Introduction to the Economics of Financial Markets - Essay Example

Competition ID: Competition Introduction Currently, the level of competition in the market has increased tremendously. This results from the entry of multinational businesses in the market. Globalization which emanates from liberalization of markets, integration of the economies, and efficient flow of information has enabled the businesses to venture into new markets. This has created four types of competition, i.e. perfect, monopolistic, oligopolistic, and perfect competition. This paper will discuss the characteristics of each market and contrast on the economic efficiency of the outcomes under perfect competition and monopoly. Perfect Market A perfect market is characterized by a high number of buyers and sellers. In this market, the product or services being offered are hard to differentiate. Therefore, there are many substitutes in the market. Unlike in monopolistic competition where one firm controls the market, in a perfect market, there is no single seller who has the largest market share. In addition, the buyers have access to the prices of the commodities. In addition, they have a high bargaining power because they can get similar products from the other sellers. In this market, the sellers work hard to attract the customer loyalty in order to prevent them from being lured away by the products of the competitors (OSullivan & Sheffrin, 2008). Therefore, customer relationship management is significant in this market. This is achieved by giving offers and loyalty points to the customers. This is in an attempt to increase the number of referrals. In a perfect market, there are no barriers of entry and exit from the market. As a result, companies can enter the market and once they fail to achieve their objectives, they can exit the market without any struggles. Another major characteristic is that the prices of this market are determined by the forces of demand and supply. Therefore, there is no single player who can dictate the prices of the commodities in this market. As a result, the producers are subject to prices that are determined by the market forces as they do not have the leverage. For instance, in case a producer increases the prices of the products in order to make more profits, the customers will just shift to the competitors products which are of lower prices. This would make that company to lose the market share. The competition in this market is therefore, based on quality of products being offered to the market (OSullivan & Sheffrin, 2008). This is because all companies have equal access to the raw materials, capital labor, and even technology. A perfect example of this market includes those that offer agricultural goods such as livestock and corn. Monopoly A monopoly is characterized by a single player, i.e. seller/producer. The products sold do not have close substitutes. Therefore, the single player controls all resources in the market. In addition, the player controls the technology used in the market. This is a market with a very high barrier of entry. For instance, the government might set laws to prohibit any other interested investor from entering in the market. Many governments have been setting these structures in economic areas that are critical to the economy, e.g. power distribution. This is done to protect the country from privatization. This is because in case the private sector is allowed to venture into this sector, it can hold the economic at ransom in order to make more profits. However, there is monopoly competition even in a competitive market (OSullivan & Sheffrin, 2008). This is mainly in areas that require huge investment. Therefore, not many firms can afford the money required to open a business. A monopoly is common in a market with high risks. In such cases, businesses fear entering in such markets. On the other hand, when one firm enters the market, it accumulates a lot of money. The funds are used as a barrier of entry to other investors. In such a case, there are no restrictions to enter the market. However, such a company has become so strong for any other investor to compete with. This has been common in markets untapped markets. The first entrant ensures that it accumulates a lot of money. In addition, it segments the market, positions its products strategically in the market, and attracts customer loyalty towards its products or services (Frank & Bernanke, 2004). As a result, this aspect makes it very hard for any other investor to enter the market and get a significant market share to sustain its operations. A monopoly dictates the prices of the products or services in the market. Therefore, market forces are so weak. In addition, the bargaining power of the customers and suppliers are so low. As a result, the customers and suppliers had to comply with the conditions set by the firm. This form of competition hurts the customers. Monopolistic Competition Monopolistic competition portrays characteristics of competition and monopoly. The market has many firms which offer substitutes products. This is unlike in monopoly where there is only one player in the market. However, in this market, there are less sellers and buyers than in perfect market. In addition, the market has many buyers. However, although the products are substitutes, they are mainly differentiated based on physical attributes, image, advertisements, and other accompanying services. For instance, Dominos and Pizza Hut are differentiated based on the ingredients, recipe, and taste (Frank & Bernanke, 2004). Therefore, one company can gain a monopoly over the other players in the market through offering quality products or better services. Customers in