ECON7200 Economic Principles Report Sample

ECON7200 Economic Principles Report

Your task is to select a real-world market and determine which model of market structure studied you think would be most appropriate to describe that market. You should discuss how the nature of the market structure relates to the market outcomes observed.

Market Selection

You must clearly define the market that you are analyzing.

You are not permitted to select the same market as Assignment 1.

As this is an individual assignment, students should not intentionally select the same market as their classmates.

Economic Analysis

The exact details of your analysis may depend on what is appropriate for the market selected. In most cases many of the below will be relevant, but not all will be relevant to all cases. You should focus on what is most relevant to your market to draw out the key relevant concepts for your case. A coherent argument should be presented around this. Do not simply go through the dot-points below sequentially or use these as subheadings.

Topics that may be useful to address:

• How well the market fits the assumptions of the model

• The nature of the product (eg. differentiated?)

• Factors about the production technology of the product, such as: Are there economies of scale? How might the minimum efficient scale compare to the size of the market? Are there any other interesting aspects of the cost structure that might be an important part of the story regarding the type of market observed, the pricing, or profits?

• How large is the number of competitors?

• What is the degree of market power of firms in this market?

• How do firms compete or set prices in this market?

• Are there significant barriers to entry?

• What outcomes do we observe such as prices, mark-ups, profits and firm entry/exit?

• It may be useful to contrast short-run and long-run responses in the market to changes in demand or supply factors, or more particularly to economic profits

• Is it an increasing-cost or decreasing-cost industry, and is this relevant to the analysis?

Real world markets often do not perfectly meet the assumptions of the models, so in many cases you may also discuss (if relevant) which aspects of the real-world market do not fit the model (or are closer to a different model) and which aspects of market interaction or outcomes are not well described by the model selected. Where market diagrams are used, they should be your own diagrams, whether prepared in a computer software, or (often more easily) hand-drawn and a scan/photo embedded in the document.

Solution

Introduction:

The study tries to analyse a real-world market to identify its market structure depending on its nature of product, production technology and competitiveness in the market. For this, the assignment selects the world market of toys, which are associated, especially with infants and young children. A toy is an object, which is used to entertain, play and educate kids. Some well-known toy manufacturing companies are Fisher-Price, Lego, Funskool and Mattel (Statista. 2024). The size of global toy market was valued almost USD 324.7 billion in 2023 while it is expected that the compound annual growth rate (CAGR) of the market will be around 4.3% between 2024 and 2030 (Grandviewresearch. 2024). Customers purchase toys for various reasons such as encouraging cognitive development, stimulating creativity, and developing social interaction. Toys can be categorized in different forms like building blocks, action figures, puzzles, dolls, electronic devices and board games.

Structure of the Market:

Market structure is an economic concept where various industries are categorized depending on the competitiveness for goods and services. According to the nature of the market, it can be said that the toy industry is performing in a monopolistically competitive market as some assumptions are fitted with it (Dean et al. 2020). To understand this, the assumptions of the specified marker structure is needed to describe.

• Firstly, `a monopolistically competitive market has many firms in the market. Likewise, the toy market also has vast number of small, medium and large size firms across the world. As per the present report, US has 772 manufacturers of toys and games on 20th April, 2024 (Rentechdigital. 2024). On the other side, China has around six million small and large toy factories that produce various plastic toys, plush toys, wooden toys and alloy toys (Unionsourcechina. 2023). The increasing demand for toys has influenced many firms to enter into the market for getting profit. However, this in turn generates a robust competition among them. This market is not perfectly competitive as different firms are selling different types of products based on sizes, colors, qualities and types. The market does not also follow oligopoly market structure as no limited number of firms enjoy the maximum market share.

• Secondly, product differentiation can be observed in the toy market. Product differentiation happens based on brands, product categories and intellectual property rights (IPs). For instance, Mattel, a California-based multinational company, is known for manufacturing the iconic brand ‘barbie’ (Mattel. 2024). In addition to it, the manufacturer has another brand, Hot Wheels. On the other side, Lego, a Denmark-based company is the largest manufacturer of plastic construction toys. Lego brick is the iconic item and its related products including video games, figurines and films (Lego. 2024). Therefore, each company ha a monopoly power in producing and selling unique brands. However, those brands have close substitute in the market.

