Product Market Strategy and Business Model

Question: Discuss about theProduct Market Strategy and Business Model. Answer: Introduction In the first part of this report, detailed examination is done on whether firms can ensure optimal profits in future when they offer differentiated products in varied market structures. Differentiation is said to occur when firms offer unique features in a product to their customers thus, cutting the intense competition. The advantages gained through product differentiation are briefly outlined reflecting firms capabilities in different market structures. Moreover, the firms capacity to vary the prices under monopolistic market is also highlighted through Chamberlins theory. In the next part, the grounds on which wage rate vary across or within the occupations and industries are discussed. Questions regarding the wage distribution within occupations and critical examination of the same are further demonstrated in this report. Carl Barsky and Martin Personick researches are been considered for determining the extent to which wages tend to vary across industries and occupation. Product Differentiation Maximizing Economic profits Of Firms Differentiation tends to enhance product attractiveness by highlighting its unique features in contrast to other competing products. The seller of the products, through the successful application of product differentiation, gains a competitive advantage. Profits eventually determine what market a firm should enter in and the type of products it needs to sell (Kaiser and Wright, 2006). Profit is gained when the firms total revenue exceeds the total costs of a given set of quantity. Thus, in order to maximise profits, firm needs to produce output where their marginal cost equals marginal revenue regardless of the market structure in which they operate. This condition determines the extent of profit maximisation regardless of the market structure in which a company currently operates. Profit maximising firms aspire to differentiate their products because it assists in earning greater profits. Differentiation has the ability to affect the performance of an organization by cutting direct competition, therefore, increasing its profits (Stieglitz and Heine, 2007). Product differentiation holds the capability to shift the supply or demand curve. So long as the customer perceives that there is a change in the product differentiating it on some or all aspects from the others, they are ready to pay extra for the unique features present in the goods. Price competition might not be easy in cases where market contains more operating firms. The price competition can be kerbed by offering differentiated products in the more concentrated market with few players (Conrad, 2005). Given the market demand, competitors are shielded in cases where products are differentiated. A downward sloping demand curve is observed when a company offers differentiated products. This is because even if the prices are charged above the prices of its competitors it does not lose all of its customers, as some of them are still willing to pay extra for the additional features of that, particularly differentiated product. The organisations that differentiate their goods in the market face a cumbersome process as the product choice has an ample effect on the revenues. Besides this, the level of product differentiation tends to intensify the rivalry among all market players. For instance, a novel firm enters into a perfectly competitive industry i.e., expanding for making more profits in a short run. In a perfectly competitive market, all goods are substitutes thus making product differentiation inconsistent with the conditions of perfect competition. Since in this market, the companies are selling close substitutes their demand curves are more elastic (Baker and Sinkula, 2005). As more organisations enter this market, it will cause an inward shift and an increase in elasticity because more close substitutes are available and lesser consumer demands are present for an individual firm. In a monopolistic competition, a company selects to maximise its output by ensuring profits in the long run. One of the essential traits of a monopolistic ally competitive market is that there are no substitutes available for a monopolised good therefore making product differentiation a key feature for such market. Herein, the products are featured with different characters from others making its categorization difficult, drawing lesser similarities with its competitors. Differentiation holds the potential to create some sense of value for the firms product by demonstrating unique features of the respective product (Zott and Amit, 2008). A deep intent of profit persists when a firm engages itself in product development as it herein differentiates themselves from a large segment of their competitors. RD expenditure in such market structure is limited because most companies are unable to obtain cheap funds for RD resulting in temporary financial profits. The below figure illustrates mo nopolistic product differentiation through the Sun Record Labels attempt at discovering and shaping new, different and exciting performers who could draw a following of loyal fans. Figure 1: Monopolistic Competition (Source: Zott and Amit, 2008) According to Edward Chamberlin (2013), the key element of monopolistic competition is that most firms are not just confined to price competition but they survive through non-price competition. This is possible through companies presenting a unique product or advantage, which give them a superseded control over the price (Zera, 2013). Through product differentiation, the firm gets to vary the prices over the long run. Lastly in an oligopoly market, product differentiation is not a compulsive feature but if an organisation has successfully been able to engage itself in product differentiation it can gain more market power by dominating at least a part of the industry (De Loecker, 2011). An impending advantage is foreseen for firms when they are able to facilitate demand through differentiation. Below is an example of product differentiation carried out by Apple and its economic profit before and after the differentiation. Figure 2: Product Differentiation under Oligopoly (Source: De Loecker, 2011) It has been seen through these results, which indicate that firms are having an upper hand by offering products that hold some unique features in them. The prices are lowered in presence of any market competitor but have minimal effect when the competitor is having a different product type (Stieglitz and Heine, 2007). Thus, it can be seen that differentiation is an ideal product choice of behaviour because the threat lying in the competition is lessened when the product offered by them is differentiated. Wage Rate Differential within occupations and industries Analysts have extensively researched the phenomenon of wage differential and determined a range of factors affecting wage rates. Factors