Managerial Economics Analysis of IKEA's Market Structure

This report provides an analysis of IKEA's market structure using managerial economics concepts. It discusses the different market structures, suggestions for the company to operate in a different market structure, and government interventions. The report also includes an introduction to the company and an analysis of its market.

MANAGEMENT
ECONOMICS- 2

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
Introduction of company.............................................................................................................1
Analysis of market......................................................................................................................3
Different market structure...........................................................................................................6
Suggestions for the company operate in a different market structure and the government
interventions................................................................................................................................8
CONCLUSION ...............................................................................................................................8
REFERENCES..............................................................................................................................10

INTRODUCTION
Concept of managerial economics focuses on solving issues of entity and decision making
with implementation of models related to microeconomics and macroeconomics. It uses multiple
tools which belong to various disciplines that are statistics, production, human resources and so
on (Zhang and et. al., 2018). In a business, it aims to provide effective framework to make
decision that are focussed for maximising outcomes and profits. It highlights enhancement of
efficiency of organisation by employing all possible resources which increases output as well as
decrease unproductive practices. To gain insights about managerial economics, IKEA is chosen
company which is a conglomerate specialised in designing as well as selling ready to assemble
home accessories, furniture, kitchen appliances and other home services. It was established in the
year 1943 by Ingvar Kamprad.
The project highlights about the company, its products and past. It further analyse market
structure wherein the business is operating since inception. It also discusses characteristics of
past market structure and suggestions for intervention of government.
MAIN BODY
Introduction of company
IKEA is largest retailer of ready to accumulate home accessories, furniture along with
various home related products and services. It was founded at Sweden by Ingvar Kampard in
1943 with the vision of creating better everyday life for various people(Dehghani and Yoo,
2020). The company work with mission of offering wide category of well-designed and
functional home furnishing goods at lowest prices so that many people are able to afford them. It
has modernist designs for ample kinds of appliances, furniture addition to its interior designs
work is related to eco-friendly simplicity. In the year 2019, the company has earned revenue of
approximate € 41.3 billion. It serves at global level including key areas of Europe, Southeast
Asia, Middle East, Oceania, North Africa and so on. It has presence at more than 445 locations
worldwide. At present, IKEA range includes 9500 home furnishing articles that are designed for
functional as well good looking, while at low prices.
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Figure 1: Retail sales share of IKEA worldwide. 2021
(Source: Retail sales share of IKEA worldwide. 2021)
From the presented graph, it is determined that product line of IKEA is huge. In the year
2019, living room based products of the company held around 19% that is second highest retail
sales share. At same time, outside of other category with 19% of IKEA’s international retail
sales. Moreover, its other products including bed & bathroom was accountable to 22%, food to
5%, kitchen & dining to 15% and children to 5% shares in the industry.
In the year 1943, IKEA was established as mail order sales business. It began to sell
small household products such as wallets, pens along with frames for pictures initially and
opened first store at Älmhult, Småland in 1958. In 1963, IKEA’s first store at global level was
launched in Norway and Denmark in 1969 to sell furniture products. In 1970s, stores of the
company spread to another parts of Europe following Switzerland in 1973 and West Germany in
1974(Cretì and Fontini, 2019). Later the decade, stores of the business were established in
Japan, Australia, Canada, Hong Kong and the Netherlands. The company had biggest market in
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Germany in the year 1989 with around 53 stores and United States with 51 stores. In 2010, IKEA
store was opened in Santo Domingo. With passage of time, the company have started selling
homeware, food products and many more to meet needs of market. In the year 2020, the
company operates functions at more than 445 locations with nearly 220000 employees.
Analysis of market
Market structure is defined to the ways various industries are categorised and differentiated
as per their degree along with nature of competition. Key aspect for determining market structure
of company is to look towards number of agents in market, sellers and buyers, relative
negotiation strength for setting prices and easiness to enter. Some of market structure in which
IKEA is operating since inception are as follows:
Perfect competition: It is ideal kind of market structure in which all buyers and sellers
possess symmetric information and no transaction costs. For example, when IKEA operate in
perfect competition market it allocates resources in best effective and efficient manner in long
run(Baumers and Holweg, 2019). There is no failure of information because all types of
knowledge are spread out evenly. The company has chances to enjoy maximum consumer
surplus addition to economic welfare. However, limitation of operating in perfect competition
market includes undifferentiated products, no incentive for development of new technology and
limited supernormal profits.
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Oligopoly: The market structure exists when small number of large organisations have all
or maximum of sales in the industry. It is characterised by selling homogeneous as well as
differentiated products, few sellers and control over prices(Si and et. al., 2020). Such type of
companies is having the interdependency as well. For say, If the competitors is reducing the
price then the other firm have to respond back so that they can effectively meet the requirement
of the business. Such business is having huge funds by which they can meet the expectations of
the potential buyers.
Monopolistic market: It is the type of market structure in which the existing in the real
world as there are large group of buyer and seller but do not offering homogeneous products.
Such organisation offers the same product but they are differentiated from each other. Consumer
is having vast choices for purchasing product over another so there is huge competition and they
can make slight change in the prices as they can enjoy the market power. In context to IKEA,
they are operating their business in the monopolistic market as there are large number of buyer
and seller present in the marketplace.
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Monopoly market: It is the market structure in which there are single firm in the market
which is having full control over the market so they are free to use price discrimination in the
market as they are the price maker in the industry(Markandya, 2017) Buyer do not have any
substitute for changing their product range so that they can pay for the given commodity
according to the price set by the seller. They are offering unique products have no rivals in the
market which makes them a market leader for sustain in the large market.
Different market structure
In the initial stage, Ingvar Kamprad founded IKEA in 1943 as a mail order sales business
and they started to sell furniture after five years. They have opened their first store in Almhult,
