Subject: the analysis of real companies and raw data



Subject: ECO511

Subject name: Economics for Business

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Name: Saiman Shrestha

Student Number: 11648698

Lecturer: Maruf

Word limit: – 2000

Due date: 1st
January, 2018


In recent
times as consumers have been afforded multitude of choices in particular
markets thanks to various reasons such as increase in their disposable income,
exposure to the internet and globalization, companies have invested billions in
research and development to keep up with the changes in customer preferences. Similar
to any other industry, the modern automotive firms have to constantly evolve in
order to survive under constant cutthroat competition. It is often said that “necessity
is the mother of all inventions”. However, firms in industry spearheaded mostly
by technology have been face with the need to adopt a proactive model by
creating segments of necessities for customers rather than responding to their
necessities. As argued by Bolton (1993), firms either, underperforming or
flourishing, always find the need for innovation to be constant for respective
reasons. So, to withstand the perpetual outward pressure of the customers,
competing firms and environmental advocates regarding different aspects of the
products such as safety, design, reliability, quality etcetera, the
manufacturers rely on its Research and Development team for innovation to
overcome such challenges (Howell & Hsu, 2002). It is essential to explore
the nature of the competition in the market before identifying the reasons
behind companies’ strategical decisions. In this report will be the analysis of
real companies and raw data comparison as well as rationale behind their need
for innovation.


The scale
of competition invited by the surge in demands for cars is such that the car
manufacturers have found margin of error to be non-existent in their attempts
at increasing market shares through product differentiation. Manufacturers
achieve this product differentiation by standing out amongst the competition
which allows them to make profit both in the short run and the long run.
Depending on the type of market they operate in and the level of competition,
the cost associated with product differentiation can vary. As the modern car
market is a highly saturated one with many competing manufacturers whose
customers have access to comprehensive, albeit not perfect, information about
the specifications, prices, quality, we can render the modern car market to be a
monopolistically competitive one (Salop, 1979).

discussing about whether a firm can generate profit in the long run by
differentiating its product in the market, it simply boils down to the type of
market in which it operates. For instance, producers of everyday items such as
grocery items can earn regular income in short run without having to increase
their cost of production on advertising as a result of homogeneity of the
products. However, due to the presence of close substitutions, producers might
have to lower their prices to keep their products competitive in the market.
Moreover, firms in competitive markets concede the ability to set prices solely
to the market forces (demand and supply). So, as they try to undercut rivals
for profit, their attempts backfires as the rivals match their prices promptly
(Bourdon, 1992).


(1985), defines monopolistic competition as,

A situation
where (1) there are many firms producing differentiated commodities ; (2) each
firm is negligible, in the sense that it can ignore its impact on, and hence
reactions from, other firms ; (3) free entry leads to zero profit of operating
firms ; but (4) each firm faces a downward-sloping demand curve and hence
equilibrium price exceeds marginal cost. (p. 529)

Much like
in perfect competition, the entry and exit into the market is easy and hence
have only partial control over the pricing. However, what others do is not of
much concern to the firms and prices are not interdependent so firms set their
own prices. Furthermore, customers do have access to information about the
products but it is unlikely to be perfect.

How product
differentiation occurs

In a
monopolistic competition, firms can find the need for product differentiation
to be indispensable especially in the long-run. This is because as existing
manufacturers generate profit in short run as a result of monopoly or
oligopoly, more new firms will get attracted to that market due to low barriers
to entry and the firm’s profit will suffer in the long run. Product
differentiation is a source of competitive advantage for firms in a
monopolistic competition and is achieved by featuring characteristics such as
quality, flexibility and reliability of delivery (Baines & Langfield-Smith,
2003). Through product differentiation, firms can make their products
physically stand out by making use of appearance, performance, conformance, durability
and reparability. Marketing is another tool of product differentiation and it
can have varying impact depending on the scale of promotion. Firms can also integrate
their brand marketing with Corporate Social Responsibility which will attract
positive attention from environmentalists.

