Economics of Southeast Racing Parts in North Carolina

Southeast Racing Parts (SRP) sells engine and chassis parts as well as safety and set-up equipment for entry-level racers. The factors affecting the demand for these products differ at the international, national, state, and regional levels. The major factor affecting the global demand for race-car engines and chassis is technological advancements in the automobile industry. Some of the latest advancements that may affect consumer demand for engine parts include the development of electric vehicle engines, turbo-charged engines, and techniques for reducing the emissions from internal combustion engines after-treatment techniques for internal engines (Tripathi, Dhar, & Sadiki, 2018). Many consumers would, therefore, be in need of the latest technology in racing car engines to keep up with the market trends. Meeting the consumers’ need for the latest-technology products would increase the costs of the engine parts since the newly-released technologies would be harder to access and would be relatively scarce.

At the national level, the demand for the engine and chassis parts of the racing cars would depend on the number of races held during the year, the pricing of engine and chassis parts in various locations around the country, the availability and cost of racing cars in the country, and the number of novice racers. A large number of races hosted within the country during the year would translate to high demand for the engine and chassis parts as racers would be in need of reliable cars and novices would be interested in joining new races. The second factor – the pricing of the engine and chassis parts in other places around the country – would affect the demand for SRP’s parts since the availability of alternative options would reduce the demand while the availability of fewer options would increase the demand.

The third factor affecting the demand for SRP products nationally is the availability and the cost of racing cars around the country. If there is a large supply of fully-assembled racing cars, the demand for the parts would be low and vice versa. Furthermore, if the costs of obtaining such assembled cars are lower than the costs of obtaining parts and assembling them, the demand for parts would be significantly low. Finally, the number of novice racers determines the demand for the products that SRP offers since a large number of novices would translate to high demand for the engine and chassis parts. For all the factors, high demand for the parts would translate to increased prices of the parts as a result of a relatively low volume of the available parts whereas a low demand would result in a lowering of the prices of the available parts.

At the state and regional levels, the factors affecting the demand for engine and chassis parts would be relatively similar. The first factor is the availability of racing cars in the geographical area. If fully assembled racing cars are easily available to the target consumers within North Carolina or their county of residence, the demand for the parts that SRP sells would be low. However, if the fully assembled cars that are available are more expensive than the process of acquiring parts and assembling them, then the demand for the engine and chassis parts of racing cars would be high.

The second factor affecting the demand for SRP products at the state and regional levels is the availability of assembling companies in the geographical area. If there are companies that assemble racing cars within the state or region, consumers would find it easier to obtain cheap parts and have them assembled, thereby increasing the demand for the parts. Otherwise, the demand for fully assembled cars would be higher. The last two factors include the number of entry-level racers and the number of races held during the year within the target geographical region, whose effects are similar to those observed at the national level.

Based on all these factors, high demands would translate to higher pricing of the products due to a relatively low availability or scarcity. If all the factors were to come into play at the same time – a large number of races, availability of assembling companies, fully assembled racing cars being more expensive and the unavailability of cheaper alternatives among others – then the demand for the products that SRP offers would be quite high. At the same time, due to the high demand, there would be a reduced amount of the available products, resulting in scarcity.

At the international level, there is one main factor that affects the supply of racing car engine parts, chassis, and safety and set-up equipment, which is the cost of production of engines and chassis parts. The production cost is a function of the labor charges, material costs, new technologies in the production process, and machinery costs (Lumen Learning, 2019). Consequently, the supply of racing car parts will be higher if the production costs are minimal, thereby guaranteeing the producers more profits, and it would be lower if the production costs are high. Based on the production costs, SRP would price the parts depending on the supply: if the supply is high, the pricing would significantly reduce, and the amount transacted would be relatively high. Similarly, low supply would mean that SRP would price the products highly and deal with fewer products.

