Managerial economics is defined as the science of utilizing scarce resources to cut their costs effectively..
Managerial economics is defined as the science of utilizing scarce resources to cut their costs effectively. The discipline of managerial economics comprises competitive markets, imperfect market, and markets power (Audretsch and Siegfried). Moreover, understanding of the term market is important as it aids in explaining the branches of managerial economics. Thus, a market is a context at which buyers and seller voluntarily communicate and exchange goods and services (Audretsch and Siegfried). This applies where the exchange takes place within a country or with other countries. The paper discusses the application of competitive and imperfect market and market power in our economies.
Tesla is a car-manufacturing firm based in California. The firm has announced that it will join GM and Toyota in mass production of electric cars of about 500,000 in a year (The Economist). This would be a leave from its tradition of producing high-end cars for the wealthiest American. Therefore, the players in this industry comprise of Tesla as a car manufacturing firm, households as the consumers of the products and various supplier of raw materials and finished cars parts products. Tesla competitors include Audi, BMW, Buick’s, Regal, Enclave, and La Crosse (Davis, Williams, Boundy and Moore 135). Moreover, other car manufacturers such as Toyota, Nissan, Chevrolet, GM, and Camry are also in the market for electric cars (Davis, Williams, Boundy and Moore 135). Therefore, there are about 11 companies competing for a share of the market in the US and around the world. Therefore, Tesla Company is in a competitive market characterized by many sellers and buyers. Tesla has an oligopoly market structure because is competes in the market for electric cars with other companies.
The price of Tesla cars is largely determined by the forces of demand and supply forces. This means that an increase in demand for electric cars will push up the prices of cars while an increase in supply will reduce the prices respectively, all thing kept contact. However, advertisement and customer loyalty in most cases alter the demand and supply model in the US market. Tesla Model S has a market share of 52.2% among four top full electric manufacturer companies including Nissan Leaf with 32.5% share, BMW i3 8.7%, and Chevy Spark EV 6.6%. Thus, Tesla has a lead in the market for hybrid cars with a 52.2% market share. Thus, given the companies’ market share we can find the four-firm concentration ratio as follow;
C4 = W1 + W2 + W3 + W4
= 0.522 + 0.325 + 0.087 + 0.066
Therefore, the four-firm concentration ratio for the market is 1 indicating a high concentration of firm in the market. Thus, a 100% concentration confirms that the Tesla and its competitors are in a pure oligopoly market structure. Moreover, the Herfindahl-Hirschman Index (HHI) of 3903.66 shows that the market for fully electric cars is highly concentrated with individual firm contributing significant supply of cars to meet the market demand.
Tesla has a market power in the US for pure electric cars. The company has the edge over other companies in innovation and technology of efficient batteries pack. The 85 kWh battery supplies approximately 265 miles distance. This is the best battery option in the market. Moreover, the availability of competitors in the market ensures that there is a readily available substitute to Tesla model S and model X cars. Among the products, these Tesla products include Nissan Leaf, BMW i3, and Chevy Spark EV. These products are available in the US market so as Tesla goods. Therefore, comparing Tesla products to its substitute one can draw that Tesla models and model X are more superior to BMW, Nissan, and Chevy. This indicates that Tesla has a market power over its competitors. Thus, a change in the price of Tesla products is bound to increase or decrease its sales respectively.
Tesla has an elastic demand for most of it products as they are viewed as luxurious goods. Moreover, the cost of buying Tesla products is too large in proportion to the average consumer incomes. Furthermore, there are substitutes in the market for Tesla Model S and X. Moreover, when customers are dissatisfied with low range effect of Tesla competitors cars they result to Tesla Internal Combustion Engine or Hybrid Electric Vehicle cars. This means that Tesla competitors including BMW i3 and Nissan Leaf cannot raise the price of their product because they will lose their market to less costly companies. Nonetheless, though Tesla has market power it needs to manage its costs of production and manage the demand for goods through advertising, price, and policy geared to competitor’s contribution to the market (Audretsch and Siegfried). Therefore, Tesla cannot set the price only and expect to move the quantity demanded. The understand of the implication of market power led Tesla to invest heavily in research and development to find an innovative way to which the company can cut on the cost of productions. For instance, the establishment of a state of art battery manufacturing plant in California just close to the mother plant is aimed to cut cost of batteries used in assembling full electric cars
As demonstrated in the graph a small change in the price of Tesla full electric products from P1 to P2 would result in a significant change in the demand for the product from Q2 to Q1. When P1 = $70,000 and the firm increases the price to $80,000 the quantity demanded would decrease from 50,000 units a year to around 28,000 units. Therefore, using the above figure we can calculate the Rothschild index of Tesla full electric car. Given that a small significant change in price result to a greater change in the quantity demanded a firm, the Rothschild Index for this market is likely to be 1 or close to 1. This means that Tesla has an elasticity of demand similar to that of the whole market. This confirms that the firm had market power over it rivals (White 5).
The market analysis for fully electric cars in the US is characterized by an oligopoly market structure (White 5). This is so because the four-firm concentration equal to 100% and the Herfindahl-Hirschman Index of more than 3000 also confirms high concentration if the market. Furthermore, Tesla production has been found to have an elastic demand, which is synonymous with differentiated goods in the market. Therefore, Tesla investment on technology is aimed at boosting the company’s products compared to it rivals. This is the case with it low-cost batteries, which lower the cost of producing a unit car about BMW or Nissan who sought to, outsource their car batteries from other firms.
Audretsch, David B. and John J. Siegfried, eds. Empirical Studies in Industrial Organization: Essays in Honor of Leonard W. Weiss. Dordrecht: Kluwer, 1992.
Davis, Stacy, Williams, Susan, Boundy, Robert, and Sheila Moore. 2015 Vehicle Technologies Market Report. Oak Ridge National Laboratory: Oak Ridge, 2016. Print.
The Economist. Tesla’s Mass-Market Ambitions: On a Charge. Economist.com. The Economist. 19 Mar. 2016. Web. 30 Nov. 2016.
White, Lawrence. Chapter 5. Market Power: How Does It Arise? How Is It Measured? Nyu.edu. New York University. N.d. Web. 30 November 2016.