The major
effect of product differentiation for a firm is that, in short run, it can enjoy
more profit than its counterparts in the market as a result of temporary
monopoly. At this point, there will be profit maximization (MC=MR) because the
demand is inelastic I.e. the demand curve lies above the Average Total Cost
Curve (ATC) (fig 1). Hence, the firm can charge at prices above marginal costs
(fig 1). In time however, due to low entry barriers, other firms will enter the
market looking to earn economic profit and the demand curve starts to shift to
the right (fig 2). At this point, due to intense competition, firms will stop
earning profit and just break-even. So in order to correct this problem, firms will
invest heavily on product differentiation primarily through product alteration
and aggressive product marketing. If successful, the firm can regain its lost
market shares effectively shifting its demand curve back to the right. However,
as established earlier in this report, companies who tend to overcome this
situation do so by making timely adjustments in their production and marketing
strategies before their profits start falling down.

Figure 1                                                                                   Figure



iPhone is one of the household names in the mobile phone market. Even though it
has such a huge customer base worldwide, the presence of a large number of
other cellphone companies means that it cannot always rely on its brand name to
attract customers. Hence, Apple has sought to produce differentiated batches of
products regularly to keep its customers excited. Apple designs its new
products in such a way that the new iPhone is an upgrade on not only its own
older model but on all the other cellphone models in the market in terms of
security, endurance and durability, battery lifespan, aesthetics, camera
etcetera. After spending so much on product development, Apple does not spare
any costs on advertisements as well regularly hiring marquee Hollywood
celebrities to promote its products. Apple’s confidence in reaping profits
after spending so much on product differentiation shows the need for perpetual
innovation to stay a step ahead of its close competitors.

Product development in car


Moving on
to the case of car manufacturers and why more and more new models of cars are
being introduced to the market. The demands for cars worldwide has been on the
up as more and more customers are looking to buy quality products at lower
prices. This fact can be reflected on the Australian car front where in 2016,
for the third year in a row, there was a new car sales record with an increase
of 2% over the preceding year’s sales (“RECORD SALES YEAR FOR 2016 |
Federal Chamber of Automotive Industries”, 2017). With increase in demands
for cars, companies are under constant pressure to meet expectations from
customers regarding the product’s quality, safety, durability, post sales
service. In addition, environmental concerns from vehicular emission poses a
substantial challenge for firms. Failure to meet these expectations at minimum
could mean that the firm could be driven off from the market. The
responsibility of incorporating all the necessary new features and innovation
with the business strategy before rolling them out into the market falls on the
firm’s R.

discussing examples of firms today who are making use of product development as
a differentiation tool, we should look at an example of General Motors who
faced financial difficulties in the early 90’s because it failed to continue on
its product innovation and needed a strategic reshuffle.  This was as opposed to what GM had been doing
historically on the innovation front which saw them pioneer features such as
speedometer, auto transmission, crash-test dummies, integrate chassis system to
name a few (Howell, 2000).

Toyota and Volkswagen
are two of the biggest players in the current car market with the two rivalling
each other across various product markets. Among the influx of Toyota and VW
models rolling out yearly in the market, Toyota Prius V and Volkswagen Golf are
two of the more popular models.




Baines, A., & Langfield-Smith, K. (2003). Antecedents to
management accounting change: a structural equation approach. Accounting,
Organizations And Society, 28(7-8), 675-698.

Bolton, M. (1993). Organizational Innovation and Substandard
Performance: When is Necessity the Mother of Innovation?. Organization
Science, 4(1), 57-75.

Bourdon, E. (1992). Pricing Strategies in Highly Competitive
Markets. Management Decision, 30(4).

SALES YEAR FOR 2016 | Federal Chamber of Automotive Industries. (2017).
Retrieved 26 December 2017, from

Hart, O. (1985). Monopolistic Competition in the Spirit of
Chamberlin: A General Model. The Review Of Economic Studies, 52(4),

L. (2000). Innovation in the automobile industry: A new era.
Retrieved 27 December 2017, from

Howell, L., & Hsu, J. (2002). Globalization within the
Auto Industry. Research-Technology Management, 45(4),

Salop, S. (1979). Monopolistic Competition with Outside
Goods. The Bell Journal Of Economics, 10(1), 141.




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