At the national level, the major factors affecting the supply of the SRP products include the cost of production in the country and the government policies and subsidies. The cost of production in the country affects the supply of the parts in a manner similar to how it affects the supplies at the international level. The second factor is the policies that the government adopts including taxes and regulations (Lumen Learning, 2019). The tax policies may affect the cost of importation, local production, and the purchase of the parts whereas the regulations determine how the company promotes sustainability in the environment. In case the government policies and regulations are costly to the process of acquiring the products, the supply would decrease, the product prices would be higher, and the company would trade lower volumes of the engine and chassis parts. However, in case the government gives subsidies for purchasing the parts internally, the supply of the products would be high.

At the state level, the factors affecting the supply of parts include the costs of production parts within the state, the costs of importing parts from other states, the state government’s policies, and the availability of suppliers. The costs of production have a similar effect on the supply of the products at the international, national, and state levels. The second factor at the state level is the cost of transferring products from one state to another – if the costs are high, it would be difficult to import the products from other states, leading to a low supply. The third factor is the policies of the state government on issues such as taxation, environment, and subsidies on automobile parts. If the policies and regulations are favorable, the supply of the products would be high, which would translate to a lower pricing and a higher amount obtained from the sales.

At the regional level, the costs of acquiring the parts are the major factor influencing the supply of the SRP products. These costs are dependent on all the factors at the international, national, and state levels. If the company incurs high costs in obtaining the parts from various suppliers in other states or outside the country, then the supply would be low, leading to a higher pricing of the products and a lower volume of sales. However, should the costs of purchasing the products be affordable, their supply would be high and their pricing would be lower for the target consumers.

Generally, the demand for the products that SRP offers depends on the technological demands in the automobile industry, the number of motorsports races, pricing of engine and chassis parts, the number of entry-level racers, the availability and cost of ready-made racing cars, and the availability of assembling companies. Due to the popularity of motorsports in the United States, the demand for racing cars is relatively high, and depending on the factors mentioned above, the demand for engine and chassis parts is equally high (Simone, 2018). However, the supply for the parts may depend on the factors including the cost of production of the parts, government policies on taxation, importation, and production, government subsidies, the availability of suppliers, and the costs of acquiring the products. If these factors are favorable, then the supply of the products would meet the high demands.

The demand for a product or service is considered to be elastic when changes in its pricing produce a significant change in the quantity of the item that the market demands (Lumen, 2019). There are five major factors affecting the price elasticity of demand, which is defined as the degree to which the quantity of an item that is on demand changes with a change in its pricing (Lumen, 2019). The first factor is the availability of substitute products, with elasticity being higher when there are a large number of substitutes. In the current market for racing car parts, there are few substitutes that the target consumers can access, which make the price to be relatively inelastic.

The second factor is the percentage of the consumer’s budget that they utilize on the product – products are more elastic if consumers spend a fortune on them (Lumen, 2019). In the purchase of engine and chassis parts as well as the safety and set-up equipment, racers usually spend a large proportion of their income, which makes the price to be elastic. The third factor is the level of necessity since consumers have a tendency of buying necessary products regardless of their price, making them inelastic (Lumen, 2019). Since racing car parts is essentially a necessity for novices to participate in car races, they are highly likely to purchase the parts they need regardless of the cost, hence making the price to be inelastic.

The fourth factor is brand loyalty, with consumers’ attachment to specific brands making them relatively insensitive to price changes, resulting in inelasticity (Lumen, 2019). SRP customers have varying degrees of brand loyalty, which makes the price relatively elastic. The fifth factor is the time it takes for the price change to be in place (Lumen, 2019). Durable goods usually have a lower elasticity in the short-run since consumers would still purchase them regardless of the price, but the consumers would look for alternatives in the long-run, increasing the elasticity (Lumen, 2019). Generally, the demand for the durable engine parts, chassis, and safety and set-up equipment is inelastic since most of the target consumers need them regardless of their costs.

