Analyzing Market Structures and Their Usefulness for Firms and Policymakers - Essay Example

Analyzing Market Structures and their usefulness for Firms and Policymakers Analyzing Market Structures and their usefulness for Firms and Policymakers Introduction The market structures vary a great deal and these theoretical models are used in order to compare and contrast economic systems across borders. There are multiple models which are deployed in order to explain the nature of economic activities in different cultural and societal systems. The nature of businesses change as their external environment varies. The developed and advanced nations tend to create a mechanism that ensures that the businesses must pay all taxes while serving the society in a reasonable manner. The governments of developed nations work hard in order to make the businesses realize their true position in the society (Alvord, Brown, & Letts, 2004). In developed nations, companies are supposed to inform the customers about prices and they are also anticipated to remain truthful to all stakeholders to a respectable degree. The goal of administrative bodies of developed nations is to minimize monopolistic characteristics in the local economies. The perfect competition and monopoly do not exist in the real world scenario because it is impossible to have large number of companies in a certain type of industry whereas, perfect information level can also not be maintained in the market and therefore, perfect competition is more like a standard with which other real economic systems are compared in order to determine their true economic nature. The companies will most probably not operate in the perfect competition because it will cause their profitability to become compromised. The compromising profitability will compel the player to shut down operations because no organization is going to serve the society without making a reasonable return on investment. The perfect competition will help the organizations in terms of making a normal profit that means that the companies will only manage to cover cost of production (Walter, 1951) and therefore, the economic need to maximize profit will also become a dream state to achieve. Perfect Competition The model of perfect competition establishes that there is no differentiation in products made by different competitors in the marketplace. The companies are using same sort of technology and the information levels are symmetrical as well. The labor and input markets are also perfectly competitive and there are no entry barriers. The perfect competition model is used to promote a utopian state of affairs in the economic arena (Robinson, 1934) which cannot prevail in the practical world. Additionally, the companies will have to serve the society with making a minimum level of profit and that is why they will opt out from operating in a perfectly competitive market. The input and labor markets cannot attain the level of perfect competition because of differences in quality and human resource supply. The assumption of perfect competition to have unlimited number of companies in an industry is also non-practical in nature because it literally means that there are inexhaustible level of production factors as well. The perfect competition stands against every assumption that provide basis for the economic theory. Firstly, the perfect competition does not permit the companies to maximize their profits and as there is no opportunity for growth the companies do not invest in betterment of technology and therefore, the economic systems will become frozen over the passage of time. Secondly, the assumption of having unlimited number of players in the industry is also hypothetical in nature. Thirdly, the companies will not be able to produce homogenous products and services due to differences in technology and cost structure. Fourthly, there are always remains the factor of entry barriers such as investment needs (Robinson, 1934). Based on the above argument, it can be established that perfect competition is a theoretical framework that promotes utopian state of affairs in the world of economics and that is used in order to determine the nature of economic systems that are currently operating in the world. Monopoly The monopoly will also not be sustained in the practical world of fiscal science because few of the companies will always operate in the industry and therefore, minimum level of competition will prevail in the market all the time. The monopoly is a market structure that involves only one supplier and therefore, the company will have perfect control over price level and it is in perfect position to make abnormal level of profit as well. The customers will be exploited as they will not have any other supplier and therefore, they will have to purchase poor quality product at an inflated price (Bergemann & Schlag, 2011). The company will not have any reason to invest in the betterment of technology to drive down cost of production as there is no competition in the marketplace. The company will keep on making abnormal profit over selling an outdated design because of absence of competition. The force of differentiation will become irrelevant because the monopolist does not have any need to differentiate its offerings because there is no competition. In the given state of affairs, the government interferes in order to introduce the element of competition by providing subsidiaries to companies that are interested in operating in the monopolized industry. The monopolies are known to exist in highly specialized industries of weaponry, healthcare products and housing schemes and