Reference no: EM132167499

Question: Need response

Anthony Knapp

• Identify the market structure that best characterizes the industry described in the article.

Home Depot's market is considered an oligopoly. An oligopoly is when a small group of companies share the market and entry into the market will be hard due to their market share. There are very few other companies in the same market as Home Depot such as Lowe's, Menard's, Ace Hardware, and True Value. The benefit of having very few companies in the market allows them to utilize zone pricing. Zone pricing allows companies to set different prices in different zones or areas, so the prices are not the same at every store.

• Explain the factors you considered when identifying the market structure for this industry.

Home Depot and Lowe's hold the home improvement market of 31 percent and 21 percent respectively (Webb, 2018). The other company's makeup the remaining 48 percent of the market. It would be difficult for another company to come into the market and try to compete with them because of their large market share. Since there are two main companies, their pricing remains competitive because if one lowers their price too far then profits would be reduced, and the other company would have to follow suit. They also carry the same or similar brands so product differentiation is not common due to construction materials being common.

• Analyze whether this industry will work better if it changes its market strategy and starts showing characteristics of another market structure.

If these firms were monopolists, this would represent a missed opportunity to price discriminate and increase profits. With competitive interaction, however, price discrimination has an ambiguous effect on both profits and consumer welfare (Holmes, 1989). There would be fewer profits and lower prices if the market was filled with competition. The market would survive under monopolistic competition because there are many different areas in home improvement that would allow the firms to break away. The home improvement retail industry has stores that have many different areas of home improvement under one roof. If they were to break up into smaller stores but focus on one area, the industry will still survive due to the need for the material and services provided.

• Critically analyze the advantages and disadvantages of the market structures that you studied in the readings.

There are four types of market structures which are perfect competition, monopolistic competition, monopoly, and oligopoly. Perfect competition is where it is easy to enter the market, products are homogenous, and there is large buyer and seller pool. The advantages include efficient use of resources due to the competition, price is equal to marginal costs, and profits are made overtime. The disadvantages include undifferentiated products and research and development has no incentive because information is shared easily. Monopolistic competition is where there are many firms that sell slightly different products with different prices such as the automotive industry. The advantages include buyers have plenty of options, marketing is done through multiple channels allowing customers to discover new things and to make informed decisions on which product to purchase, and it promotes innovation by making firms try to become different. The disadvantages include high prices for differentiated products, basic product stays the same as added features camouflage the product, and increased cost of products due to high marketing costs. A Monopoly has no competition which allows it to have high profits. The advantages include duplication nonexistence which allows resources not to be wasted, research and development helps sustain the firm as being a monopoly, and government gain extra revenue from monopolies from extra taxes. The disadvantages include poor service, no consumer sovereignty, and lack of competition may lead to outdated products. An Oligopoly is when a small group of firms control the market. The advantages include choices are simple, higher profits, and creates competitive prices. The disadvantages include fewer choices, reduces motivation to compete and difficult for emerging firms to enter market.