The demand for the SRP products is not strongly inelastic. Based on the analysis of the determinants of elasticity, there are factors that contribute to an element of elasticity in the demand for the products. The first factor is the large proportion of the consumers’ income that they spend on the racing car parts, which makes the demand to be elastic. The second factor is the novice racers’ varying degrees of brand loyalty, making the demand to be relatively elastic. Therefore, even though most of the determinants point to the SRP products having an inelastic demand, there are still consumer attitudes that lower the strength of inelasticity. Consequently, if the pricing of the products changes, the demand will slightly change as some consumers would be affected by the two factors while some of them would delay purchasing the car parts (Woodruff, 2018). Most of the consumers who are willing to enter into races, need racing car parts, and can afford to pay for them would not be greatly affected by the price changes.

The determinants of elasticity that informed the classification of SRP products’ demand as inelastic included the availability of substitutes, the level of necessity, and the short-term versus long-term timing of the price changes. Based on the competitor analysis in SRP’s market niche, there are few alternative products to the engine and chassis parts that the organization offers, which means that consumers have fewer substitutes to select from. Therefore, when they need the products, the demand would not change significantly even if there are changes in the pricing.

Furthermore, based on the analysis of market needs, entry-level racers require the services and products first before considering the price and availability. Moreover, they need the best engine and chassis parts to give them a winning shot at competitive racing, meaning that they have a high level of necessity for the products that the company offers. This high level of necessity makes the demand to be inelastic (Woodruff, 2018). Finally, the engine and chassis parts, as well as the safety and set-up equipment that SRP offers, are durable in nature. The durability means that short-term pricing changes would not greatly affect the demand for the products, which means that the demand is inelastic in the short-term timing of prices (Woodruff, 2018). However, the demand would be relatively elastic if the price changes are in effect for a long duration.

The inelasticity of the demand for the SRP products makes the prices directly proportional to the revenue obtained from the product sales. In other words, when there is an increase in the product prices, the revenue that the company accrues from sales would increase, and if the price reduces, the revenue would decrease (Hutchinson, 2016). Consequently, the organization can develop relevant pricing strategies depending on the demand for the products. Since the demand is inelastic, SRP can strategically increase the products’ prices without the fear of losing customers (Woodruff, 2018). However, the sales and marketing teams need to implement price increments after considering the factors determining the demand for the products.

There is a potential for SRP to influence the elasticity of the demand for its products. As Fletcher (2017) explains, there are firms that have succeeded in taking advantage of consumer behavior to develop successful business strategies. It is, therefore, possible to adopt ethical strategies to exploit consumers’ habits and preferences to influence the elasticity of demand for specific products. Based on the findings of the market analysis, motorsports is becoming increasingly popular in the United States, and SRP can tap into this racing culture and habit to make the demand more inelastic (Simone, 2018). The company can exploit the habit by making attractive offers for entry-level racers to seek for reliable engines and chassis parts and the services they need to get their racing cars ready for any competition that they would like to register in. The reason behind making the demand more inelastic is to allow the company to have the flexibility of setting pricing strategies that would see it become more profitable without losing customers.

As Aurora University (2017) explains, there are four main market structures: pure competition, monopolistic competition, oligopoly, and pure monopoly. The products in a pure competition are identical among a large number of competitors, with little or no differentiation. It is an ideal market structure and does not fit SRP’s goods and services. In a monopolistic competition market structure, there are a large number of small companies which sell similar products that are highly differentiated. However, the element of the existence of several competing companies offering similar products disqualifies it from being close to SRP’s products and services. The other market structure is the pure monopoly, where a single organization produces goods and provides services that have no close alternatives (Aurora University, 2017). Since there are alternatives to SRP’s products and services, it does not belong to a pure monopoly.

The market structure that best describes the company’s goods and services is an oligopoly. An oligopoly is characterized by the existence of a few organizations that offer products and services that are homogeneous or differentiated (Aurora University, 2017). The automobile industry is an oligopoly, which is also true for the firms that sell engine and chassis parts for racing cars. From the competitor analysis, there is only one significant competitor for SRP’s products and services within the market niche as well as a few rival companies including NASCAR Winston Cup suppliers, Asphalt late model chassis builders, and national mail order suppliers. Therefore, the industry has a few firms that offer differentiated products, with SRP’s products and services being unique to the target geographical location.

