Another barrier to entry is innovation. There are already so many different styles and variations of watches (as opposed to only one, as it would be if it were in perfect competition) that it may be difficult for a new firm to be able to think of a good idea for a new style or function of watches that would sell. Also, a relatively large amount of capital would be needed to start up a watch firm for initial advertising/promotion, manufacturing and production costs. All of the established firms have a competitive advantage in at least one area, most likely innovation or reputation.
The watch industry is more inelastic* (see fig.2.) than not, because in oligopolies competition tends to be based on non-competitive pricing*, ‘brand proliferation’ and promoting the product and differentiating it rather than making it cheaper. This is because price wars* are not wanted in the industry. However, the watch industry isn’t so small that price can be totally disregarded. The prices still must be low enough for consumers to want or to be able to buy them, because there are still other watch brands they could buy that will be cheaper (but may not have the same brand reputation). The largest factor in choosing a watch, according to Mintel (P29), is being ‘in my price range’, so people will often not buy a watch if it is out of their price range even though the brand may have a good reputation.
When importing any goods, the exchange rate would be a factor in cost of goods. However, I do not feel that this has a large effect on prices or the market, so I will not investigate any further into this.
Fig.1.-
Analysis
Although the barriers to entry are valid points, not all of the factors stated will necessarily be relevant or true. For example, it was referred to earlier that a new firm coming into the industry would have trouble selling its watches because they do not have an established name in the watch industry. If an already established company that was previously in another industry came in using their name (such Daewoo did when they went into the car industry using their already established name in electrical appliances), then this would not necessarily be the case. This takes away the competitive advantage ‘reputation’, because the new firm may already also have a good reputation (Another example of this taking place is Nike’s move into the watch market). Also, if a company joining the watch industry is already operating in other areas, the chances are that a large amount of capital will be available, meaning that the advantage of economies of scale that the watch firms have is lost.
Although officially the watch industry is an oligopoly, I believe that because different makes of watch are targeted at different socio-economic levels, each level has its own small monopoly in my opinion. For example, Rolex sells watches at the highest end of the socio-economic groups (with watches costing several hundreds and even thousands of pounds) (price skimming* on a long-term basis) and is usually considered more of a luxury or status good. Casio on the other hand sells watches from a few pounds up to around one hundred pounds (an equilibrium of market price and economic price) and is considered more of an everyday ‘utility’ watch. Being ‘in my price range’ does not necessarily mean that a cheap watch is being sought out. The two makes are not really in competition at all because Casio targets the lower to middle class socio-economic group where Rolex targets the upper class group only. Other than price, many brands have their ‘niche’ style of watch even in the same pricing levels, for example some brands focus on (but not exclusively) sports/outdoors utility (Casio ‘G-Shock), whereas others focus on style (Seiko).
Another barrier to entry that may not always hold is that of innovation. It is true that companies may have trouble creating new styles or functions of watches, but many firms have succeeded in simply copying the same styles as other brands and selling them. The ‘copies’ are often of less quality, but are cheaper, which appeals to many people.
I do not think that economies of scale would have an immense affect on new firms, because although the larger firms do get a cost advantage, the amount of materials needed to produce a watch is relatively limited. The scale of the advantage is not as large as in other industries where large raw material inputs are needed, such as the car or construction industry.
Evaluation
The Mintel report that I used for this investigation was from 1995, so some of the information that I have used may now be obsolete. I was unable to obtain a more recent report of the watch industry, as there have not been any more released as far as I am aware. The ‘big picture’ of the watch industry should be roughly the same as it was in 1995 however, as it has only been seven years since the report was written and there have not been any huge changes in the watch industry since then that I am aware of. Also, the Mintel report is an independent study of the watch industry and so it is more likely to be a ‘neutral’ sided report. Information in the Mintel report is taken from a large range of sources and compares the watch market from several different years, which gives a good picture of the overall watch market and not just one particular year.
Teachers provided the worksheets that I used in normal lessons. It is fair to assume that the information is up to date and accurate.
Conclusion
To conclude, I consider my hypothesis at the beginning of this investigation as only partly correct. I was accurate in the hypothesis of the watch industry being dominated by an oligopoly. I had not foreseen the industry being divided into ‘sub-groups’ for each socio-economic level. This often allows the watch firms to have an almost monopolistic approach to pricing (often meaning high prices). I had hypothesized that the watch firms benefit by being in an oligopoly, and this is evidently the case. However, they are being benefited through effectively being monopolies, which I had not considered. Consumers do not benefit as much as I had earlier presumed, nevertheless, as the watch industry isn’t actually a monopoly but an oligopoly, there is still some price competition, which may bring prices down some.
Glossary
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Oligopoly: Is when there are few (4 or 5) main firms who sell differentiated products using either priced or non-priced competition.
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Market leadership: Comes from having the largest market share. It is a sought-after position and advantages of size often accompany the role. There is, however, constant threat from others that would like to steal ‘the crown’.
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Organic Growth: Occurs when a business expands through increasing output and sales itself without taking over other businesses.
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Monopoly: Exists when there is only one supplier in a particular industry. This gives the business the power to control price and/or output.
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Perfect Competition: Exists when there are many buyers and many sellers all interacting freely with one another. It is unlikely to exist but is an important measure of how much competition there is in a market.
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Market Share: Identifies the proportion of sales of a product that are made by one company or belong to a brand.
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Barriers to Entry: Are all the things that can deter a firm from entering the market lead to there being less competition.
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Free Entry: Means that new firms can come into the market without any difficulty.
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Economies of Scale: Refers to the shape of a firm’s long-run average cost curve. If the average cost falls as output increases, the production process is said to exhibit economies of scale.
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Control of retail: Powerful firms try to prevent competition by restricting access to retail outlets. E.g. Only Zeon watches may be sold in the ‘Next’ retail stores. (Made up example).
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Price war: Occurs when each business in the market cuts prices in turn. This process can continue until some of the competitors are making losses.
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Non- pricing competition/ Non-competitive pricing: Involves adding value to the product by finding ways to make it different from the competition. Design, quality, any individual features, advertising and other forms of promotion may all be possible.
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Price Skimming: Initial price set high for one of two reasons. A) To recover initial development costs. B) To ‘cream’ off the market- the product is a novelty/ luxury item. The success of this strategy depends on maintaining low costs at low volume on a high quality image with few or no competitors.
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Price Makers: In a monopoly situation where there is only one, or very few suppliers. The industry can set its prices at whatever level they want without the chance of being undercut by competition (because there is none).
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Price Takers: In an industry where there is a lot of competition (ideally perfect competition), the sellers must have the prices of their product low in order to sell them. If they did not have low enough prices, customers would go elsewhere as there will be many substitutes that are cheaper.
Bibliography
- The Watch Industry Mintel Report- 1995 (obtained from Sheffield Hallam University’s ‘Adsett’s Centre’)
- Business and Economics class worksheets
Contents page
Section Page number
Hypothesis 1
Aim 1
Findings and Application of theories 1
Analysis 3
Evaluation 4
Conclusion 4
Glossary 5
Bibliography 5
Appendix
Is the Watch Industry dominated by an Oligopoly, which is beneficial to both firms and consumers?