these industries are often controlled by governments in order to keep the prices low (Bergemann & Schlag, 2011). The weaponry and space technology industries are kept under tight governmental controls because the element of competition may well compromise the essence of these fields. The housing schemes and healthcare industry is there to provide cheap housing and health related services to the masses and therefore, commercialization of these areas of the society may cause the capitalists to serve those who can pay more and poor people will remain dreaming about having houses and cheap healthcare services. The space technology needs high quality tools and technical gear and introduction of competition will cause the companies to use substandard stuff and may risk jeopardizing lives and the very purpose of the respective field. Monopoly unlike Perfect Competition is not unheard of but it is used in rear fields where element of competition will do harm to public or compromise the general objective of the particular field. Oligopoly The oligopoly is a market structure in which the competitors do not compete willingly and join their forces in order to control the prevalent prices. The oligopoly is also known to emerge in the industry of specialized and scarce product (Janssen & Roy, 2010). The oil producing nations have historically created a platform with the name of OPEC that works regarding management of oil prices in the world economy. The oligopoly is considered as a subtype of monopoly and it is created when many small companies or producers of a specific product jointly work in order to influence prices. The governments are notorious for kneeling in front of oligopolies because of their overpowered political position. The oligopolies are known to run with the help of informal settings and therefore, they are hard to break. In every industry of the world, the competitors have been famous for working out minimal wage rates and prices. The operational layout of the industry is fixed by mutual understanding of all the players and in this way, oligopolies are an integral part of economic activity in all parts of the world. The oligopolies are usually formalized in the form of unions which work in order to negotiate with governments. The oligopolies often turn into gigantic monopolies and the partners may obtain unjust power over the moment of price. In this kind of situation, the governments must intervene and use heightened taxation in order to take away the price advantage from the players. Under serious circumstances, the governments may have to resort to offensive measures such as embargo and ban on operations of companies that are causing the clientele to suffer and consequently, the general public has to suffer pain and discomfort (Bain, 1949). The international trade organizations do not dare to interfere with the operations of oligopolies because it will cause a ripple effect and other economies may also suffer. The oligopolies are difficult to manage because they have substantial number of partners and they are usually formed by producers of specialized products. The governments are often unable to introduce the factor of competition in oligopolies because it is capital intensive course of action and therefore, the governments negotiate a middle path in order to keep the prices of specialized products steady every now and then. The democratic systems of the world appreciate the formation of unions because they will assist the administration in negotiating with the single and unified front of the entire industry. The oligopoly can be managed with imposing heavy taxations when it is formed in the consumer goods industry and the governments have the option of introducing the element of competition with providing subsidiaries to the interested parties as well. The oligopoly may cause the monopolistic attributes to become strengthen in the economy. The industries of consumer goods succumb to oligopolies’ creation when there are not enough customer bases to work with and therefore, the companies collaborate in order to sustain each other. In the abovementioned set of circumstances, the governments and policymakers tend to promote creation of joint ventures and mergers so that organizational setup can be strengthened once again. Organizational Focus and Performance in Three Common Market Structures In Perfect Competition, the companies operate in order to produce homogeneous products and there is no differentiation. The focus of organizations working under Perfect Competition remains on maintaining sameness of the product offerings whereas, they tend to serve the customers absolutely by making normal profit that assists them in covering cost of production only. The production volume of the industry remains constant as there are no entry and exit barriers and therefore, the abandoned organizations are replaced by others and the production level remains the same in the long run. The governments have to intervene in such market structure, if it really exists in order to facilitate innovation. The innovation will cause monopolistic characteristics to grow in the economy and therefore, the customers will have different options to buy from eventually (Walter, 1951). The governments are supposed to eliminate sameness of the offerings by helping the companies with respect to creation of differentiation. Finally, Perfect Competition benefits the customers a great deal because they can purchase same product against same price from all of the producers In case of monopoly, the company focuses on maximization of profits and the only producer works in order to make an abnormal profit as