Characteristics of Markets - Essay Example

Characteristics of Markets Grade (December 11, Characteristics of Markets Competition is a major characteristic of the capitalist markets, which entails the definition of the manner in which the markets operate, such that a market can be either fully competitive or dependent on a single or few operators in that market. It is the nature of the competition prevailing in the market that have different implications both on the consumers and the overall state of the economy (Hill, 2011). Thus, the market structure in a capitalist economy is defined by varying degrees of competitiveness of the firms operating in the economy, such that the overall economy results in varying degrees of competition for a particular commodity (OConnor, 2004). It is the nature of the markets that causes the economists to consider certain market conditions more desirable than others from the point of view of the society. The classification of different market structures is essential to determine the benefits or the limitations that are associated with the market type. The basic characteristics that define the nature of the market structure include the number of firms that operate in the market, owing to the fact that a highly competitive market structure will comprise of a high number of firms operating in the market, while a less competitive market will comprise of just a few firms (OConnor, 2004). The other important factor that defines the nature of the market is the powers of controlling the prices of commodities in the markets, with the highly competitive market comprising of limited price control for the market operators, while the less competitive market will comprise of a high power to control the prices for the firms operating in that market. Further, the market structures differ in the nature of the products that are sold in the market, such that a highly competitive market will comprise of a diverse nature of products being offered by the firms operating in the market, while the less competitive market might be offering just a few category of products (Hill, 2011). The other major characteristic that differentiates the market structures is the nature of the barriers to entry or exit into the market, such that the highly competitive market will comprise of less barriers to both entry and exit into the markets. On the other hand, the less competitive market comprises of high barriers to entry by the new firms that could be seeking to enter the market and still offer high barriers to exit of such firms from the market. The nature of the competition, often classified as either price or non-price competition, defines the nature of the market structure. The most competitive market is defined by price competition, while the less competitive market is defined by the non-competitive competition (Baumol, & Blinder, 2012). Finally, the market structures are also defined by the nature of the collaboration that the operators in such markets have. Thus for the most competitive markets, there is little collaboration among the firms, either in terms of price control or the control of the quantity of commodity to be offered to the market. On the other hand, the less competitive market is defined by little or absolutely no collaboration amongst the firms operating in the market. Main characteristics of Perfect competition Perfect competition is a market that is characterized by high prevalence in most of the capitalist market, such that the perfect competition market structure is the most desirable nature of the market as far as the society is concerned. Thus, perfect competition is a market structure that is characterized by homogeneity of the products that are offered in the market by the firms operating in the market (Baumol, & Blinder, 2012). In this respect, the other major characteristic of perfect competition is a high number of firms that operate in the market. Perfect competition entails numerous firms operating in the market, which are selling identical products that are not differentiated (Baumol, & Blinder, 2012). In this respect, both the homogeneity of the product and the high number of products will create a situation where the firms in the market will be competing stiffly for the available customers, since they lack the advantage of differentiated products which could attract customers to the specific firm. Nevertheless, the perfect competition market structure also comprises of a high number of customers in the market, such that the demand for the firm’s products is also from diverse customers. Thus, perfect competition market structure impact on the society in a neutral manner. This is due to the fact that the homogeneity of the products being offered by the numerous firms operating in the market means that the customers do not mind where they will purchase the products (Hill, 2011). The only concern for the customers is the prices at which the homogenous products are being sold in the market, such that as long as the price of the products remain the same for all the sellers, then customer has no preference for which seller to purchase from. Additionally, perfect competition is characterized by little or no barriers to entry and exit into the market (Hill, 2011). Thus, the new firms wishing to join a perfectly competitive market can easily join the market, while those firms wishing to leave the market can do so at will. Main characteristics of monopolistic competition Monopolistic competition is a market condition that entails many firms serving the market. This market structure is differentiated from the perfect competition market by the fact that many firms operating in this markets offer differentiated products (Hill, 2011). The other characteristic defining a monopolistic competition is that the products offered are not perfect substitutes for one another. This therefore means that there is no firm that is in control of the prices of the products offered into the market. The many firms operating in the