Oligopoly and theme parks

http://www.nytimes.com/2012/05/21/business/universal-armed-with-cash-from-comcast-takes-aim-at-disney.html?pagewanted=1

Theme parks industry is very similar to the oligopoly structure: small numbers of large firms, high barrier to entry, products differentiation. In this article clash of the theme parks, it describes the competition between two major firms in this oligopoly structure industry. From this article, we can see how oligopoly firms compete with each other since the price is relatively stable.

The two major competitors in the theme park industry are Universal and Disney, and they are two of the large firms in this industry. According to the article, “Parks can be vulnerable to swings in the economy and require costly and continuous investments in new rides; escalating labor costs threaten margins.” This is because the operators of the park must fix the instruments regularly to make sure they are safe to use. Not a lot of company can afford the extremely high cost to open a theme park. “A major 3-D ride themed to Michael Bay’s “Transformers” movies opens this Friday at Universal Studios Hollywood, at an estimated cost of $100 million.” It cost Universal $100 million to open a new theme park, and that indicate the high barrier to entry this industry. The high barrier decreases the number of competitor, so that Universal and Disney have much power to decide the price. However, in oligopoly, in this case, the non-collusive oligopoly, the firms are unlikely to compete with each other on price, even though the two theme park operators do not make agreement on prices. This is due to the kinked demand curve of non-collusive oligopoly. On the graph, it shows a kinked demand curve facing each firm. And the marginal revenue curve is a broken one, and the broken point is exactly the kink in the demand curve. Suppose Universal and Disney want to compete with each other on price: if Universal raise its price, Disney and other theme park operators may not increase their prices. If the other operators continue charge at P1, they will attract more consumers thus gain more market share., which Universal will not be happy to see. And the demand curve above P1 is relatively elastic, so each unit of price the Universal increases, a large number of demand will decrees. On the contrary, if Universal decreases its price, even though it might gain more market share, but since the demand curve is relatively inelastic under P1, so the firms need to decrease its price a lot to only increase demand a little. So, the non-collusive oligopoly structure has a stable price.

Since Universal can Disney cannot compete on price, they will have to differentiate their products. Disney has eight parks in California and Florida that attract over 73 million visitors each year, while Universal operates three parks, with annual attendance totaling about 18 million. In order to gain more market share, Universal invests $265 million on the Harry Potter theme park, which does attract a lot of consumers. On the other hand “Competition with Universal, for instance, factored into Disney’s decision to beef up a previously planned expansion to its Magic Kingdom park in Orlando and spend an estimated $500 million on an “Avatar”-themed addition to its nearby Animal Kingdom park.” Disney provides new facilities too, in responding to the Universal increased products. “New draws at Universal Orlando include a refurbished Spider-Man ride, a lavish parade, a high-tech fountain and pyrotechnics show and a ride based on “Despicable Me.” And again, the Universal provide new products. “The rivalry between the two parks operators, which dates to the late 1980s, when Disney scrambled to open its Hollywood Studios park here to beat Universal’s planned arrival, next moves to California. Universal will soon open its “Transformers” ride; Disney will unveil a $450 million “Cars”-themed addition to its California Adventure park in Anaheim on June 15.” The long history of competition between these two major theme park operators indicate that in the theme park industry, the basic strategy to attract more market share is to increase new facilities, and it is the “product” that the two major theme park operators are competing on, instead of price. And the firms invest their abnormal profit to the research on new projects so that the new projects can attract more consumers thus allowing them to gain more market share. Since the price is relatively stable in oligopoly, market share is the key point of gaining more revenue.

1 Comment »

  1. wileye Said,

    December 16, 2014 @ 4:16 am

    I found this surprising that Disney and Universal are even competing. Universal is a huge company, but I never imagined it was anywhere near Disney. I think the idea of an oligopoly was clearly put forward, as well as the idea of competition. The fact that each company is always trying to “beat” the other as far as time, entertainment value, and price are clear signs of an oligopoly. These two companies are also the two biggest behind theme parks.

RSS feed for comments on this post · TrackBack URI

Leave a Comment