like industry and the occupation, unionisation, ownership and size of the establishment, and geographic location have been analysed, as have individual features like the knowledge, performance, tenure, gender and skills of the employees. The majority of such research works have concentrated on pay disparities within establishments and occupations and have highlighted the influence that the above-mentioned elements had in clarifying the reason behind higher wages in some occupations as compared to others (Lane, Salmon and Spletzer, 2007). Wages may also dramatically differ within a single occupation. For instance, in 2004, in the USA, ten percent of computer programmers were paid $17.19 per hour, while the leading ten percent were paid $42.07 per hour. Questions concerning wage distribution within occupations, within companies, are appealing when seen alongside the setting of evolutions in worker wages during the past ten years. Certain employee compensation specialists have advocated that competitive pressures encouraged organisations to gradually shift to variable compensation plans, which involve variations in workers wages per annum or every salary period, based on company or employee performance. This concept is in contradiction to the conventional notion that workers get an hourly wage or a predetermined annual, monthly or weekly pay. The arrival of broad-banding culture in several organisations in the 1990s also suggests that wage was becoming more scattered over time. Broadband refers to the classification of job which describes the profiles more widely as compared to conventional job descriptions, usually by mixing previously different profiles into one category. Along with the wider job description is a broader gamut of compensations, which can be paid to the employees in broad-banded jobs (Sunday, and Pfuntner, 2008). A 1981 research by Carl Barsky and Martin Personick examined the degree to which pay rates differed within industries in 6 mining and 43 manufacturing sectors. The authors identified that industries varied noticeably in the degree of pay diffusion. It was also identified by them that the industries varied in what was the extent of the difference because of dissimilarities inside companies with dissimilarities across companies (Sunday and Pfuntner, 2008). Apparently, some occupations are higher paying than others. Doctors make more than professors, who make more than salespeople. The majority of such wage differentials are the outcomes of training and educational requirements, which is usually referred to as human capital. Another important factor which determines wages is the demand for labour, which is obtained from a product or service demand which the employee provides. If the person provides a good or service which is greatly desirable, then a greater wage will surmount for a given supply of employees who can perform that job (Audretsch and Siegfried, 2012). At times, ability makes a significant difference in wage potential which overshadows the variation in ability. Some jobs are high paying due to the nature of work involved which is not commonly desirable. They may be dirty or hazardous, or the employment may be seasonal and sporadic. For example, construction industry pays more than retail due to such compensating differentials, which are non-financial distinctions among jobs where lower or higher wages are paid due to the variations in the attractiveness of the job (Banerjee, 2005). Several occupations pay wages which are commensurate with performance, like managerial or sales occupations. The aim of this performance based pay is to lure the employees with the greatest marginal revenue productivity (Torpey, 2015). For any particular type of job, salaries are normally higher in one region/country than in others. Much of such variation is due to dissimilarities in the cost of living. Individuals may not be willing to surrender health insurance, pension plans or seniority at their current employment. Therefore, wage differentials in diverse regions may exist, even if individuals are aware that higher wages can be earned somewhere else. Local labour markets differ in wage levels, based on the industrial composition (Hickman, 2009). Communities in which a huge percentage of companies are in high-profit sectors are likely to be high paying communities and usually, have a greater cost of living. On the other hand, communities with a large number of companies in low-profit sectors are likely to have lower wage levels. At times, communities witness a short-term rise in wage levels due to increasing in demand of labour as compared to its supply (Cottrell and et al., 2009). When questioned, the majority of the companies answer that the main determinant of their wage level is the market rate. Nonetheless, there is normally a caveat to this, which is their statement whether it is affordable to us. Hence, it would appear that the wage rate of the company is determined by external forces but the reality of the companys financial standing may alter or override the carrying out of such desire. As reported, profitable companies tend to pay greater remuneration, whether their prosperity is based on management ability, technical efficiency, size, product market, or some other element. The situation of the automobile sector is an illustration of what can conjure when a sector which is immensely profitable becomes prey to bad times and its wage level must decrease too in order to sustain and survive (Lane, Salmon and Spletzer, 2007). Technological changes are also found to be positively correlated with industry wages and also with the ratio of earnings of the high ly educated relative to less educated employees. Conclusion It is well articulated from the first part of the report that organisations have a less negative impact when they differentiate their products. Through product, differentiation competitors are able to sustain their monopolistic prices assuring profits for the future. Sufficient claims are provided in the report to determine the optimal benefits of the product differentiations in a monopolistic market. Furthermore, the Chamberlins verdict indicates product differentiation has the power to influence the price under monopolistic competitive market. From the second part of the report, it can be concluded that the wages paid to workers greatly varies. Such wage differentials are mainly the outcomes of differences in the workers ability and the efforts put in by them for performing the job. Wage differentials also exist across occupations, due to disparities in the supply and demand of workers for a specific occupation or job. Such differences emanate mainly due to the differences in the level of training or education needed as well as in the desirability of the job. References Audretsch, B. D. and Siegfried, J. J., 2012. Empirical studies in industrial organization: Essays in Honor of Leonard W. Weiss. Springer Science Business Media. 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