Essay Questions 1

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The Monopoly of Luxottica Company

Generally, Luxottica was launched in 1961 and specialized in manufacturing sunglasses

and frames. Although Luxottica was established first in Argodo, its current headquarters are in

Milan. The company engaged in different acquisitions to expand operations to new horizons. By

1981, Luxottica Company was already operating in Germany. Since its foundation, the company

has indulged in significant deals that have revolutionized its global market presence (Luxottica).

The Company owns various products such as Pearle Vision, Sears Optical, and Sunglass Hut.

The company is involved in manufacturing, retail, and wholesale distribution. The assembling of

the plastic, metal, and glass is approximated to cost between $25 and $50 (Swanson). However,

Luxottica end products are extremely costly as they range between $400 and $500 (Swanson).

Therefore, the company benefits from high-profit margins and controls 80% of the eyeglass

market share (Swanson). The firm has dominated the eyewear industry and thus can alter prices

and quality without affecting demand. Luxottica is the main supplier of eyewear products; hence

is more oriented on price making and maximizing returns (Cnbc). The other traits also include

high entry barriers and price discrimination. The monopolistic nature of the Luxottica Company

has been associated with its enormous control of the eyewear market.

In this case, the firm adopts a monopoly strategy where it determines the quality and

prices of the products it provides its consumers. As indicated in figure one below, the demand is

downward sloping, and the company must lower its prices if the management wishes to sell more
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glasses and frames. Furthermore, since the firm is a monopoly, it needs to charge the same prices

to customers and lower prices to augment sales. However, the most crucial feature of the graph is

that marginal revenues (MR) are twice what is demanded. For instance, assuming the cost of one

pair of glasses is $400 and two for $798. Thus, the price must decrease by one dollar to retail two

pairs of glasses. The MR for the second one is a change in total revenues divided by variation in

quantity or $ (798 - 400) / (2-1) = $398. Hence, the MR dropped by $2 ($400-398), double the

price rate. In the case of a monopoly, the MR is not the same as the price, and the curve is steeper

than the demand curve.

Luxottica revenues are determined by the quantity of produced items and set price marks.

In Luxottica. Profit is optimized when the MR is equitable to the marginal cost. In this regard,

the demand curve's rise influences the prices, maximizing the profit quantity. The company has

substantial market control by charging the highest price a customer can afford. Hence, Luxottica

products vary in price based on the demographic of the customers. The second graph exhibits the

profit amassed by Luxottica and is computed by subtracting the total expenses from the total

income. The total costs are calculated by obtaining the product of average costs and profit to

obtain the maximized profits. However, the company will earn short-term losses or profits and

zero income in the long haul. Adopting pure competition would make the company profitable

when MR=MC and its product with sold quantity are obtained.
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Figure 1. Luxottica Single Price Monopolist

Figure 2. Luxottica Revenues

Question Two

Luxottica's substantial impact in the frame and glass industry has been facilitated by its

strategic management. The company has utilized the benefits of horizontal and vertical

integrations with diverse brands to enhance its control of the eyewear industry and boost its

market position. The strategy has enabled Luxottica to eradicate popular distribution channels by

utilizing the brick-and-mortar stores. For instance, Luxottica acquired Ray-Ban in 1999 on the

verge of collapsing. During the acquisition period, a glass pair was sold at $30 (Goodman). The
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company strategized on rebranding the Ray-Ban products after removing them from the market

for a year. The rebranded products cost five times higher compared to the initial prices. The

demand for Luxottica products increased substantially, resulting in enormous profits. The

rebranded products enhanced Luxottica's diversification of products and profitability.

Figure 3. Price Elasticity Concept

The acquisition of Ray-Ban can be illustrated using the above price elasticity analogy.

Luxottica redesigned Ray-Ban items and leveraged its merchandise's price elasticity. In this

regard, its rebranding process entailed product remodeling, enhancing its products and launching

a new concept to customers (Emporium). The company uniquely acquired Ray-Ban ne,

enhancing the product values and increasing its costs. Products retailed at $30 were relaunched

in the market under a different brand and sold at $150. Notably, Luxottica's products are high

quality, and the brand has earned customer trust and loyalty. Thus, the products are price

inelastic, indicating that price changes do not substantially impact the demand for Luxottica

products.Consequently, Ray-Ban also had a strong market position and client base; hence the
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acquisition augmented the profitability of Luxottica. The rebranding process was costly hence

supporting the need to increase the prices. Thus, the acquisition resulted in increased demand for

products despite increasing prices.

Question Three

The success of Luxottica is attributable to the adopted model of vertical integration,

which has facilitated its competitive benefit in the past years. The model has also contributed to

the company’s dominance in the eyewear business through the strategic elimination of rivals.

Moreover, the business model has fostered the growth of Luxottica's income by enhancing its

market share and position over time. The company head, Leonardo Del Vecchio, was enlightened

on the significance of vertical integration in penetrating and dominating the eyewear industry

(Knight). Hence, the company has strategically moved from one acquisition to another in the

quest to expand operations and build a global customer base.

