing” production of oil is concerned.

The demand for oil as a commodity, unlike its supply, largely relies on the choices made by a multitude of firms and individual consumers. Nonetheless, because of the significance of this resource with regard to issue of national security and the economy, private interest groups greatly plays a significant role in influencing its demand. In this case domestic oil refiners remain by far the most influential of these private interest groups.

In this case, these refiners are charge4rd with the responsibility of acquiring sufficient amounts of crude oil from comparatively stable sources. In addition, oil importing nations also greatly influence the oil market in terms of antitrust policies, fiscal instruments, petroleum exploration activities, strategic oil reserves, public funds to facilitate oil exploration or alternative sources of energy, and environmental regulations.

The nature of competition in the foreign exchange market for Australian dollars

Among the most traded currencies globally, the Australian dollar is ranked in position number five. The other currencies include the United States dollar, the Sterling Pound of Great Britain, the Euro, and the Yen (Maps of the World Finance 2010). The table below is an illustration of the exchange rates of the Australian dollar against other world currencies:

(Source: Maps of the World Finance 2010.

The foreign exchange market for the Australian dollars is quite unique as a result of a several reasons. To start with, its huge trading volume implies that the market is characterized by high levels of liquidity as well. In addition, the foreign exchange market has a wide geographical dispersion, not to mention that it enjoys continuous operations. In this case, the market operates on a 24 hour basis, save for the weekends.

There are also a large number of factors that seems to impact on the exchange rates. Moreover, in comparison with other markets that enjoy a fixed source of income, the profit margins of the foreign exchange market are relatively low. Furthermore, leverage is often used at the foreign exchange market with a view to increasing profit margins in terms of the size of the account. For these reasons, the foreign exchange market may at best be described as an ideal form of perfect competition, in spite of the apparent market manipulation by for example, the federal reserve bank in Australia.

Conclusion

Different industries are characterized by different structures of competition. For example, the tobacco industry has historically been identified as an oligopolistic industry. In an oligopoly form of competition, every firm in the industry is aware of the existing mutual interdependence on the other firms. In the face of intense price wars and product innovation, tobacco companies have still managed to fix high cigarette process as a result of the few manufacturing firms in the industry.

These few firms also control a large share of the market. In addition, the industry is characterized by high entry barriers and even the few smaller firms that manage to penetrate into the industry have a near insignificant impact on the price wars in the industry. In addition, there also exist opportunities in the industry that enables a coordinated price increase among the industry players. On the other hand, the restaurant trade may be regarded as an example of perfect competition due to the low entry and exit barriers, hence meaning more players have frocked the market. In contrast, the global oil market is oligopolistic in nature owing to the apparent dominance of the market by a few suppliers who control the supply of the commodity, thanks to their large market share. Finally, the foreign exchange market can be categorized as a form of perfect competition.

Reference List

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