this type of market assess the products based on their quality. As a result, the competitors are innovative in trying to come up with products that will outdo other players in the market. This type of a market is mainly found in sectors that requires high investment but has fewer risks. Oligopoly Oligopoly is characterized by few firms that make the industry. These firms have control over the prices in the market. Just like monopoly, the companies can conspire to create an artificial demand in order for the prices to increase. This is in order to gain more profits through charging high prices for the products. In addition, the firms create a barrier of entry for any interested investors just like the case in a monopoly. This achieves this aspect through raising the threshold for any firm that is trying to enter the market (Hirschey, 2009). Unlike in perfect competition where each player tries to compete against each other, the few firms in the market work together as a unit towards the prosperity of their businesses. Oligopoly is characterized by production of products that are almost identical. Therefore, the companies that are competing for a market share are interdependent with each other. For instance, if one company is producing fifty products and the other one producing a similar number, the prices of both commodities will be interdependent on each other. Unlike a monopoly market that is normally dominated by one single seller, an oligopolistic market has at least two sellers who produce closely related products thus creating some form of competition. The pricing in an oligopoly industry is however moderate and fair as compared to the high prices in a monopolistic industry. This is because; each seller in the industry must set its prices according to the prices set by other similar industries. This is because; if a seller dares to increase his prices slightly, he will end up making a multitude of loses because; all the buyers will move to other sellers. On the other hand, if a seller decides to lower his or her prices slightly, other sellers, who are watching, will also lower their prices. This gives rise to the oligopoly graph referred to as a kinked demand curve, which implies that, a seller in an oligopoly market cannot benefit from either a price decrease or increase (Bradfield, 2007). Therefore, sellers have to charge similar prices in order to remain competitive in the industry. Contrast between Monopoly and Perfect Competition. In a perfect market, the completion between the sellers and the buys benefits the consumers. This is because the major focus is on pleasing the target market. As a result, a country with a perfect competition is able to enjoy the benefits of lower economic situation. This is because its population is able to afford commodities from the market. On the other hand, monopoly hijacks growth and development of the market. The customers rely on the mercy of the producer. Therefore, the producer creates an artificial demand at will. This has a major role in reducing the economic efficiency of the market. This is because the producer is not growth oriented. In addition, in many cases, the products produced do not meet the expectations of the customers. However, there are no substitutes in the market. Therefore, the customers had to continue relying on the company. Perfect competition encourages innovation. In this market, the players tries to outdo each other through coming up with innovative products which will attract the target market. This is in an attempt to create a larger market share. In addition, the firms increase efficiency in order to reduce the production costs. Therefore, they are able to offer the market with cheaper products. This plays a significant in improving the lives of the customers. However, monopoly companies do not put any effort to increase efficiency. This is because the customers are willing to pay any prices for the products being released to the market. Moreover, monopoly businesses do not invest in innovation. This is because they do not get any pressure from the customers. They have been characterized as rigid to changes. Their main focus is only on profits. A monopoly company does not have any interest in growth and development. Such companies charge high prices for the products and services offered without proper reasons for hiking the prices. In many cases, they suppress any move by any other investor to venture in the market. As a result, people are forced to either use the products or stay without them. This is very risky to the economy. Conclusion A perfect market is the best for the growth and development of any country. It provides an opportunity for the firm to be creative and innovative. It also enables the customers to enjoy low prices. Clients are able to bargain for better prices of the products. Moreover, suppliers have a strong bargaining power. This is because there are many players that are willing to purchase their raw materials. On the other hand, monopoly is not healthy for the economy of a country. This is because it is retrogressive and rigid to changes. The burden of inefficiency is carried by the consumers. Nevertheless, it is best form of competition when the products or services provided are very critical to the economy. References Bradfield, J. (2007). Introduction to the economics of financial markets. Oxford: Oxford University Press. Frank, R. H., & Bernanke, B. (2004). Principles of economics. Boston, MA: McGraw-Hill. Hirschey, M. (2009). Managerial economics. Mason, OH: South-Western Cengage Learning. OSullivan, A., & Sheffrin, S. M. (2008). Microeconomics: Principles, applications, and tools. Upper Saddle River, NJ: Pearson Prentice Hall. Read More