Generally, the company’s manufacturing sector incorporated aspects of vertical

integration associated with distribution expansion from wholesale to retail, then later ventured

into the lucrative venture of eyewear. Monitoring the entire production procedures ensures that

Luxottica verifies and guarantees the highest quality across its processes and items. The

company facilities bear the slogan "Made in Luxottica" when executing overall operations.

Moreover, the company easily reckons its customer needs, changes in preferences and emerging

trends by engaging them in a 360-degree feedback program (Knight). The framework enables

management to understand the relevance of eyewear production from distribution to design.

Moreover, Luxottica utilizes the feedback channel to bolster cross-functional innovation and
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welcome synergies. The benefits of a vertical integration framework attract prominent fashion

firms to the company portfolio.

The company controls a significant share of glasses and frames in the market, which is

facilitated by implementing management strategies. The management has stressed integration to

increase the company's ability to influence prices in the industry. For example, Luxottica owns

its downstream distributors and has acquired its distribution channels. In this regard, Luxottica

has acquired the largest North American eyewear retailer, Sunglass Hit, Pearle Vision and Oliver

People (Emporium). Hence, Luxottica has gained total control over its supply chain system and

expanded its market share through strategic acquisition.

The acquisition strategy is associated with many benefits to the company's long-term

growth and controversy and success and its customers. First, the vertical integration strategy

lowers fixed costs, enabling the company to optimize profits. The company has amassed

significant new profit areas by directly retailing its items to customers. The framework also

enables the company to expand its operations and dominate local markets with eyewear products.

For instance, acquiring a North American firm enabled the company to dominate its operations in

the region.

Although vertical integration is profitable, it is also fraught with many drawbacks. In this

regard, the model impacts the organization’s efficiency levels through unpredictable labor issues.

The acquisition process is expensive hence making the company products more costly.

Therefore, acquisitions are associated with positive and negative benefits impacting the

company.

Markedly, horizontal integration is evidenced when two firms operating in similar

industries opt to merge operations. For instance, Luxottica initially disregarded Oakley due to
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performance issues but later merged efforts in 2007 (Emporium). The model is also associated

with benefits and drawbacks to the management, which must be addressed to optimize profit. For

instance, the company has enjoyed enhanced revenues, increased market share for its items,

minimized rivalry and improved marketing synergies. The major drawbacks of the model include

government scrutiny, which hinders merging activities.

Question Four

Figure 4. Monopolistic Competition

The figure above indicates that returns are optimized at the point on the curve whereby

the MR and MC are equal. The point establishes the company’s equilibrium whereas prices are

determined at the intersection between the demand curve and the MR curve. The shaded area

presents the total profits and is obtained by the product of average total cost and average

revenue. Monopolistic competition firms are the major manipulators of product decisions in the

short term, like the case of monopolies.

Ideally, an online retailer's entrance into the eyewear market will influence the normal

equilibrium and promote a decline in Luxottica's market share and profits. Online retailers will
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utilize the current marketing trends and use digital platforms to reach a wider customer base.

Moreover, the online companies will target millennials who are major consumers of the products

and significantly influence the market share of Luxottica. In this case, Luxottica will produce

instances whereby the MR is equitable to the MC. The demand for the products will decline and

shift downwards while online firms join the markets. Online firms will easily enhance awareness

of their products and impact the overall demand for Luxottica products. Thus, the company

share, sales and revenue will decline substantially based on the new player's intensity. That way,

the company will sell its products om the established average prices. The entry barriers will be

low, whereas the companies in the market will not enjoy significant profits in the long haul.

Figure 5. Long run Decisions on Output and Prices

Works Cited

Cnbc. "Why Glasses Are So Expensive." YouTube, 16 May 2019, youtu.be/Mx1dMvbT5Fw.

Accessed 4 Apr. 2022.

Emporium, Spectacle. "60 Minutes Luxottica Do you know who makes your glasses." YouTube,

22 Feb. 2016, www.youtube.com/watch?v=yvTWjWVY9Vo.

Goodman, Andrew. "There's More To Ray-Ban And Oakley Than Meets The Eye." Forbes,

14 July 2014, www.forbes.com/sites/agoodman/2014/07/16/theres-more-to-ray-ban-and-

oakley-than-meets-the-eye/?sh=3b91913822cd. Accessed 4 Apr. 2022.

Knight, Sam. "The Spectacular Power of Big Lens." The Guardian, 10 May 2018,

www.theguardian.com/news/2018/may/10/the-invisible-power-of-big-glasses-eyewear-

industry-essilor-luxottica. Accessed 4 Apr. 2022.

Swanson, Ana. Forbes, 10 Sept. 2014, www.forbes.com/sites/anaswanson/2014/09/10/meet-the-

four-eyed-eight-tentacled-monopoly-that-is-making-your-glasses-so-expensive/?

sh=19a424cc6b66. Accessed 4 Apr. 2022.