Economics - Data Response January 2006
Economics – Data Response – January 2006
- The structure of the United States digital camera market over the period shown in 2003 in Extract A shows us that the market is an oligopoly. By looking at the extract it is visible that the market is highly concentrated. The top five firms (Sony, Kodak, Canon, Olympus and Nikon) account for 76.4% of the market – therefore there is monopolistic competition.
- There are many possible economic reasons as to why Kodak has continued to manufacture traditional film-based cameras, even though the company makes a loss on these cameras (due to the introduction of the superior digital cameras). One reason that Kodak continue to manufacture traditional film-based cameras could be due making money with complimentary goods, such as the film to go into the cameras and photographic paper. Kodak could also make money on developing the photographs as consumers are not able to do that themselves at home as you can with digital cameras. Another reason for the Kodak continuing to produce film-based cameras is for it to retain it’s brand name and image. Even if they are making a loss, a world leading camera company to stop producing a type of camera is not good for its reputation.
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There is also the reason that Kodak are still making film-cameras is the possibility (though unlikely) that the film-based camera market will recover. Though there is a risk with this as the cameras are currently making a loss so all the costs are sunk costs, and if the market does not recover these costs will not be possible to get back. They are spent on intangible items.
- Barriers to entry are obstacles in the path of a which wants to enter a given . Barriers to entry are the problems and barriers a firm attempting to gain entry in to a market or industry may face – such as predatory pricing, high investment costs, advertising etc. Barriers to entry can protect Kodak as it makes it more difficult for competitors to enter the market and compete. Kodak is protected by entry barriers as investment in specialist equipment is required, together with the knowledge of chemical processes that are not used in digital photography
However, Kodak is facing competition from a new photographic technology. Sony has made a successful transition from video technology to digital photography, and now computer makers such as Hewlett Packard and mobile phone manufacturers have also entered the market. Mobile phones capable of taking digital pictures will soon outsell both film and ordinary digital cameras. Thus, even though Kodak have high entry barriers, there entry barriers are for photographic film and paper which Kodak dominate. However the new digital technology which Sony, Hewlett Packard and mobile phones have do not need photographic film or paper in order to operate. So the barriers protecting Kodak are not relevant as mobile phone manufacturers are not trying to enter the film-based market.
- Firms can grow internally or externally. Firms growing internally, also known as organic growth. This comes about from a business expanding on its own operations, rather than relying on takeovers and mergers. Internal growth can come about from expansion of existing production capacity, investment in new capital and technology, adding to the workforce, developing and launching new products and growing a customer base through marketing.
Kodak’s strategy on the other hand is based on takeovers rather than on internal or organic growth through investment. Kodak grows externally. External growth is the fastest route for growth is through mergers or contested takeovers. In recent years there has been a boom in merger and takeover activity.
With external growth firms may use horizontal integration. This occurs when two businesses in the same industry at the same stage of production become one – for example a merger between two car manufacturers or drinks suppliers. Recent examples of horizontal integration include: Nike and Umbro, Body Shop and L’Oreal, NTL and Telewest which is now known as Virgin Media. The advantages of horizontal integration are that it increases the size of the business and allows for more internal economies of scale – lower long run average costs – improved profits and competitiveness. It also creates a wider range of products. Another advantage is that it reduces competition by removing rivals, which increases market share and pricing power.
With external growth, firms may also use vertical integration. Vertical integration involves acquiring a business in the same industry but at different stages of the supply chain. Examples of vertical integration include: Film distributors and owning cinemas, Brewers owning and operating pubs, crude oil exploration all the way through to refined product of sale (such as BP and Shell). The main advantages of vertical integration are that there is greater control of the supply chain, this helps to reduce costs by eliminating intermediate profit margins. There is improved access to important raw materials, and better control over retail distribution channels.
Both external and internal growth can improve resource allocation and the efficient and profitable use of assets by switching under performing assets to more profitable ones.
There are also disadvantages of mergers and takeovers. Many takeovers and mergers fail to achieve there aims. The financial costs of funding takeovers including the burden of deals that relied heavily on loan finance is a disadvantage. Also the need to raise fresh equity to fund a deal can have negative impact on a companies share price. Many mergers also fail to enhance shareholder value because of clashes of corporate cultures and a failure to find the all important synergy gains. There is also the issue of the ‘winners curse’ which involves companies paying over the odds to take control of a business and ending up with little or no gain in the medium term. Another important disadvantage of a merger or takeover is that competition policy concerns can come into play especially when there is a risk of monopoly power from vertical and horizontal integration.