Comparison of market structures of US retail and housing industry - Term Paper Example

?Comparison of market structures of US retail and housing industry Executive summary This study focuses on different market structures and their implications on US retail and housing industry. These industries possess different market structures; retail industry lies in Oligopoly whereas construction industry carries monopolistic competition structure. Where there are four types of market structure which are monopoly, oligopoly, pure competition and monopolistic competition. there are number of factors which determine the market structure which are number and size of firms in the particular market, degree of similarity with competitor’s product, firm’s control over its product’s prices, barriers to entry and exit in the market, and the amount of competition based on non price factor. USA housing industry is classified sector wise in mining, construction, manufacturing, retail, wholesale, real-state, professional, administrative and other. These sectors are interdependent on each other in terms of performance and growth. The effect of US crises on housing industry was devastating as demand for land development turn down largely, now the circumstances are far better and recovering. Whereas US retail industry vends specialized and customized products and offers wide variety of products to the consumers. The change in consumer preference and taste has brought up many new opportunities and challenges for retail industry. Recent recession in US economy has shrank the purchasing power resulting in low sales and ultimately low revenue. The selected US retail industry for analysis is tobacco industry; it retails cigarettes, loose tobacco, cigars and cigarillos, and chewing tobacco. Cigarettes have the highest market share of more than 90% in tobacco industry, whereas others have very low market share with very growth rate. Whereas construction is the selected sector from housing industries, which is the second largest revenue generating industry among others US housing industries. US tobacco retail industry is dominant by few large players namely Philip Morris, Reynolds American and Lorillard which jointly holds 90% of the total market value which is actually very huge percentage and hindrance for the growth of small companies (Zitzewitz, 2003). Cigarettes segment is the dominant segment therefore market structure of this industry depends on its market size, market growth, competition and number of companies operating. Product differentiation is very low in this market whereas barriers to entry are significantly high, and associated companies face non-price competition. This shows that this industry possess oligopoly market structure. The selected US housing industry is construction and engineering, is the second largest in terms of revenue contribution to housing industry whereas it has the highest employment ratio as this sector is highly dependent on human resource. This industry decline by 13.9% in 2010 with a market value of $563.1 billion where as it is forecasted that this industry will show an increase from 2010 to 2015 by 26.2 % with an increased market value of $712.9 billion (Datamonitor, Aug 2011). This US industry contributes 24.7% in the global construction and engineering industry. Players in the market are dependent upon suppliers and buyers, whereas the largest segment of US construction and engineering industry is non-residential building (Datamonitor, Aug 2011). The market structure of the US construction and engineering industry is determined by five key drivers, which are supplier power, buying power, degree of rivalry, new entrants and number of substitutes available. Barriers to entry are there in the market but industrial growth, accessibility of suppliers and weak brands in the market largely appreciates new entrants. There are various factors which determine the supplier power in US construction and engineering industry which are, the degree to which input is differentiated, forward integration, importance of quality/cost, number of substitutes available, threat of large firm’s rule, player dispensability, player independence, supplier size, and switching cost. The following diagram shows the degree of these drivers in the US construction and engineering industry, 2010 which affects the supplier power. Whereas the drivers for buyer power are backward integration, buyer independence, buyer size, financial muscle, low-cost switching, oligopsony threat, price sensitivity, product dispensability, tendency to switch, and undifferentiated product. US construction and engineering industry has a market structure of monopolistic competition as this industry offers similar but not identical products, there are large firms but small firms are also operating in the market, competition often doesn’t depends on the price whereas government regulations are there but market growth and weak brand in the market appreciates entry of new entrants (Smith and Beeck, 2009). Introduction USA has the largest economy in the world with a per capita GDP of $48100; it is ruling the world with its power of technology and economy. There are many different industries operating in the US economy, catering to the needs of consumers locally and internationally (Watkins, 2011). USA retail and housing industry are very vast and comprises many sub industries; numerous companies related to these two industries are among the leading companies of the world contributing largely to the economic growth of US economy. US retail and housing companies vary in terms of market structure, a number of related firms are working as a cluster and enjoying the large market share underlying in the market structure of oligopoly, some are fighting for resources and competing each other possessing the market structure of pure competition whereas some are enjoying monopoly and others having monopolistic competition. Housing industries USA housing industry is sub categorized sector wise to mining, construction, manufacturing, wholesale, retail, real state, professional, administrative and other. These sectors are interdependent on each other in terms of growth and business for example if economy is facing crises, demand for housing and land development falls which result in low manufacturing and construction activities similarly it effects the buying and selling of land, houses, shops etc effecting the business of real state. In this way these all sectors are looking forward to each other to get more business and flourish in the market. There are 122 industries operating under above discussed sectors which are largely affected by US crises started in 2007 resulting in downturn of profits of housing related industries. The effect of US crises was immense as demand for land development due to investment