Market Structure and Market Competition(http://cyro.

cs-
territories.com/asa2_economics/unit4/monopolisticcompetition.html)
The market structure where a travel agency operates is monopolistic where many sellers offer
their prouct with ifferentiate features. !arious reasons can "e attri"ute for this.
There are ifferentiate proucts as ifferent firms offer ifferent types of holiay# such
as ifferent agencies offer packages in ifferent way. They offer iscounte price for
tickets an the amount of iscount varies from agency to agency.
There are low "arriers to entry as an iniviual can set up a company an operate it from
home. The $nternet has also improve information. %o near perfect information e&ists in
the market as prices an holiays are easily compara"le on the $nternet. The customers
can easily compare the prices an packages an go for his esire one.
There are a large num"er of small firms operating in the market an the market. The
num"er of agencies is increasing now rapily as the "usiness is "ecoming profita"le ay
"y ay.
The market also has some other characteristics such as the agencies have consiera"le
control over price. The market for travel agents therefore has most of the characteristics
of a monopolistically competitive market. This means that there are too many firms in the
market# as competition re'uires all firms to prouce with e&cess capacity.
The marketing activities for this inustry are usually one through avertising# like
presenting attractive features to the consumers through we"sites# offering seasonal
iscounts. %ome agencies offer special iscounts in packages if a group of customers
purchase ticket altogether.
The eman curve for monopolistic competitors is elastic as there are many firms# whereas the
monopolists are much more inelastic ue to the lack of close su"stitutes. The following iagram
can "e use to show the cost structure of a monopolistic competitor in the short run# where the
shae area represents supernormal profits.
$n the long run the eman curve for the iniviual firm will shift to the left# as more firms will
"e proucing more ifferentiate proucts. This assumes that the market eman remains
constant an that eman for the prouct remains the same as the new firms enter the market.
This shifting of the eman curve stops at a point where the eman curve is tangential to the
(T) curve. There is then a single price an 'uantity at which the firm can prouce to "reak
even. *o supernormal profits are mae as (+ , (T). (t any other output (T) -(+# so the firm
will make losses.
Market Competition
In order to measure the competitiveness in the market, we can use the porters five force model
that deals with five factors to determine competition. These forces are referred as the micro
environment, to contrast it with the more general term macro environment. They consist of those
forces close to a company that affect its ability to serve its customers and make a profit. A
change in any of the forces normally reuires a business unit to re!assess the marketplace
given the overall change in industry information.
"ig# $orters "ive "orces
Threat of New Entrants
$f the threat from new entrants into the prouct category is high# the attractiveness of the inustry
iminishes. .n the other han# if the risk of new entry is low the firms in the inustry can take
the avantage to raise price an earn greater profits. $n case of a travel agency the entry "arrier is
too low an that is why the threat of new entrant is high.
Bargaining Power of Suppliers
/argaining power of suppliers epens on factors like num"er of firms an suppliers in the
market# 'uantity of prouct orere "y the firm etc. $f the num"er of firm is high an the num"er
of supplier is low# the supplier has higher "argaining power. %uppliers can charge high price
since there is less alternatives. .n the other han# if the num"er of firm is low an the num"er of
supplier is high# the suppliers "argaining power is low. $n the travel agency inustry# the
suppliers are the airlines who are large in num"er# an the num"er of agencies is also increasing.
0ere# the airlines have more control over price an num"er of tickets to "e offere epens
mostly on the airlines. That is why the "argaining power of supplier is high in this case.
Threat of Existing Competition
(s the market has so many players# there is intense competition among them. The challenge here
is to make the proucts more ifferentiate "y offering attractive packages. The companies
shoul also focus on rigorous marketing activities to make the consumers fascinate to their
offers.
Threat of Substitutes
$f the num"er of su"stitute is high in an inustry an the switching cost is low# the companies
face huge threat of su"stitutes. $n travel agencies the services o not have many su"stitutes# so
the companies can easily gra" the attention of the consumers towars their service. %o the threat
of su"stitutes is low in the market.