Monopolistic Competition - Toyota Motor Corporation - Assignment Example

Name: Professor: Institution: Course: Date: Table of content 1.0 Introduction………………………………………………………………………………3 1.1 Company’s background…………………………………………………………………..3 2.0 Monopolistic competition…………………………………………………………………4 2.1 Demand Curve under monopolistic competition…………………………………5 2.2 Determination of price and output in a monopolistic market…………………….7 2.3 Price and output levels in the short run…………………………………………...7 2.4 Determination of price and output in the long run………………………………..8 Conclusion………………………………………………………………………………………...9 Recommendation………………………………………………………………………………...10 References………………………………………………………………………………………..11 1.0 Introduction A product market is the market in which various commodities are sold. An industry is made up of a group of firms producing similar products; it may be made up of only one firm or several (Lawrence & McDaniel 2008). This means that firms in different industries operate in different market conditions for their products (Lawrence & McDaniel 2008). The number of firms operating in a particular market will determine the degree of competition that will exist in a given industry. In some markets there are many sellers meaning that the degree of competition is very high, whereas in other markets there is no competition because only one firm exists. There are four main market structures, namely; perfect competition, monopoly, monopolistic competition and oligopoly (Lawrence & McDaniel 2008). This report will focus on Toyota Motor Corporation and demonstrate that the market for its product represent monopolistic competitive market. 1.1 Company’s background Toyota Motor Corporation is the largest car company in Japan and the largest in the world after overtaking General Motors in 2008. By the late 1990’s, the company was producing five million units per annum and controlled 9.8% of the total global markets of auto mobiles (Toyoland.com 2011). Today, Toyota is manufacturing a diversified line of vehicles ranging from subcompacts to SUV, to trucks to luxury, sports vehicles, minivans and buses. Toyota, as an innovative leader, is well known to be the first mass-market hybrid in the whole world as well as for its management philosophy (Toyoland.com 2011). Their vehicles are manufactured with either a hybrid or combustion engine as with Prius. The subsidiaries of Toyota also produce vehicle; Hino motors produces buses and trucks while Dalhatsu Motor manufactures mini vehicles. In addition Toyota manufactures automotive parts for their own use for selling to the others. Toyota popular models include Corolla, Land Cruiser, Camry, Tundra truck and luxury Lexus line. Toyota Company is one good representation of a true success story in the history of the manufacturing industries (Toyoland.com 2011). 2.0 Monopolistic competition Monopolistic competition falls within the range of imperfect competition. It s not possible to have a market structure where there are many buyers and many sellers who produce a homogenous product (perfectly competitive). In the same way, it is not possible to have a market structure with only one firm producing a commodity which has no close substitute (pure monopoly). All the market structure in the real world lies between perfectly competitive markets and pure monopolies (Brakman & Heijdra 2004). These markets are referred as imperfect markets. In a monopolistic market there are many sellers of a similar product which is made to look different and this is referred to as product differentiation. In this market, the companies produce similar products but they differentiate it through packaging, designing, colour, etc. for example, we have many makes of cars from different manufactures e.g. Toyota, Hyundai, Chevrolet and Peugeot, but in essence they are all just the same . (Brakman & Heijdra 2004) The following assumptions are made for a monopolistic competitive market: A large number of sellers in the market who operate independently The sellers in the market offer differentiated products where the differentiation may be real in that different materials are used to make the product. The differentiation may also be imaginary, in that it has been created through advertising, branding, etc There are no barriers to entry or exist from the industry Firms set their own prices which depends on the cot incurred in production and the demand in the market No company has control over the factors of production. The companies acquire the factors at the prevailing market prices (Brakman & Heijdra 2004). Huge selling costs are incurred in this type of market due to heavy advertising. This helps companies to get a substantial number of customers. Companies in monopolistic competition engage in non-price competition. This may include offering customers after-sales service, gift or free transportation of the commodity. 2.1 Demand Curve under monopolistic competition Firms like Toyota that operate in a monopolistic competitive markets focus in differentiated products that have close substitutes. If the nature of differentiation of the vehicles is so small that the vehicles are alike, then the firms face a demand curve that is fairly elastic (Davies & Cline 2005). This is because vehicles are very close substitutes. If Toyota decides to raise its price, some of its customers are likely to switch to vehicles of other rival firms. From the diagram below, Toyota can be able to sell q2 units of output at the price p1. If the company decides to raise its price to p2, then th quantity demand of the commodity falls from q2 to q1. Source: Davies & Cline (2005) If the Toyotas vehicles are so differentiated that they appear quite different from those of the competitors, the demand curve tends to be a bit inelastic as shown in the figure below. This is because Toyota will not lose many customers if it decides to raise its prices due to product loyalty. A