Market Structure, Differentiation and Wage Rates
Question 1 (15 marks)
In any market structure, an appropriate once-off expenditure on product differentiation will guarantee the firm’s ability to maximize economic profit into the future
Product differentiation provides consumers with a variety of products within a particular industry instead of homogenous products which are a characteristic of purely competitive markets. It provides welfare enhancing benefits which doesn’t only serve to provide that variety for its own sake but to make consumers buy the product of a company rather than that of competitors at a cost of a higher average total cost of production(Lancaster, 1966). When product differentiation is considered as a strategy to improve products rather than just making them different, it presents itself as a key driver to future economic success(Gans, 2014; Ansoff, 1957). This question serves to explore the possibility that a once-off expenditure on product differentiation guarantees a firm’s ability to maximize economic profit in the future with specific reference to the Australian market.
While demonstrating the benefits of companies having market power, neoclassical theory of the firm differentiates the natural monopolies which characterize the water supply of Australian cities with the competitiveness with the assumption that market structure is exogenous(Browning and Mark, 2003). However, several other firms in the clothing industry of Australia such as Billabong have taken actions to produce market power for themselves such that market power is not exogenous. It is worth noting that the most competitive strategies for firms consist of finding ways of differentiating their products to give them some degree of market power rather than minimizing the production cost of a homogenous product(Porter, 1979).
Actual market competition features companies strategizing at differentiation of products to enhance desirability. It results into innovation which comes with creative destruction. In Australia, companies which do not innovate continually will have financial unviability in the future. Considering that markets evolve as innovation find ways of producing products which appeal to customers, profit maximization will learn more on innovation rather than cost minimization(Valentino, 2003). Most company executives and managers in Australia strive to find the cost-minimizing combination of inputs in order to maximize output. A vast majority of firms are run by entrepreneurs who seek better ways of lowering costs in the production of a new and better product to entice buyers to have that willingness of paying a price above the total average cost for their product. Effective entrepreneurship combined with good management helps firms increase their profits in the long run.
In any market structure, differentiation is aimed at making products more attractive by differentiating its unique qualities with that of competing products. The success of a product differentiation is subject to the creation of a competitive advantage for the product’s seller. If the product is seen as desirable, higher selling prices will be allowed. Classical economics assume that firms seek to maximize profits. In that case,
Profit = Total revenue – Total costs.
Hence, profit will be maximized when there is a large gap between total costs and total revenue. A company can maximize profits only if it produces at an output whereby marginal cost (MC) = marginal revenue (MR)(Gans, 2014). The situation where marginal costs equals marginal revenue is useful in determination of the profit maximization level of output of every company regardless of the market structure in which the company operates in.
Looking at monopolies in Australia in particular, there is no available substitute for the monopolized good since there is a great absolute product differentiation. With competitive monopolies in the Australian markets, consumers see that there are non-price differences among the competing products and that there is no business which have total control over the market price considering that there are many consumers and producers in the market(Salerno, 2004). It is worth noting that the expenditures on product differentiation are not so great as to eliminate other goods as substitutes. Whenever the elasticity of demand of goods in such monopolistic market is high, the differentiation will not allow high-price points to be charged by the company which translate to short-term losses as the average total costs associated with unique advertising and changes in styling and design exceed the price that monopolies as well as competitive firms can charge at the profit maximizing level of output.
Once-off expenditures of product differentiation bring a lot of advantages which guarantee profitability in the future. One of the advantages is the increase in the market size which can only be achieved if the firms position themselves to take opportunity of the holes existing in the market by reaching to the customers which haven’t been reached before or addressing the preferences of the customers which have not been addressed. For instance, Coca-Cola Company has increased its market share in the Australian soft drink market by differentiating its products to suit various taste preferences from the customers. This has seen its profits grow substantially. This implies that leading the market with the strength of the product is a good approach in positioning. In this case, a firm should strive to be the first to introduce a new concept to the market. Technological firms in Australia, such as those concerned with the production of renewable energy technologies such as the solar panels have harnessed this technology and its profitability was noticeable from the time people embraced roof solar panels in Sydney.
Companies differentiate their products to avoid unhealthy price competition. Some firms will differentiate their products based on performance, professional credibility or might offer product features not provided by the competitors. It is strategic that a product is positioned within the market such that the product presents unique features uncommon to the competitor’s products. Most firms do this by cultivating a perception based on physical changes or images, they attract more customers and become profitable. Companies which use the negative approaches of differentiation of playing to weaknesses of the competitors must exercise caution or alternatively reposition the competition within the industry(Piercy, 1997). Once-off expenditures on differentiation allows that dynamic ways of characterizing products which changes with time and shifts in market forces. An excellent differentiation strategy is that one which capitalizes on the on the organizational strengths and minimizes environmental threats while exploiting opportunities. This implies that businesses must be very alert in continually evaluating the effectiveness of their attitude and positioning of target customers in order to maximize profits now and in the future.
