MANAGERIAL ECONOMICS

Case Study 5: Competition in Magazine Industry

Earlier, there were only few organizations operating in the magazine publication industry. At that time, it became a trend to provide free gifts, audio and video CDs, DVDs, and scented candles, to customers along with magazines. The concept of free gifts was introduced to increase customer base.  However,  after  some  time,  it  became  a  problem  for  the  entire  industry  as  he  cost  of production was increasing. In such a situation, some organizations stopped providing free gifts, so that  the  cost  of  production  could  be  reduced.  Consequently,  these  organizations  lost  their customers. This is because at this point, customers preferred free gifts with magazines. On the other hand, some organizations increased the prices of magazines to overcome the cost of production. However, these organizations did not succeed in their strategy, as the customers were not willing to buy magazines at higher prices. Even some of the organizations reduced the prices of magazines to increase the number of customers, generate revenue, and overcome the production cost. As a result, rest of the organizations in the industry also reduced their prices to earn profit and minimize cost of production. This led to heavy losses for organizations that initially reduced the prices. Therefore, organizations were bound to provide magazines at fixed rate along with free gifts.

Questions:

Q1. What type of market structure is prevailing in the magazine industry? Why?

Q2. What are the problems faced by organizations in the magazine industry due to oligopoly?