Samland in 1958 and named Mobel-IKEA(Mobel means furniture in Swedish). Other stores in
opened in the different locations of Europe in the 1970s. Later they decided to open their store in
other parts of the world such as Japan(1974), Canada(1975) and The Netherlands. Then the first
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IKEA store opened in Latin America opened on 17 February 2010. They are continuously facing
huge competition in the market and hence they have followed perfect competitor in the market
by which they can meet the needs and wants of their customer by offering the quality furniture
(Abbott and Sumaila, 2019). As there are larger number of buyer and seller and company is
working in the competitive business environment. By making uniqueness and offering quality
product to the customers. They become the market leader as they have fulfilled the needs and
wants of their potential customers and move towards growth and development.
At the time of establishing their business, they have followed the perfect competition in
the market and it is the market where, there is large number of buyer and seller and there are no
barriers of entry and exist in which companies can offer the unique products and services and
meet the huge competition in the marketplace. The seller in such industry can quit the industry if
they are feeling so or not generating higher profits in their business there is no barrier in doing
do. Characteristics of the perfect competition which is being used by the IKEA are explained as
follows:
 Large number of buyer and seller: It is the main attribute of the market and there are
larger number of buyer and seller present in the market which is offering the same
product line. There is no control of the single firm over the whole market as the position
of the seller is like drops of eater in the oceans as they are having large group of buyer in
the market. Due to change in the technological world and the advancement in the
operations methods, market is getting more competitive. Every organisation is focuses on
offering the products that can be different form other firms so that they can be the market
leader.
 Homogeneity of the product: In perfect competition market, they are offering the
product which is same in usage, nature and identity. Those goods can be easily replaced
by other product due to many seller present in the market. Price is the important factors
which differentiate the product of the various brands and consumer will make the better
choice on the basis of their purchasing capacity and preferences.
 Free entry and exit of companies: A competition can be enhanced by the presence of
buyers and sellers in large numbers and all have many options in the large marketplace.
The buyers as well as sellers have the option and freedom to initiate the new business and
the existing companies have liberty and freedom to leave the industry. There is absence
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of barrier on the exit and entry of the enterprises. When the business enterprises are
generating high amount of profits, it can sustain in market and on other side, when the
firm faces heavy losses, it can make exit from the industry by making the appropriate
decision so that the young generations can be motivated for starting the new business and
get high success in marketplace.
 Perfect knowledge of the market: It is such attribute that states that the seller and a
buyer have the perfect knowledge of market as the seller may make a better decision as to
where it wants to open the store and what kind of products it can offer in order to
generate high revenues. On other side, the buyers have the knowledge of the latest trend
and what all products or services can help in fulfilling the demand so that they can make
the purchase for it. The seller can also make the full consideration of factors before the
price of its offering by way of making analyzation of the competition in market.
 Perfect mobility of factors of the product as well as goods: This aspect provides that a
factor of production involves man, land, machine and the labor so that there are no
restrictions on workforce as it can switch to other company where they are getting good
compensation and working environment(Patel and et. al., 2020).
 The companies may hire the talented and potential candidates by making them pay more
so that the employees can contribute for the growth and profitability of the firm. These
are such factors that can be move in any firm in accordance with the suitability and
preference.
 Independent relationship between the seller and buyer: In a market, the seller and
buyer are huge in number which have differentiated wants and needs which may be
changed over the period of time wherein the buyer have option to move to the other brand
or product. This aspect helps in attracting large number of customers in order to meet
their wants and needs which is dependent upon the changing scenario and needs of
market. The individual buyer is also not bound to make the purchase of a specific product
as the consumers have integrated set of preferences and choices which helps in taking the
decision for the purchase accordingly.
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Suggestions for the company operate in a different market structure and the government
interventions.
As the company is operating their business in the monopolistic market in which they have
large number of buyer and seller but they are offering product differentiation by which consumer
can make the better choice among them according to their needs and wants. IKEA is already
incurring high huge production cost as they are offering quality products if they they wants to
change their market structure so they have to change their product line or do some modification
by which they can attract the large group of customer in the target market. Hence, they can not
enter in the monopoly market and if thy want to choose the perfect competition so they tends to
do some changes in their product by which they fall down the market value as they are having
good brand image in the marketplace. It is suggested to the company that they do not change
their market structure to the other as they have established good brand image in the market by
offering quality product in the market.
Government interventions are the certain rules and regulation which is being imposed by
the government which ensure the lawful operations within the organisation. The main
consideration is to eliminate the equalities form the market by imposing proper taxations policy
in the country. This also helps in eliminating the market discrimination or the monopoly form the
market. These factors must be fair to the society as this helps in making the best use of the
company so general public can have the goods with low tax rate as this could leads to have the
imbalance in the monthly budget of the individuals.
When they are taking the consideration of the general public, there must be less inference
of the government as they involves which leads to increase the tax rate on goods and services
which means manufacturer will sell their product with high tax rate so they need to considered
that welfare of the society by conducting campaigns for the social welfare of the people.
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CONCLUSION
It is concluded from the above report that macroeconomics plays an significant role in
understanding the demand ad supply according to the market conditions so that they can
effectively contribute in the growth of the country. There are various market structure which is
being used by the business such as oligopoly, perfect competition, monopolistic and monopoly.
As the company was operating their business in perfect competition since their inception but
with the sue of advance technology and understands market scenario, they are currently using
monopolistic market structure and having high brand value across the world. Lastly, It is
suggested to the company to stay in the same market so that they can have their loyal customer in
the market and there will be less interventions of the government so that seller do not change
huge taxes on their products and services.
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REFERENCES
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