• Thirdly, each toy manufacturing company takes independent decision regarding product design, price level and marketing strategy. For instance, Lego steps into digital world by incorporating gaming options on website so that it can enhance brand loyalty and customer engagement (Dobrynskaya and Kishilova, 2022). The company applies value-based pricing strategy and hence it sets price depending on perceived value of their products. On the other side, product innovation is a marketing strategy of Mattel as it tries to improve product design according to the customer’s preference and needs. Moreover, the company charges high price for products at the initial phase and skim the price afterwards depending on the market demand. Thus, it is seen that two companies follow different business strategy to compete in the market.

• Fourthly, another assumption of a monopolistically competitive firm is to earn excess profit or to gain profit maximization. Each firm in the toy market is to maximize profit. Each toy manufacturing firm enjoys monopoly power due to product differentiation and hence it can control the quantity and price accordingly without considering the market scenario. Hence, the firm acts as a price maker instead of a price taker who can be seen in a perfectly competitive market.

As per the assumption, a monopolistically competition market for MBA assignment expert allows new firms to enter while existing firms can exit easily from the market due to lack of barriers. However, unlike this market, a small toy firm has several barriers such as high fixed costs, economies of scale, slow growth market and uncertain demand to enter into the market.

Market Condition of the Toy Industry Across the World:

The toy market is expected to grow gradually over the years due to increasing demand in the world market. However, the market experiences the issue of economies of scale as firms depend heavily on large scale production for gaining profit (Mauler, Duffner and Leker 2021). This in turn needs high investment as well as continuous demand that can be difficult to gain in developing countries. To avoid high investment, Lego shifts some of its manufacturing process to Mexico and Central Europe where low wage labor as well as short supply chain of product are available. As a result, most of the toy manufacturing companies perform in the left-side of their long-run average cost (LRAC) curve. However, some large-scale multinational companies like Mattel and Lego do not have economies of scale.

Figure 1: the Economies of Scale in the Toy Market

The minimum efficient scale (MES) point obtains at the lowest point of LRAC where it intersects with the long-run marginal cost (LMC) curve (Sukesti et al. 2021). At this point, the firm can perform efficiently and effectively with the lowest possible unit cost. However, as the toy market has economies of scale, it is difficult for a firm to gain MES. As the production cost in this market is high, a firm cannot completely exploit economies of scale and hence it cannot achieve productive efficiency.

The degree of market power differs according to the market structure. As the toy market follows some assumptions of a monopolistically competitive market, it has relatively low degree of market power. As, a large number of firms operate in a monopolistically competitive market, it is difficult for a firm to influence the market price significantly by altering demand and supply in order to increase profits. The demand curve of a toy firm is downward slopping and as the products are close substitute, the firm can set a price above its marginal cost though by losing some sales volume. Each toy firm enjoys minimum market power as the product of one company is different from another though some customers also try to substitute the product in the market.

To understand the market price and output of a toy firm, it is beneficial to measure the equilibrium condition of it. As a monopolistically competitive firm, a toy company possesses downward slopping demand curve. This implies that if the firm increases product price then its quantity demanded for products will loss. This happens as the market has close substitute products. However, due to the existence of product differentiation and brand loyalty, all customers will not be lost. In the short-run, the firm can gain excess profit by setting price accordingly. The equilibrium point occurs where the marginal revenue (MR) curve cuts the marginal cost (MC) curve from below. The short-run profit maximizing condition of a toy firm is shown below:

Figure 2: Short-run Profit Maximisation of a Toy Firm

In the above figure, Q and P represent short-run market equilibrium output and price, respectively. At this price and output level, a firm can gain economic profit as per unit price exceeds per unit cost.

