Differentiating between Market Structures - Essay Example

?Output choices of firms were limited due to market demand and production function. However, not all firms respond to this limitation in the same approach. The number and size of the firms in a market or the market structure have to be taken into consideration as they may bring effect to the production and pricing decisions. These market structures range from the perfect competition to monopoly, in between these two extremes are the monopolistic competition and oligopoly. Their differences may be summarized through the number of firms present in the industry, barriers to entry, their market power and the type of products they are selling (Schiller, 2006). An industry with a structure of perfect competition may be seen with a large number firms competing for consumers purchase, monopolistic competition has many while few firms are present in an oligopoly and monopoly has only one. Fruit and vegetable vendors in a marketplace are examples of perfect competition, home products producers like Unilever, Colgate-Palmolive and Procter and Gamble are under monopolistic competition, credit card companies such as Visa, MasterCard and American Express are oligopolists and Microsoft has monopolized the operating system for computers. The number of firms in an industry is dependent to the level or degree of barriers present in the market. A high level of barrier discourages if not totally eliminate new firms from joining the industry. This is true for oligopoly and monopoly. Barriers like high capital requirements, established loyalty from customers and collaboration or cartel may deter entrance of new or smaller firms. On the other hand, a lower degree to the point of absence of barrier may encourage the new entrants. A perfectly competitive market has no barrier at all, prices are set by the market itself and so the competition, price and non-price, is very healthy. A low level is observed in a monopolistic competition causing new firms to be attracted in joining the industry. The level of market power that a firm possesses reflects its control over price. However, this power depends on factors like the numbers of producers, the size of each firm, barriers to entry and the availability of substitute goods. With the existence of one or few producers, the power to control the market is automatically granted. The size of the firm relative to the size of the product market can affect its market power. A big firm could possess a small power if it is in a large industry but a small one could hold a lot of power if it is a small market. The ease or difficulty of entry into an industry limits the ability of a powerful firm to dictate prices and flows of products (Schiller, 2006). If new firms will be willing to enter the market, share in the spoils and succeeded, the market power will also be distributed among the firms in the said market, otherwise the power will remain concentrated in the big players. With the fourth determinant, if there will be substitute goods that customers could avail of, prices will not be set at very high level and so they can decide to switch or choose the closest substitutes. The oligopoly and monopoly both hold substantial power to control the market, from the output production to dictation of prices. Monopolistic competition may hold some but the firms under perfect competition holds no power at all. As in other industries, the market structure of the computer industry has evolved over time. It was never a monopoly, nor was it ever a perfect competition (Schiller, 2006). It was more of a monopolistic competition. This market structure is characterized by several sellers producing the same products that are slightly differentiated. Apple Inc. was one of the first companies who dominated this industry. Its success and high profits attracted other producers of microcomputers to imitate them. With the entry of over 250 firms between 1976 and 1983, the industry became more competitive but not perfectly competitive. Prices were pushed downward and products were improved because of the increased competition. Apple Inc. has to face little competitions from other producers like Dell and Microsoft. But being in a monopolistic competition where different producers can set their prices without affecting the market prices, every firm in the computer industry like Apple Inc. has the ability to take initiative of setting a price set according to the taste and preferences consumers. There is no unique price because of the fact that their products are the same but not identical. This gave rise for more product innovation and product differentiation. As technology is changing so fast and the competition in the computer industry becomes so intense, firms have to improve their products and prices. Apple Inc. continues to develop and launch new products revolutionizing the computer industry. The competitive process can be traced from the creation of Apple I to Apple II up to introduction of iMac which bears little resemblance to the Apple I but with price much less than that of Apple I (Schiller, 2006). It’s the basic incentive of any firm for producing goods and services to expect profit. This motive drives the producers to operate the business and survive the industry. Different market structures have also different ways of maximizing their profit. For firms under perfect competition, profit will be maximized and continue to attract new entrants in the short- run at the rate of output where price equals marginal cost (p = MC) and as long as price is greater than average total cost (p > ATC) in the long- run. Under monopolistic competition, the short-run profit maximization rule is to equate marginal cost to marginal revenue (MC = MR). There are no economic profits in the long run because as the low entry barriers permit new firms to enter the industry, the demand for output of existing firms will be reduced. Oligopolists maximized their profit by concurring to the price of the monopoly and agreeing to maintain it by limiting output and allocating market shares. These could be done by forming barriers to entry such as patents, predatory price cutting and cartels. For a monopolist, profit is maximized at a rate of output where marginal cost equals marginal revenue (MC = MR). Because MC is less than price in monopoly, the monopolist will produce less output and sell these at higher prices. The demand elasticity reflects the responsiveness of the consumers in relation to a change in price. Change in price may or may not affect the demand for certain products because of several factors. These include the type of product, availability of substitute goods, income and time. Demand for necessities like fuel is relatively inelastic as compared to the demand for luxuries like wine and cigarettes. The greater the available substitute for wine makes its demand more elastic. The price of the good in relation to the consumers’ income also affects the elasticity of a product the same as time does. Sales promotion as a way of enhancing the revenue of a firm may affect the demand of a product in the short run but customer loyalty can have long-run implication. Sales promotion may cause prices to drop and so consumers are willing to buy more of that product. In doing so, the demand becomes inelastic for a short period of time. However, the established loyalty of consumers to a certain brand can make demand less price elastic. This is because strategies like reducing the price or having tie-ups with the purchase will no longer appeal to them. They will still prefer to buy the brand which they considered as “tried and tested”. Market structures emerged because of the fact that the opportunity to earn profit is not equally enjoyed by all the firms in the industry. Some are just lucky enough to earn more profits than the others. But business owners are not only after the profit, there are those that want to work to have the power to control others, for personal satisfaction and still some are motivated to gain social status or recognition. But because their fate in being successful depends on the demand of the consumers, they have to respond to this limitation intelligently. The type of products of the firm and the entry barriers present also caused the emergence of market structure. Perfect competition encourages business owners who want pure competition as they sell products which are identical; they have to compete for consumer purchases to stay in the industry. They also have no power to control price because they are considered as price takers. Large number of firms is present in a perfect competition because of the ease of entering brought about by the absence of barrier. Economies of scale is enjoyed by these firms as long as price exceed the marginal cost because this means an extra unit will bring in more revenue than the cost it requires to produce it. The monopolistic competition emerged due to the establishment of brand loyalty among consumers. Barrier that may cause its emergence may be that of high non-price competition in the industry. Firms under this structure have to differentiate their products to have loyal consumers. In the end, brand loyalty gives the monopolistic competitors the power to control the price of their products. The more consumers become loyal to their brand, the lesser the reduction of sales will be in case of an increase in price. There will be economies of scale in this structure if the monopolistic competitor will do just what the monopolist do even if in the long run the profit is eliminated by the entry of many firms in the industry. The emergence of oligopoly may be attributed to the standardized or differentiated products that the industry is producing and the substantial market power that an oligopolist can have. Because of these barriers also, the oligopolists should agree on some of their decisions such as pricing and output. Aside from forming cartels and acquiring patents, some firms also opted for merging. These barriers were formed not only for the oligopolists to enjoy market share and profits but also economies of scale. Having a unique product gave rise to the monopolist. The economies of scale act as the natural barrier to entry in a monopoly (Schiller, 2006). As a monopoly can produce large amount of output at lower cost, the potential rivals are discourage to join the industry. Bibliography Schiller, Bradley R. (2006). The Microeconomy Today. New York: McGraw-Hill Companies, Inc. . Read More