big change in the prices of the vehicles will result to a small change in the quantity demanded. The action of a single vehicle’s firm is keenly watched by the other rival firms in the industry. If the companies manufacture perfect substitutes, a slight reduction in the prices by one of the company will force the other firms to reduce the prices as well. However, in reality, if one of the firms raises its prices of its vehicles slightly above the prevailing market price, it is unlikely to lose many customers since they are brand loyalty Davies & Cline (2005). Source: Davies & Cline (2005) The action of a single vehicle’s firm is keenly watched by the other rival firms in the industry. If the companies manufacture perfect substitutes, a slight reduction in the prices by one of the company will force the other firms to reduce the prices as well. However, in reality, if one of the firms raises its prices of its vehicles slightly above the prevailing market price, it is unlikely to lose many customers since they are brand loyalty. The attachment that the customers have to the Toyota brand will make them to continue buying it. Also, a company that decides to lower its prices slightly below the prevailing market price will not gain many customers because of brand loyalty that the customers have to the other brands. 2.2 Determination of price and output in a monopolistic market Firms operating in a monopolistic competitive market produce commodities that enjoy brand loyalty from its consumers; such firms like Toyota usually enjoy some monopoly power as far as their brands are concerned. As a result of this, the companies fix their own market prices as well as output which may vary considerably from one company to another in the industry. However, the demand curve of a company like Toyota that is in a monopolistic competitive market is fairly elastic compared to that of a monopoly company. This is because there are still other firms that offer close substitutes (Stephen et al 2003). 2.3 Price and output levels in the short run According to Stephen et al (2003), a company in a monopolistic competitive market maximizes its profits at the point where: MR = MC MC cuts the MR from below For a monopolistic competitive firm like Toyota, the position resembles that of a monopoly firm and is as shown by the diagram below. Source: Stephen et al (2003) The company’s short run equilibrium price is pe and qe is the equilibrium quantity. 2.4 Determination of price and output in the long run In the long run new firms enter the motor vehicle industry and existing firms may also increase their production capacity. This leads to an increase in the supply of the motor vehicle in the market. Companies are therefore forced to invest additional resources in advertisement and brand improvement in an attempt to get more customers. The additional costs incurred lead to an increase in marginal and average costs which shift upwards (Stephen et al 2003). The new price and output levels are shown in the diagram below. Source: Stephen et al (2003) In the long run, Toyota’s new equilibrium price is pe and qe is the equilibrium quantity. The equilibrium is reached when the firm’s average cost curve is tangential to the average revenue curve as shown in the above figure. It is also very important to note that in the long run, the firms in a monopolistic competitive market such as Toyota incur additional costs in terms of advertising and brand improvement. The MC and AC curve shift outwards due to an increase in cost. The fact that the AR curve in a monopolistic competitive market is downward sloping allows the firms to produce less output and charge higher prices than firms in perfectly competitive markets. The revenue derived from the sale of an extra unit declines as output increases (Stephen et al 2003). Conclusions From the findings, it is evident that Toyota motor corporation market for its products represents a monopolistic competitive market. There are a large number of sellers in the motor vehicle industry who operates independently. Sells in the market offer differentiated products, this brands include; Toyota, Hyundai, Chevrolet and Peugeot. Also there no barriers to entry or exist in this industry since no company has control over the factors of production. Finally, Toyota and other brands in this market determine the own prices which depends on the cost incurred in production and demand in the market. Recommendations In such a market Toyota needs to come up survival strategies since the level of competition is very. Most company in the motor vehicle industry has focused more on advertising as a tool of increasing their revenues. However, the several strategies which can give Toyota a competitive advantages in the market over its competitors. To start with, Toyota must identify what sets it apart from its competitors, they need to be clear about the products and services the business offers and believe in them. Toyota should understand the difference between a customer and a client. A customer comes and goes but a clients implies a long-term relationship therefore they are loyal for a lifetime. Finally, the company should focus on what the client needs. There is a very big difference between what the client wants and what the client actually needs References Brakman S, & Heijdra (2004) The monopolistic competition revolution in retrospect 1st Edition: London, university press Davies A & Cline T (2005) "A Consumer Behavior Approach to Modeling Monopolistic Competition" Journal of Economic Psychology 26: 797–826. doi:10.1016/j.joep.2005.05.003. Lawrence J. G, & McDaniel (2008) The future of the business: The essentials, 4th Edition: London Stephen K, Stonecash R, Gregory M (2003). Principles of Economics: Thomson Learning ISBN 0-17-011441-4 Toyoland.com (2011) Toyota corporate history Retrieved on 13th May 2011 from http://www.toyoland.com/history.html Read More