Table of Contents
The challenges facing financial managers in a perfect competition market structure
The challenges facing financial managers in a monopolistic competition market structure
The challenges faced by financial managers in a monopolistic market structure
Financial Managers’ Challenges in Oligopoly
Arnold (2013) claims that financial managers must be able to evaluate, analyze, and predict economic, regulatory, and legal issues. Financial managers are therefore required to act in a way that increases the profitability of organizations. Financial managers have to deal with different challenges depending on the market structure. For financial managers to be able understand the current challenges, they must have an understanding of market structure, competitiveness and market liquidity. Market structures provide a context for financial managers’ work.
This video provides an overview of four market structures. Four market structures are used to identify different types of markets. The four market structure are monopolistic, perfect, and oligopolistic competition. In this paper, we will discuss different types of markets structures as well as two major challenges facing financial managers. The paper will also review and analyze two scholarly articles dealing with the challenges facing financial managers, such as competitiveness, market liquidity, and efficiency.
The homogeneous market includes both products and service. This structure does not allow a single firm to determine the price of a product. This structure is characterized by five characteristics: buyers know all goods and prices, firms all have small market shares, organizations all are price takers and industries are open to entry and exit. In reality, however, the video shows that there is no perfect competition.
Price Setting is the major challenge facing financial managers within a structure that promotes perfect competition. Financial managers set prices for the products of their companies. In order to do this, they must take into consideration a wide range of factors such as production costs and product quality (Moyer et.al.,2011). In the case of a perfect-competition market structure, prices set by financial managers must be consistent with market price. This market structure means that if the price set by a financial manger is higher than what the market offers, it will be ignored. In a market structure with perfect competition, financial managers face a difficult task in setting prices.
Maximizing profitability is the second challenge financial managers must face when it comes to a perfect market structure. The financial managers’ task is to ensure that their firm makes more profit. The market structure limits the maximum profit that a company can make. Firms, for example, cannot increase revenues by setting prices. A small percentage of the total market is available to the firms, so they can’t produce large quantities in order for them to achieve economies of scope.
In the video, a monopolistic competitive market is defined as a structure in which there are a number of companies that produce products that are slightly different within an industry where entry barriers are minimal. In this type of market structure, buyers are more likely to focus on the qualities that they appreciate most in the firms where they purchase their products. The price of one firm is not influenced by the prices set by other firms. The firms have relatively low market power and are all price-makers. In this type of structure, the firms are known to spend a lot on advertising.
The Challenges of Monopolistic Market Competition for Financial ManagersIn a market structure with monopolistic competitiveness, one of the main challenges facing financial mangers is that they have to deal with advertising. Financial managers are responsible for ensuring the products of the company are known to potential customers. Due to the heavy emphasis placed on advertisement, financial managers can have a hard time prioritizing their resources. In a monopolistic market structure, financial managers may find it difficult to prioritize resources for advertising and product quality improvement.
Second, financial managers must also consider the level of competition in the market. Due to the low entry barriers, it is easy for any company to enter the market and produce similar products at lower prices. It is also possible for other companies to produce similar products by differentiating theirs. Financial managers are responsible for ensuring that the products of their firm are widely promoted.
Monopolistic market structures occur when only one company sells a specific product within an industry. This structure is characterized by a dominant firm that may also control the entry to the market. It makes it very difficult for any other firm to enter the industry. The demand curve of the monopolistic company is the demand curve of the market. Prices are also set by the firm.
The Challenges of Monopolistic Market StructuresFinancial managers are faced with a challenge in the form of product development. Financial managers are responsible for ensuring the value of the products to buyers in terms of financial consideration. Due to the lack of competition in this market structure, firms tend not to invest much in R&D. It leads to poor quality products and a lack in innovation.
Pricing is another challenge that financial managers face. Financial managers have the responsibility of setting prices for products. As there is no industry competition, prices set by firms become market prices. The financial manager faces a difficult task when there is not much pressure on prices.
A market structure that is an oligopoly has a few firms with a large market share. A monopolistic or oligopolistic marketplace is similar, but two or more companies dominate it.
Financial Managers’ Challenges in OligopolyThe main challenge facing financial managers in oligopoly is competition. The intense competition in an oligopoly market is due to the very limited number of companies. Financial managers’ decisions about pricing and other factors can affect other companies in the market. The financial manager is responsible for keeping a close eye on competitors. Financial managers may find it difficult to get information from competitors about their plans.
In this market structure, the financial manager also faces challenges in terms of differentiation. The industry is small, so differentiation is vital. When attempting to differentiate their product offerings, financial managers should ensure that they are not compromising the customer’s needs or expectations.
The articles suggest that setting prices and ensuring competitiveness are two of the most important challenges financial managers face today. Prices are determined by what buyers are willing pay for products. This is done after considering the entire cycle of production. Market liquidity refers to the ease of converting assets into cash by a business. To understand how other companies may impact their business, financial managers should consider the type and structure of the markets in which they operate. Competition is defined as the impacts of other firms on the quality and cost of products in a market.
In order to be able to manage the competition, financial managers should understand the differences between the types of market structures. In a structure that is characterized by perfect competition, the competition level will be higher than on other markets. The market efficiency is the ease of the market structure to operate when the price, supply, and demand are correct. Financial managers should have a complete understanding of market structures to be able to maximize the efficiency of their firm (Arnold 2013,).
