Research Paper on Financial Management Challenges

Introduction

The video Microeconomics: Understanding the Market System explains the four categories of market structures that exist: perfect and monopolistic competition, oligopoly, and monopoly. According to the video, markets environments have different features that are defining them. The perfectly competitive market embraces many sellers who share smaller market segments amongst themselves. Product homogeneity characterizes this structure as well as lack of price competition, while its suppliers are price-takers who enter and exit it at will. The market does not exist in the modern world, but monopolistic competition is the closest markets get to it. The monopolistic competition includes many firms that control small market shares, with minimum product diversification and entry and exit barriers. These firms enjoy some level of price control arising from marketing efforts. Restaurants, clothing companies, and most of consumer service providers are the standard examples of this structure.

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Oligopolies consist of a few large firms whose market domination enables them to set prices. Competition is intense, while entry and exit barriers are high. Firms in this category are price setters and use pricing and non-pricing strategies. Their large sizes imply decisions and actions of each firm have huge implications on the entire market, creating some interdependence. Media houses, supermarkets, banks, and telecommunication companies exemplify oligopolies. On their part, monopolies occur when only one firm exists and operates without any competition. Entry and exit barriers are overly high. Pure monopolies typically arise in state-run setups. The Indian government, for instance, runs the rail system. In the private sector, firms like Microsoft, which dominates the PC market with its Windows OS, are moderately monopolies. Regarding these features, this paper discusses some of the most challenging issues that contemporary financial managers face in these varied market structures, with a focus on how market liquidity, competitiveness, and efficiency impact them.

Market Liquidity

Market liquidity is the ability of a firm to sell financial securities without necessarily having to substantially cut their price to attract buyers (Byrd, Hickman & McPherson, 2013). Financial managers grapple with the issue of market liquidity because if a firm's securities trade infrequently, it became prone to illiquidity, which affects investors' confidence concerning its long-term prospects. According to Rosch & Kaserer (2012), one issue that adversely affects liquidity is the decline of the stock market because the market and liquidity risks have a positive correlation. The authors investigate the link between credit and liquidity risks, and argue that the spread between credit risk and liquidity risk widens with the rise in market uncertainty as credit risk adverse effect on liquidity intensifies (Rosch & Kaserer, 2012). Financial managers, thus, must carefully deliberate on maintaining their companies' liquidity, if they intend to make positive decisions about profitability. They ought to be more vigilant during market crises, given that investor tends to get averse to risks during such times. As a result, they typically drift toward less risky ventures and the most liquid securities.

Competitiveness

Competition is a great worry to almost all managers in all market systems other than monopolies. For instance, the perfectly competitive market means seller offer many identical products to the same pool of buyers, which drives profit margins down. On the other hand, imperfect competitive environments result in high entry barriers or diversification. Companies face a more significant challenge to not only to implement operational efficiency but also to invent dynamic initiatives and positions different from those of the rival companies. In this case, managers should know when tradeoffs are the most basic course of action for them to take as they help establish the need for choice and objectively constrain firms from overcommitting its resources by converging their objectives. In the perfect competition and monopolistic situations, the homogeneity of what firms offer implies financial managers struggle to strategize on how to create an edge over rivals to drive profitability (Kang, 2004).

Efficiency

To survive in all these markets, firms must operate under high efficiency. For instance, monopolies are likely to be inefficient as their pricing structures often result in over or under-utilization of managers/owners' efforts that lead to the distortion of their costs systems (Chen, 2009). Likewise, in monopolistic competition, firms may overly rely on pricing or advertisement as they to drive sales, while price wars affect oligopolies and the homogeneity of products, and low competition hinders perfect competitions. Therefore, financial managers should always insist on the efficacy of their firm's operations to balance the many challenges businesses faces in their different industry and market settings.

Conclusion

Financial managers grapple with the daunting task of ensuring their firms are competitive and their operations efficient without overexposing liquidity. Striking this balance is quite tricky. As a result, it is upon each of them to learn how to adapt company strategies with the change in the business environments where their corporations operate.

Reference

Byrd, J., Hickman, K., & McPherson, M. (2013). Managerial Finance. San Diego, CA: Bridgepoint Education Inc

Chen, J. (2009). Monopoly, competition, and productive efficiency. Available from ABI/INFORM Collection. (304863045). Retrieved from https://search.proquest.com/docview/304863045?accountid=45049

Kang, K. (2004). Market structures and competition in system markets. Available from ABI/INFORM Collection. (305177745). Retrieved from https://search.proquest.com/docview/305177745?accountid=45049

Rosch, C.G., & Kaserer, C. (2013). Market liquidity in the financial crisis: The role of liquidity commonality and flight-to-quality. Journal of Banking & Finance, 37(7), 2284. Retrieved from https://search.proquest.com/docview/1349940774?accountid=45049

Films Media Group. (Producer). (2011). Microeconomics: Understanding the market system [Video File]. Retrieved from Films on Demand