Market Structure, Market Power And Profitability
In today’s economy, there are several market structures in which corporations can operate. Market industries are broken into four distinct market structures which are the monopolistic, oligopoly, monopolistic competition, and pure monopoly. The type of market structure a firm chooses influences the behavior, efficiency, and profit level it can generate. According to Web Finance (2017), “market structure is a collection of factors that determine how buyers and sellers interact in the market, how prices change, and how different levels of production and selling processes interact.” In the economic field, market power is the ability to control or reform prices of goods within the specific market of operation. Corporations strong enough will be in a position to raise prices without losing customers. Take Netflix for example, becoming one of the most favored digital streaming networks, with a market geared towards its customers. “Competitions generate diversity in three critical inputs to the innovation process: motivations, participants, and organizations”. Competitive markets exist when many buyers and sellers within the market offer similar values within like products; no buyer or seller has the power to influence the price of the product bought or sold; that not of Netflix. Monopolistic markets are considered to be monopolistic when they carry features such as high prices, supply restrictions, or excessive barriers to entry (obstacles required to enter the market). “A monopolistic market comprises of one entity, in which consumers have no choice but to use the service of the company”.
Netflix, for instance, does not have a monopoly in the entertainment market. Netflix offers service like that to other companies such as Hulu Plus, Amazon Prime, and YouTube Red. Proceedings services offer streaming content to customers looking for their favorite forms of entertainment available to them. While providers such as these offer linear programming that is readily available, these providers offer distinct content which only available through that specific service. Because these companies are so distinct from one another; Netflix, Hulu Plus, Amazon Prime, and YouTube Red operate in an oligopoly market structure. An oligopoly market structure is when companies sell or offer similar, but not identical product. Though dissimilar, each oligopoly market has some sort of monopoly over the unique product they produce. For example, unique broadcasts that can only be found within that product. However, participants within the oligopoly market are similar in nature in one form or another. Similarities between the companies range from price, subscription plans, and compatible devices, allowing the consumer to view content from wherever they want.
Technology and social environments have advanced from previous years, where demands for devices have become compatible with needs of the consumers and that of the entertainment markets. Whether a consumer chooses a subscription to one distinct or multiple contents; advancements have been generated to cater to the consumer’s needs. Similarities of each company are within the content, whereas the extra features are provided with whichever a consumer chooses to follow. Each company is compiled of original content, along with broadcasts content from other sources, and made them available to subscribers. The price structure to have linear entertainment is based on the consumer whom has decided to cease access to personal cable programming; customers, in general, pay less than if chosen to continue with a cable provider. Netflix costs subscribers a minimum of $7.99- $13.00 a month, depending on the number of streamlines one wants, and upon if one wants the premium package. Hulu Plus costs subscribers a minimum of $7.99- $21.99 depending on package type. YouTube Red provides customers one option of $11.99 per month, and Amazon Prime an option of $8.25 per month or $99.00 for a full year of access. Each relate in price depending on what one chooses, but within each, consumers are limited to what is available; not all provide similar broadcasts. Consumers, in the long run, may purchase more than one; cable alternative. Based on fact, Netflix offers consumers access to media content and original production at an average cost of $9.99 per month. By comparison, though it is not the cheapest or more expensive, Netflix justifies the cost with great content and most licensing contract with the entertainment prediction companies.
According to Grace Allen (2014), “Disney struck a deal with Netflix, granting the on-demand company exclusive TV distribution rights to its movies… from Disney's live-action and animation studios, including Pixar, Marvel, and Lucas films.” Customer demand for Netflix has shown customers are price inelastic in applications for streaming services. Additionally, with this partnership, Hulu Plus, Amazon Prime, and YouTube Red continue to be competing companies. Nodaway, a clear majority of Netflix clients seem satisfied with the company’s product; it stands to reason that most will maintain the monthly membership for many years to come. However, should the company choose to venture outside of the customer’s satisfaction, customers will soon look for like resources. Following back to the year of 2011, Netflix decided to end its favorite bundle (DVD and streaming) to its entity. Customers who were paying monthly for the combined service, where now paying a “60% price increase for access to the same content”. Because of this decision, Netflix lost a vast number of customers. In an oligopoly market, there are several companies offering consumers like products; companies like that of Netflix need to keep prices competing, or customers will venture elsewhere. Additionally, with competitive prices, content must be competitive as well; companies must find a balance in both price and content structure, for that of the customer.
Netflix’s attempt to differentiate themselves from competitive companies has made them a destination brand in which customers want. Netflix has stayed consistent with the company’s focus; limited commercial free content, geared toward movies and network television series, and creating Netflix original series’. Based our position on it, today, technology is growing at a rapid force, with innovations driving the entertainment markets and demands for the latest goods. Companies within oligopoly markets must invest in better products to usher customers, while concurrent with low operating costs. As part of an oligopoly market structure, Netflix being a piece of the economic pie, it is the duty of the company to derive innovation from companies around to produce better products for the customer; better than that of the competitor. For example, in previous years, Netflix partnered with a handful of electronic companies to develop devices to broaden the scope a consumer could stream. Members could now stream from more than the computer, but cellular devices, Xboxes, Blu-ray DVD players, etc. In 2016, “Netflix spent over $800 million on developments and technology that enhanced the viewing experience for is subscription members”.
Recently, Netflix has teamed with Disney and its additional partners, adding additional favorite films from Pixar, Marvel, and Lucas Films. Oligopoly structured markets require companies to understand financial impacts of pricing and technology on fundamental business decisions. Owners of Netflix continue to ponder the thought of changing prices to gain more clients, is still a fixed issue. As an oligopoly market, knowing the most practical aspects of the business and playing by those strengths, is a fundamental element of the market. Netflix continues to create trust with customers by keeping promises; Netflix understands the needs and wants of consumers. “In 2010 Netflix added an additional 7.7 million customers were increasing to a total of 20 million, compared to five years before only reaching 4 million”.
For companies to study cost, volume, and profit analysis; companies should check the relationship between fixed and variable costs. The variable costs of the business are costs that increase directly in correlation to the amount of the sales product; for example, that of Netflix and consumer subscriptions purchased. Netflix propose subscriptions in a variety of price tiers; giving the consumer an option to choose. Fixed costs of Netflix are contracts and licenses with television producers and films. For instance, DreamWorks licenses television show rights for Netflix to air the series “How to Train Your Dragon” solely, and Netflix is in contract with that of Disney. A company can decide their breakeven point when they can identify fixed and variable costs. Break even points being consumer subscriptions to cover the costs of Netflix profitability. The breakeven point for business comes from known the cost of contribution margin per unit, the contribution margin ratio, and the breakeven sales volume for memberships. In a mathematical sense, the breakeven point is equal to the total fixed costs divided by the difference between the unit price and variable costs.
Lastly, an oligopoly market structure is a structure in which few firms dominate. Netflix has become a major customer based company that has stayed competitive in the market structure. Rising above that of Hulu Plus, Amazon Prime, and YouTube Red. Netflix has maintained the ability to forecast the current economic environment as well as customer demands. In a competing market against like services, Netflix has anticipated the change in the industry, shifts in customer needs, while maintaining the toehold in as the leading product in the entertainment market.
