ECO550-Managerial Economics Assignment #3
Groupon Inc. was launched in 2008 and is currently the world’s largest online coupon company with close to 40 million active customers. The company was one of an original business idea; they were entering a market that was new to the social media market and there was no competition. They began with high profits and then as a couple of years passed, the revenue began to decline. The decline in revenue made management begin to reevaluate their current market structure as a monopoly and begin to interpret the oligopoly business market model. The two can be close in similarities but only one can be a monopoly. With the vast growth in just a few years, critics began to wonder if the leading coupon supplier in social media would continue to survive within a market structure that has an unlimited number of competitors. By conducting research into the different market structures that Groupon Inc. could possibly transform into, the analysis of the decision-making process provides the results of either continued success or failure.
Market Model Patterns of Change Groupon Inc. is a deal-of-the-day website that features discounted gift certificates for local or national use. Groupon pioneered the social media by the use of adverse advertising campaigns designed for the growth and word of mouth of the clients they acquired for their own increases in customers as well as profits. . They launched their business in 2008 and by 2009, it operated in 30 cities in the United States, had 120 employees, 2 million subscribers, and revenue of $33 million (www.flatworld, 2013). On June 2, 2011, it announced plans for an initial sale of its stock. On November 4, 2011 it raised $700 million, making it the largest initial public offering of a U.S internet company since 2004 (www.flatworld, 2013). The company declined a $6 billion takeover offer from Google in late 2010 (Geron, T., 2011). In April 2012, the SEC examined the company’s revision of its first set of financial results as a public company following two finance revisions before its November IPO. Following the SEC examination, Groupon shares plunged and accounting experts and investors alike critiqued the company’s leadership team. The relationship between individual firms and the relevant market as a whole is referred to as the industry’s market structure and depends upon: “the number and relative size of firms in the industry, the similarity of the products sold by the firms of the industry (degree of product differentiation), and the extent to which decision making by individual firms is independent, not interpedently or collusive” (Harris, page 352). As explained in the Abstract, because of the original design and proposed business of Groupon INC’s start, they experienced very high profits and success because they had no real competition. They could have been considered in a monopolistic market structure due to them being the only company on the web to offer coupons or discounts from other products and services. They also were the first to set the price at half the cost of the actual voucher purchased and the business merchant client receiving the other half of profit. This also allowed for a business to gain exposure and product recognition as well as promoting Groupon Inc. as a result of the purchase of the voucher by the consumer. As stated in the text on page 350 is the following: “Industry demand growth can influence the intensity of rivalry. When sales to established customers are increasing and new customers are appearing in the market, rival firms are often content to maintain market share and realize high profitability. When demand growth declines, competitive tactics sharpen in many industries, especially if capacity planning has failed to anticipate the decline” (Harris, page350). This is exactly what has happened to Groupon