there is no competition in the market. The customers remain at a disadvantage because they have to purchase low quality product against inflated price. The monopolist does not have any reason to invest in the betterment of production technology because there is total absence of competition. In short, the customers are exploited in the monopolistic market structure and the producer is benefitted as it has the perfect control over price due to absence of competition (Ross, 2003). Oligopoly is a subtype of monopoly and it involves joining of many smaller players that work in order to influence price. The organizational focus remains on creating an opportunity to have abnormal profits. However, the creation of oligopoly is a hectic and long term process because all of the players have to learn to collaborate and that may cause them to lose access to attractive market sectors (Bresnahan, 1982). The Oligopolies are either formed in industries where demand levels have dropped significantly or in the industries which produce specialized products such as oil. The governments either use heavy taxation to take away unjust price benefit away from the companies and this course of action is taken in order to manage and control oligopolies that form in consumer markets but in business level industries, the governments have to learn to live with reasonable bargaining power of unions and consortiums in order to ensure constant supply of specialized product in the future. The Oligopolies are formed for a same purpose as monopolies are developed. However, the Oligopolies are formed with the help of informal settings and therefore, they appear less noticeable to the governments (Stigler, 1964). Usually, when they get noticed then they have accumulated enough political power to influence the price. Based on the previous argument, the companies work to form Oligopolies rather than emerging as a single monopolistic power because governments and consumers react adversely to companies of such sort and kind. Recommendations and Suggestions for Policymakers In Perfect Competition, the policymakers have to establish policies that must help the organizations to improve the product designs in order to make more attractive in the eyes of the customers. The force of differentiation must be introduced in the Perfect Competition so that customers can have better offerings at their disposable. In Monopoly and Oligopoly, the policymakers have to ensure that companies should not be able to control price with a singular or collective hand respectively. Additionally, the policymakers have to introduce the element of competition by either subsidizing the weaker and new players or by increasing taxation in order to limit and control the money supply of organizations. Monopolistic Competition All of the governmental efforts are made ideally in order to create Monopolistic Competition which involves the presence of differentiation of products and the companies are also allowed to advertise their products and they have the option of creating real or imaginary differentiation in the customer base as well (Badelt & Weiss, 1990). The companies have to invest in technology and production so that costs can be driven down and price advantage can be reaped in the market. The number of competitors in the market is reasonably high and therefore, the competition remains steady in the industry for acquiring more market share. Nevertheless, the Monopolistic Competition has inherited some features of Monopoly and Perfect Competition. The monopolistic attributes are created by each organization by creating customer loyalty by either promoting the product effectively or by providing exceptional level of quality. The competition is also known to prevail in the featured market setup as the companies have to better themselves and their products in order to retain the consumers. The Monopolistic Competition is the most practical and realistic system of market but it has to be consistently managed and protected from becoming too competitive or converting into an entire monopoly. The organizations of the modern day do not want to kill the competition from the base because it will make them appear monopolistic in nature to the customers and governments. The leading companies tend to carry their competitors with them in order to provide the consumers to make a comparison and contrast. Conclusion This paper reviewed and analyzed various types of market structures and found that the Perfect Competition is entirely theoretical model which is used in order to compare real economic systems with the utopian state of affairs. The Monopolies are condemned in all parts of the world because they make the customers to suffer as they have to buy low quality products against high prices and the monopolists do not want to innovate as there is no competition in the markets. The ultimate goal to policymakers and governments is Monopolistic Competition that has inherited a few attributes of Perfect Competition and Monopoly. References Alvord, S. H., Brown, D., & Letts, C. W. 2004. Social Entrepreneurship and Societal Transformation An Exploratory Study. Journal of Applied Behavioral Science Vol 40 No.3, 260-282. Badelt, C., & Weiss, P. 1990. Specialization, Product Differentiation and Ownership Structure in Personal Social Services: The Case of Nursery Schools. Kyklos 43 No 1, 69–89. Bain, J. S. 1949. A Note on Pricing in Monopoly and Oligopoly. The American Economic Review Vol 39 No.2, 448-464. Bergemann, D., & Schlag, K. 2011. Robust monopoly pricing. Journal of Economic Theory Vol 46 No.6, 2527–2543. 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