declined largely, now the situation is better and on recovery stage. Revenue from sectors varies because of number of industries operating and on their performance, manufacturing sector so far contributes largely to the economic growth as comparatively it carries highest number of industries and considered highest revenue generating sector whereas mining is the lowest revenue generating sector with lowest number of industries. The construction sector is the second largest in terms of revenue contribution to housing industry whereas it has the highest employment ratio as this sector is dependent extensively on man power (Datamonitor, Aug 2011). Retail industries US retail industry operates in specialized product lines and operators offers wide variety of products to the consumers. Changed consumer pattern of preference and purchase has brought up many new opportunities for retail industry to expand and offer more customized products. Recession has curtailed purchasing power of people resulting in low purchase of products; hence decline the profits of retailers which has forced companies to make their product mix flexible and expand into new fields however tobacco retail industry is the only industry which was in profit even when the recession hit the economy as it works as a stress reliever for the people. Retail industry of US is categorized into many sub retail industries that retails customized products in the field of fashion, consumer goods, tobacco, electronics, automobile, pharmaceutical, food and beverages, music, sports, arms, furniture and mattress. Market structures Companies have different market structure based on their market position and market factors. There are four types of market structures which are monopoly, oligopoly, monopolistic competition, and pure competition. Well there are number of factors which determine the market structure; number and size of firms in the particular market, degree of similarity with competitor’s product, firm’s control over its product’s prices, barriers to entry and exit in the market, and the amount of competition based on non price factor (Wessels, 2000). Monopoly is a market structure in which single firm dominates the market producing a unique product which has no competition, firm has full control on supply and faces no direct competition whereas there are major barriers to entry and firm is the only price maker in this industry. Oligopoly is a market structure in which cluster of few large firms dominates the market, product differentiation varies from industry to industry whereas there are noteworthy barriers to entry, firms face intense non price competition at times and their freedom to set product price vary from industry to industry. In Monopolistic competition, there are many firms producing similar but not identical products, new entrants can easily enter into the market, firms are large enough to influence total supply of products whereas there is no price competition in the market. Perfect competition is a market structure in which there are many producers producing identical products, there are many buyers and sellers in the market as it is comparatively very low entry and exit barriers, firms in this structure are price takers rather than price makers and individuals have no control over market supply (Brickley and Zimmerman, 2009). Selected industries to make comparison on market structures As the topic is very vast, it is not appropriate to discuss all retail and housing industries in making comparison on market structures therefore it is wise to decide two industries and make comparison among firms underlying in those industries. Selected housing industry is construction industry which is the second largest revenue generating industry and highly dependent upon man power, it is involved in the construction of houses, roads, highways, bridges, underpasses, buildings etc Whereas selected retail industry is tobacco industry. Tobacco industry comprises those companies which are involved in distribution and production of tobacco, cigarettes is the largest segment of US tobacco industry with a market value of more than 90% whereas cigars and cigarillos, chewing tobacco and loose tobacco collectively carries remaining percentage of market value. Comparison between market structures of tobacco industry and construction industry US tobacco industry is a profit generating industry and dominant by a cluster of companies which includes Philip Morris formerly known as Altria group, Reynolds American and Lorillard which jointly holds 90%(2010, data monitor) of the total market value. (Datamonitor, Oct 2011) whereas cigarettes are the largest segment of tobacco industry with a revenue of $87.9 billion in 2010 which means it holds 91.9% of total market value of the industry, revenues generated by the sales of cigars and cigarillos are $3.7 billion in the same year which is equivalent to 3.9% of the total market value, chewing tobacco holds 3.4 % of total market value and loose tobacco holds 0.8% market value. Overall annual growth rate is expected to decline in upcoming five years (Datamonitor, Oct 2011). (Datamonitor, Oct 2011) The US tobacco industry is highly dominated by smoking products which are bad for health and causes chronic diseases therefore this sector is considered as highly regulated and legislated by the government which discourages new entrants and limits the growth of existing market players. The another factor creating barrier to entry and growth for new and existing small firms is the dominance of large tobacco firms such as Phillip Morris, Lorillard and Reynolds American, it is very difficult for new entrants to develop a brand. Due to the negative health implications of tobacco and smoking there is a moderate competition by substitute non-durable goods, there is also some competition from illegal cigarette trade; whereas product differentiation is very low in this industry. Tobacco users particularly smokers resist to change the specific brand of cigarettes as the addiction to specific taste is hard to change, therefore mostly smokers are usually very loyal towards their brand and ignores the price factor, even they never switch to other brands no matter how much the price rises whereas few switches to other brands because of the price factor so the non-price competition is there in the market of intense level. Product differentiation is very low in the tobacco industry as product characteristics don’t vary that much; differentiation in this market can be in terms of quality of tobacco, use of filter and where it is produced. These factors determine the price of the cigarette and level of differentiation. US tobacco industry is dominated by some companies therefore it is very hard for small companies to sustain their position in the market whereas market for new entrants is very