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AutoEdge Solution - Economic Market Structures

At midday, you share an elevator ride with AutoEdge's Executive Vice President, George Wirtz.

"Ingrid tells me you gave her some useful information about the relocation issue," he says. "I could use your help with a presentation I'm making next week to a group of large shareholders."

"Of course," you say. "How can I help?"

"I understand that there are four different types of market structures: monopoly, oligopoly, monopolistic competition, and pure competition," he says. "I know that each of these market structures differs in the number of companies that compete in each one, the level of competition, entry and exit in the economy, the product price range, and the product range."

"I'm with you so far," you say.

"Normally, I wouldn't go into all of these economic terms with shareholders," he says, "but I'll be talking to a small group of sophisticated businesspeople who understand the terminology. I'm not an expert in this end of the business, and I want to check my understanding of it. What type of market structure does AutoEdge fit into? How does this market structure impact our level of competition, elasticity of demand, price, and position in the industry?"

"Well, there's a long and a short answer I could give you," you say. "I'm on my way to a lunch meeting right now and will be out of the office for the rest of the afternoon. Would it be okay if I send an e-mail later this afternoon?"

"Yes," he says. "That would be fine, but I want some research to support the information, too. Would you be able to send me a report about this by the end of this week?"

"Sure," you say. "I've already done some of the research, so that deadline is doable."

"Oh good," he says. "I appreciate your help!"

Hi James I guess I have to clarify. My confusion is "I understand that there are four different types of market structures: monopoly, oligopoly, monopolistic competition, and pure competition," he says. "I know that each of these market structures differs in the number of companies that compete in each one, the level of competition, entry and exit in the economy, the product price range, and the product range." and also What type of market structure does AutoEdge fit into? How does this market structure impact our level of competition, elasticity of demand, price, and position in the industry?"

Scenario:

This course uses the CTU Professional Learning Model™ (CTU PLM) to teach students with hands-on, industry-related, problem-solving experiences that model the professional environment and encourage achievements that lead to student and employer success. The CTU PLM is founded on the idea that students learn best by working on real-world, professional projects related to their chosen career fields. By working this way, students develop the expertise to apply conceptual knowledge to get effective results. Through professional learning, students experience the complexity of real-world problems and learn to select an appropriate approach to a problem that has more than one solution. This method of learning is called Problem-Based Learning (PBL). PBL assumes that you will master content while solving a meaningful problem in each assignment.

Throughout the course, you will work with a scenario in which some basic, background information is provided about a company. (This information could apply to any company that provides products or services of this sort in general.) You have a role in the scenario; that is, you are part of the story. The dialogue in each assignment presents the problem that must be solved. It is up to you to respond to the problem and submit a deliverable that will be graded.

Refer to the following scenario as you progress through the PBL process.
Problem-Based Learning (PBL) Scenario: AutoEdge

AutoEdge is a leading national automotive supply company located in Detroit, Michigan. Founded by Jonathan McAlister in 1976, the company specializes in engines and transmission parts and has been supplying products to the three largest U.S.-based automakers for over 30 years. AutoEdge's name is known by customers and leaders in the automotive industry for quality, dependability, and reliable products. In fact, despite the extra cost that is added to the automobiles, consumers appreciate the AutoEdge brand name and often make purchases because of it.

In 2005, AutoEdge's board of directors decided that the company needed to make some drastic changes because of the high cost of labor, rigid American regulations, and increased competition from other engine and transmission part suppliers. Their solution was to gradually close all manufacturing operations in Detroit and begin outsourcing to a well-known factory in South Korea. The board reasoned that this change would allow the company to compete with the growing industry, meet the automotive manufacturing demands, and increase company profits. Some board members were skeptical about the move, however, because AutoEdge had built a reputation for high-quality, detailed craftsmanship, and they feared that transitioning the manufacturing operations overseas would cause quality to diminish.

For the next 5 years, this strategy proved successful. The company showed signs of financial growth and company profit.

However, in 2010, the company was found guilty of supplying products that failed quality tests. As a result, millions of automobiles had to be recalled. The recall was highly publicized, and the issue of poor quality products impacted negatively on American automotive companies. AutoEdge's $51 per-share stock has fallen to $4 per share, and brand acceptance has come under scrutiny among even its most loyal customers. Although some economists blame these negative effects on the products, others believe that it had to do with the termination of AutoEdge's Chief Executive Officer, Fred McFadden.

Lester Scholl, Chairman of the Board of Directors, has called an emergency meeting to discuss AutoEdge's short-term and long-term strategies. Among other things, they need to discuss the possibility of continuing production overseas or returning it to the United States. Lester and others on the board are well-known for being financially conservative and risk-averse. Because the American economy is experiencing high unemployment, low interest rates, low GDP, and low inflation, it might be sensible to make the change. To some extent, they believe that these macroeconomic factors can be used to their advantage. They realize the immediate challenges such as the brand damage, the growing competition, and the financial challenges the company is facing require immediate action. A new strategy must be formulated quickly to save the company from bankruptcy.

You have been hired by AutoEdge's board of directors as a research analyst. Primarily, your job is to list and describe some of the legal, cultural, financial, and economic factors that AutoEdge needs to consider when deciding to either stay in South Korea or return to the United States. Because Fred McFadden was recently terminated, you will work directly with the board until a new CEO is named.

Solution Preview

"I understand that there are four different types of market structures: monopoly, oligopoly, monopolistic competition, and pure competition," he says. "I know that each of these market structures differs in the number of companies that compete in each one, the level of competition, entry and exit in the economy, the product price range, and the product range."

What type of market structure does AutoEdge fit into? How does this market structure impact our level of competition, elasticity of demand, price, and position in the industry?"

In order to quantify how AutoEdge's market structure is designed and where it fits in, we need to evaluate the different types of market structures that are most common in within our industry. In the automotive realm the four main types of market structures that businesses will pursue will be a monopoly, an oligopoly, pure competition, or, monopolistic competition.

A monopoly is a market structure that is owned by a sole producer of a single brand or product line. In other words, the maker of product x widgets is the only manufacturing company in the world that makes said widget; therefore they are the entire market. This is seen more commonly in countries that operate outside of democracy based political realms such as Saudi Arabia. In Saudi, the government has complete control over the oil industry and prevents any other competition from entering the market. This type of business is also seen with pharmaceutical company's invent a new drug under a patent, they are the sole owner of the drug and can set their own price structures, etc... during the time allowed them to be the sole producer of the drug they created (Amir, 2005).

In oligopoly's, the barriers to entry are still very high as the industry is controlled by only a select few company's who control the entire market space. In this type of market structure, the ...

Solution Summary

This solution evaluates the case of AutoEdge and researches to understand the type of economic market structure that the company is operating within. It reviews the differences between a monopoly, oligopoly, pure competition, and monopolistic competition, and identifies which segment AutoEdge best identifies with based on the case history. The solution offers over 1,200 words of text with APA references for the student to review.

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