The knowledge of the market structure enables the formulation of an effective pricing strategy. As Zhai & Zhao (2016) explain, oligopolists are price setters, that is, they have the ability to set their own prices due to the differentiation of the products and services from their competitors. Consequently, since SRP belongs to the oligopoly market structure, it is possible to institute price-setting strategies with the aim of maximizing its profitability in the long-run (Zhai & Zhao, 2016). For instance, since SRP has few competitors within its niche market and target geographical market, it can select the zone pricing strategy to ensure it has the best prices to offer within North Carolina and its environs (Adams & Williams, 2017). Consequently, an understanding of the market and its structure enables the management of the organization to develop the most suitable pricing strategies that would ensure profitability and customer retention.

The knowledge of the market structure also informs the advertising strategy to adopt. In an oligopoly, most of the players adopt an informative advertising policy since advertising also becomes an element of competition between the players (Han, Heywood, & Ye, 2016). For instance, the most relevant strategy that SRP should implement should have the objective of selling the company’s differentiated products and services and how they are distinct from what competitors offer. In the target market, the competitors offer chassis building services, supply circle track products, offer mail order services, sell used vehicle parts, or offer similar products and services at higher fees and in different locations. The advertising strategy, therefore, could focus on selling SRP’s value propositions by distinguishing its products and services from those that the existing competitors offer.

Therefore, the market structure has a huge impact on the pricing and advertising decisions that the management of SRP should make. With few competitors, the strategies should focus on offering the customers the best value. Furthermore, since there is intense competition in the advertising done by players in oligopolistic markets, the company should invest in advertising to ensure that it consistently reaches out to the target customers.

The company would prefer to stay within the oligopoly market structure. There are three major advantages that the structure presents that are preferable to the benefits that the organization can incur if it were in a pure monopoly, monopolistic competition, or pure competition. The first advantage that oligopoly offers, is the large profit margins due to limited competition (Ayres, 2016). Furthermore, since many entry-level racers are in need of engine and chassis parts, there is already high demand for the products that other companies are currently not meeting.

The second advantage that the current market structure offers is the simplicity of choices available to the consumers (Ayres, 2016). For instance, the entry-level racers only need to see SRP’s products and services and compare them with those that the few competitors offer and decide to purchase the products from SRP. The structure reduces the burden that consumers face in selecting products from a long list of options available in a monopolistic competition or a pure competition.

The third advantage is the ease with which consumers can obtain information regarding the products and services on offer, making advertising to be simpler and relatively cheaper than in other market structures (Ayres, 2016). Due to the availability of information, novice racers would easily access SRP and obtain the products and services that they need. Therefore, these advantages present SRP with the chance to maximize its stay in the oligopolistic market structure. The advantages also inform the decision against preferring a different market structure. Furthermore, based on the research done before deciding to focus on the present market niche, SRP decided to be in an industry that offers the least competition and high chances of profitability.

According to the Corporate Finance Institute (CFI), economies of scale refer to the advantages in cost reduction that a business obtains by expanding its output levels (CFI, 2019). This reduction in the costs incurred in the production of goods results from the reduction of the fixed costs per unit of the good produced. Furthermore, the variable costs reduce with the increase in the level of outputs, the promotion costs reduce, and the logistical costs also reduce. As CFI (2019) explains, the production entails all the processes and activities involved in transforming a product from its raw material to its presentation before the purchase by the final buyer. Based on this definition of production, economies of scale play a vital role in SRP’s business operations.

One of the roles that economies of scale play is the reduction in costs when the company purchases the supplies in bulk. Bulk purchases essentially reduce the per-unit fixed costs, reduce the logistical costs in shipping the products from the sellers to the organization’s facility, and enhance the discount prices that the suppliers offer (CFI, 2019). The second role that economies of scale play at SRP is in management, where the firm can lower its average costs by employing more skilled and experienced managers who would see it avert common costly mistakes (CFI, 2019). The third role that economies of scale play is technological, with the adoption of the latest technology in the services that it delivers making the processes more efficient and reducing the overall costs of maintenance. Therefore, economies of scale play an important role in the purchasing, managerial, and technological elements of the organization’s operations.

References

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