As the barriers to entry is low, new firms can enter into the market for gaining economic profit in the long-run. As a result, the supply of differentiated toys will increase and consequently, the market demand curve of each firm will shift to the left. As a result, both D and MR curve will shift and become D1 and MR1, respectively. As a result, the firm will get a new equilibrium output and price in the long-run. The following figure established the condition.

Figure 3: Long-run Market Equilibrium of a Toy Firm

According to figure 3, it is seen that the market equilibrium output and price decline to Q1 and P1, respectively. In this phase, the existing firm does not gain any economic profit.

This theory claims that no toy making company will make economic profit in the long-run. In India, the profit margin of a toy manufacturing company is around 25-30% in an annum (Investindia. 2024). Lego’s net profit in 2023 was almost 13.11 billion Danish kroner instead of the worst market condition in 15 years (Kiderlin 2024). This implies that the LRAC curve remains high compared to the AC curve in the long-run. This happens because the toy market is a decreasing cost industry. According to a study, the toy market can increase potentially due to its increasing demand and reducing production costs.

Conclusion:

After analysis, it can be stated that the toy market all over the world is experiencing a monopolistically competitive market where competition is high among firms. Each firm is selling differentiating products which are close substitute to each other. Firms can enjoy economic profit in the long run due to the decreasing cost structure of the industry.

References:

Dean, E., Elardo, J., Green, M., Wilson, B. and Berger, S., 2020. Monopolistic Competition. Principles of Economics: Scarcity and Social Provisioning (2nd Ed.).
Dobrynskaya, V. and Kishilova, J., 2022. LEGO: The toy of smart investors. Research in International Business and Finance, 59, p.101539.

Grandviewresearch. 2024. Toys And Games Market Size, Share & Growth Report, 2030. Available at: https://www.grandviewresearch.com/industry-analysis/toys-games-market (Accessed: 18 May 2024).

Investindia. 2024. Toys Manufacturing Industry in India: Invest in Toys Sector Industry in India | Invest in Toys Sector. Available at: https://www.investindia.gov.in/sector/consumer-goods/toys-manufacturing (Accessed: 18 May 2024).

Kiderlin, S. 2024. Lego CEO hails ‘very, very strong’ U.S. progress as it struggles in China, CNBC. CNBC. Available at: https://www.cnbc.com/2024/03/12/lego-revenue-grows-2percent-in-2023-as-ceo-hails-strong-us-progress.html#:~:text=The%20Danish%20toymaker%20said%20operating,13.8%20billion%20the%20previous

%20year. (Accessed: 18 May 2024).

Lego. 2024. The LEGO Group history - About Us - LEGO.com. Available at: https://www.lego.com/en-us/aboutus/lego-group/the-lego-group-history (Accessed: 18 May 2024).
Mattel. 2024. Mattel, Inc. Available at: https://corporate.mattel.com/history (Accessed: 18 May 2024).

Mauler, L., Duffner, F. and Leker, J., 2021. Economies of scale in battery cell manufacturing: The impact of material and process innovations. Applied Energy, 286, p.116499.

Rentechdigital. 2024. List Of Toy and game manufacturers in United States: SmartScrapers, SmartScraper. Available at: https://rentechdigital.com/smartscraper/business-report-details/united-states/toy-and-game-manufacturers (Accessed: 18 May 2024).

Statista. 2024. Toys & Games - Worldwide: Statista Market Forecast (no date) Statista. Available at: https://www.statista.com/outlook/cmo/toys-hobby/toys-games/worldwide#key-players (Accessed: 18 May 2024).

Sukesti, F., Ghozali, I., Fuad, F.U.A.D., KHARIS ALMASYHARI, A. and Nurcahyono, N., 2021. Factors affecting the stock price: The role of firm performance. The Journal of Asian Finance, Economics and Business, 8(2), pp.165-173.

Unionsourcechina. 2023. Toys Produced in China Occupy a Major Position in the World. Union Source. Available at: https://www.unionsourcechina.com/toys-produced-in-china/ (Accessed: 18 May 2024).