Question 2 (15 marks)
Economics has difficulty in explaining why wage rates for individuals vary across occupations and industries and within occupations and industries.
Wages conceptually includes the value of services and goods obtained through salary sacrifice arrangements which are employee choices. In Australia, the wage rate for individuals vary across industries and occupations and within them. The variance within an industry is mostly attributed to the differences in the worker’s ability and effort in performing the job. The difference seen is across the industries is attributed to the demand and supply of laborers of particular jobs. These differences are attributed the differences can be linked to the desirability of the job too. This question serves to discuss these and other reason in order to shed light on the reason why these rates vary.
The minimum wage is one factor which explains the reason why there are different rates. The Australian government under Turnbull has implemented labor policies which have put the minimum wage of $17.72 per hour with the primary purpose of enabling the unskilled workers to earn a reasonable living. As could be seen in the graph below, the higher the minimum wage, the lower the total employment(William, 2016). Some of the employees will benefit from the elevated wages while the others will be unemployed due to the lowered demand of highly-priced labor. As could be observed among Australians, most of the people benefiting from the minimum wage are those citizens who doesn’t need to maintain their own living such as the teenagers who live at home. It is noted that the minimum wage helps in the reduction of turnover saving the employees of the training costs. From the foregoing, the unskilled people working in the same industry under the minimum wage will be subject to lower pay rates as compared to those working under professional capacity. The unskilled labor will paid at rates which wouldn’t exceed the minimum wage by far while the skilled labor can go up to five times the same rate.
Market imperfections can also explain why there is no uniform rate. Economics presume that people ascend from low paid jobs to highly-paid jobs with the same requirements and same type. However, this only happens when there is a perfect information flow in the market. In Australia, however, people have that tendency of looking for jobs in their own locality using local internet listings and newspapers. Some get the jobs from their network of acquaintances and friends living in the same locality(Besanko and Ronald, 2005). Therefore, the lack of information can lead to the persistent difference in wage differential for the same type of jobs.
Locality also explain the reason why there is disparity in the rate of pay. There is a higher rate of pay in the rural drier areas of Australia as compared to cities such as Sydney. Some states such as Queensland also pay more than that of states such as in the Northern Territory(Australian Bureau of Statistics, 2015). Much of the differences in this case is attributed to the varying cost of living in these settings.However, people with lower rates have some reluctance to moving to the greener pastures considering that they would not like to change schools for their children, be subjected to uncertainty in new places, selling their houses and leaving friends(King, 1992; Elka, 2015). Some wouldn’t imagine giving up the seniority in their existing jobs, heal insurances or pension plans. Hence, the locality of one person can influence the rate of pay even with the knowledge of a better pay somewhere else. Occupational licensing in terms of locality determines ones rate of pay too as it might impede one to move to areas with higher pay. For instance, a medical or a lawyer requires state licensing to operate in a new state and may have to meet additional requirements.
Gender discrimination also explains why there are different rates within the same industry. Every industry in Australia has a pay gap favoring men with some of the highest gaps occurring in the female dominated sectors such as insurance services, social assistance and healthcare(Workplace Gender Equality Agency, 2016). The lack of flexibility in senior roles, women leadership and occupational segregation explain these gaps. However, industries whose pay rates are determined by industry-wide award have lower pay gaps as compared to those whose pay is influenced by enterprise bargaining agreement or individual contracts. In every occupational category, there is a gender pay gap favoring full-time working men over full-time working women.
When we look at the parity as it pertains different sectors, desirability of the job comes to play. The less desirable jobs pay more considering that they are dirty and somehow hazardous. For example, compensating differentials makes the construction industry pay more than the retail industry in the sense that the non-monetary differences between the wages are very high. Construction workers work in a dirty environment which requires them to spend a lot of time cleaning up after work and sometimes, they have to work for long hours to get their jobs finished and the may not get work during the cold seasons(Chapman et al., 1984). On the other hand, retailers operate in heated or air-conditioned stores where they engage in friendly conversations, requires less physical efforts and they stay clean. In this case, the construction companies pay more to attract workers. The desirability can also be studied under the status or power accorded to some jobs such as the presidency and the Supreme Court justice.
Certain occupations pay more than the others due to the human capital associated with the educational and the training requirements. In Australia, surgeons require more than ten years of education and training after high school so that they can earn a living from their science while retailers can get their job even in high school(Australian Bureau of Statistics, 2015). Training and education limits the supply of labor considering that it takes a certain amount of time to accomplish the required level of skill. In the same breathe, people under training lack sufficient time to do full-time jobs and hence, they incur an opportunity cost which is equal to the amount of money they would have earned had it not been for their training.
Several factors contribute to the level and changes in earnings. These factors are difficult to analyze independently considering that most of them are inherent in the changes in the technology, hours worked, minimum wages, composition and pattern of employment. To be particular, the government of Australia have the biggest role in influencing the rate of pay in terms of policy measures. However, they should not that most policies are counter-productive and hence, a safe economic ground should be sought to strike a balance.
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