monopolistic competition market offers the customers an option to choose the firm from which to purchase the desired products, most especially because the firms offer products that are slightly differentiated (Baumol, & Blinder, 2012). The other characteristic of the monopolistic competition is that the firms operating in this market are free to purchase the products from whichever firm they deem necessary, since the consumers consider that there is no price differences between the firms’ products. Monopolistic competition is also characterized by the fact that there are little or no barriers to entry into the market (Baumol, & Blinder, 2012). In this respect, firms are also free to enter and exit the market depending on their own situations. However, the most differentiating aspect of the monopolistic competition is that the producers have a high degree of control over the sellers, making this market structure a little competitive compared to the perfect competition market structure. Main characteristics of Monopoly Monopoly refers to a market structure where the firms operating in the market have a high control power of the market, either in terms of the prices of the products or the quantity of the products that are offered into the market (OConnor, 2004). Therefore, monopolies mainly determine the prices of the products they are going to change in the market, by reducing the quantity of the products they offer into the market. When the quantity of the products offered into the market is low, the demand from the customers is definitely high, which then means that the customers will have to purchase the products from the existing firms, regardless of the price. The other characteristic of the monopoly market structure is that there are very few firms that operates in the market, and mostly such firms are characterized by being large-sized firms although the size of the firm is not necessary a determinant factor (Hill, 2011). This is because there are still some small-sized firms which are monopolies depending on the industries in which they operate. Another characteristic of the monopoly market structure is that this market structure has a high barrier to entry into the market, such that there are very few firms which are capable of applying certain advantages to hinder others from entering into the market, such as high capital requirement or savvy technology that other firm’s ae not able to easily replicate. Main characteristics of Oligopoly Oligopoly is a market structure that is characterized by few but large firms operating in the market (Hill, 2011). The major characteristic defining the oligopoly market structure is the high level of interdependence between the firms that operate in the market, such that the action of one firm in the market determines the actions that the rest of the firms will take. For example, if one firm drops the prices of the products offered, the rest of the firms are likely to follow suit, since if they do not, they are likely to lose their market share (OConnor, 2004). Barriers to entry is yet another major characteristic of the oligopoly market structure, where the large firms operating in this market are likely to have certain special advantages that are difficult to be replicated by other firms seeking to enter the market, such as high capital or knowledge requirement. Collusion is another key characteristic of oligopolistic competition, where the firms can enter into an agreement to limit the quantity of the products offered into the market, which in turn affects the prices of the products by increasing them (Baumol, & Blinder, 2012). The oligopolistic market structure is also characterized by non-price competition, where the firms compete on the basis of the strength of their brands and the advertising strategies, as opposed to competing on the basis of prices. Economic efficiency of the outcomes under perfect competition and monopoly Under the perfect competition market structure, there is high productive efficiency, owing to the fact that the firms operating in the market do not have any control over either the price or the quantity of products that can be availed in the market (Hill, 2011). This being the case, all the resources available for production are exploited with a high level of efficiency, to offer the firms the desired gains that cannot be achieved through hiking prices. On the other hand, the allocative efficiency is also high in the perfect market condition, since the available resources are allocated almost equitably among the firms operating in the market, such that no firm has a major advantage over the rest. However, both the allocative and the productive efficiency lacks under the monopoly market condition, since this market structure has control over either the price or the quantity of the products offered to the market, such that the resources are not fully exploited to produce maximally, while at the same time the resources are only distributed amongst very few firms. Conclusion The market structure in a capitalist economy is defined by varying degrees of competitiveness of the firms operating in the economy, such that the overall economy results in varying degrees of competition for a particular commodity. It is the nature of the markets that causes the economists to consider certain market conditions as more desirable than others from the point of view of the society. The classification of different market structures is essential to determine the benefits or the limitations that are associated with the market type. The different market structures operating under the capitalist economy include perfect competition, oligopolies, monopolies and monopolistic competition market structures. References Baumol, W. J., & Blinder, A. S. (2012). Economics: Principles and policy. Mason, OH: South-Western Cengage Learning. Hill, R. (2011). Market structure and equilibrium. Berlin: Springer. OConnor, D. E. (2004). The basics of economics. 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