low. Above trends in the US retail tobacco industry shows that this industry has an Oligopoly market structure as the industry is dominant by few companies, differentiation is very low, non-price competition is very intense and barriers to entry are of significant level. Now coming up to US construction industry, the construction and engineering industry decline by 13.9% in 2010 with a market value of $563.1 billion where as it is expected to increase in from 2010 to 2015 by 26.2 % with an increased market value of $712.9 billion. This US industry contributes 24.7% in the global construction and engineering industry. The following graph shows US construction and engineering industry value forecast: $billion, 2011-2015. The largest player in the industry is Bechtel Group, it is a contractor which handles engineering, construction, and project management operations and is the leading engineering company in the US (Datamonitor, Aug 2011). (Datamonitor, Aug 2011) The largest segment of US construction and engineering industry is non-residential building, possessing 51.6% of the industry’s total value; whereas in 2010 revenues generated by sales of civil engineering is $272.3 billion, equivalent to 48.4% of total market revenues (Datamonitor, Aug 2011). (Datamonitor, Aug 2011) The market structure of the US construction and engineering industry is determined by five key drivers, which are supplier power, buying power, degree of rivalry, new entrants and number of substitutes available (Datamonitor, Aug 2011). (Datamonitor, Aug 2011) There are large players operating in US construction and engineering industry along with small players, they highly rely on suppliers and buyer for raw material and to increase revenue, which reinforce buyer and supplier power. However after recession suppliers also face difficulties to sustain its growth as raw material price has shown upward trend since the arrival of recession. Competition is not so intense because of diversification; companies broaden their horizons by expanding into other construction related areas. Buyers in this industry are contractors which work on contractual basis for a project; they are large in nature but few in number. Likelihood of new entrants in US construction and engineering industry is majorly dependent upon two factors; the rate of growth of industry and regulations. Since past few years, this industry as a whole shown good growth rate which is encouraging new players but usual severe regulations can be a source of barrier to entry whereas level of competition is truncated to some extent by good growth rate. US construction and engineering companies are highly dependent upon on suppliers and buyers therefore it is necessary to discuss the forces which determine supplier and buyer power to have a full insight on market structures. There are various factors which determine the supplier power in US construction and engineering industry which are, the degree to which input is differentiated, forward integration, importance of quality/cost, number of substitutes available, threat of large firm’s rule, player dispensability, player independence, supplier size, and switching cost. The following diagram shows the degree of these drivers in the US construction and engineering industry, 2010 which affects the supplier power (Datamonitor, Aug 2011). (Datamonitor, Aug 2011) Whereas the drivers for buyer power are backward integration, buyer independence, buyer size, financial muscle, low-cost switching, oligopsony threat, price sensitivity, product dispensability, tendency to switch, and undifferentiated product. The following diagram shows the degree of these drivers in US construction and engineering industry in year 2010 which determines the buyer power (Datamonitor, Aug 2011). (Datamonitor, Aug 2011) The threat of substitute is very low in this industry as cheap quality alternatives are not preferred in construction sector. The following diagram shows the factors which effects to the threat of substitute in US construction and engineering industry in year 2010 (Datamonitor, Aug 2011). (Datamonitor, Aug 2011) The above analysis of United States construction and engineering industry shows that this industry has market structure of monopolistic competition as most of the characteristics of the industry are similar to the characteristics of this structure. This industry offers similar but not identical products, there are large firms but small firms are also operating in the market, competition often doesn’t depends on the price whereas government regulations are there but market growth and weak brand in the market appreciates entry of new entrants. Conclusion To conclude, US tobacco industry and construction and engineering industry have dissimilar market structures. US tobacco industry is dominant by few large players whereas construction and engineering industry have both large and small players operating in the market; tobacco industry has high barriers to entry whereas new entrants in the construction and engineering industry faces regulation threat to entry but market growth, easy access to suppliers and space in the market appreciates them; tobacco users particularly smokers don’t prefer to switch to other brands thus not even price hike can’t force the loyal customers to switch their brand whereas in construction and engineering industry non-price competition is significant in the market; in tobacco industry there is some differentiation in the product such as cigarettes can be differentiated on the bases of quality tobacco, use of filter and where they are produced whereas in construction and engineering industry product differentiation is very low; lastly the impact of government is very high in tobacco industry in comparison to construction and engineering industry. Thus tobacco industry posses Oligopoly market structure whereas construction and engineering industry has monopolistic market structure. References Brickley, S., and Zimmerman, J. (2009). Managerial Economics and Organizational Architecture. Boston: McGraw Hill Datamonitor. (Aug 2011). Construction and Engineering in the United States: Industry Profile. NY: Datamonitor USA. Datamonitor. (Oct 2011). Tobacco in the United States: Industry Profile. NY: Datamonitor USA. Smith, G., and Beeck, T. (2009). ‘Leading and lagging housing-related industries.’ The RMA Journal. Retrieved May 20, 2012, from http://www.ibisworld.com/Common/MediaCenter/Housing.pdf Watkins, T. (2011). A Statistical Review of Current Economic Conditions in the U.S. USA: San Jose State University, Department of Economics. Wessels, W. (2000). Economics. New York: Barron’s Educational Series. Zitzewitz, E. (2003). ‘Competition and Long-Run Productivity Growth in the UK and US Tobacco Industries, 1879-1939.’ The Journal of Industrial Economics, 51(1): 1-33. Read More