Types of Market Structures - Example

TYPES OF MARKET STRUCTURES Introduction The industry is comprised of all organizations that make indistinguishable or similar items that are homogenous. The industry’s market structure relies upon the competition of the firms as well as their number, thereby resulting into four essential market structures specifically (Kurtz & Boone, 2011): Monopolistic competition is an industry that contains numerous contending firms. The organizations or firms offer a similar or indistinguishable even though a bit different items. The products are profoundly differentiated in terms of prices and features (O’Connor, 2004). Under monopolistic competition market structure, there are low barriers to entry and the firms normally compete by offering similar but not identical products. Monopoly is a business sector structure that has no rival in light of the fact that there is one and only firm in the business. Monopolistic market structure decreases yield with a specific end goal of driving up costs and henceforth improving profits (Tragakes, 2012). Monopolistic firms, in this way, manufacture products at greater costs than competitive firms and hence produce less than the socially responsible level of output. Perfect competition is a business sector structure that happens when there are various firms that go up against one another. Firms in this business structure produce the socially ideal level of yield at the minimum possible per unit cost. Oligopoly is a market structure that has just a couple of firms are able to collude so as to lower expenses or costs and hence drive up benefits much the same as a monopoly. However, due to the fact that such business organizations possess strong incentives to cheat on the collusive agreements, they may end up conning against one another. The essay talks about the characteristics of the four essential business structures. It then clarifies the key contrasts and similarities between the market structures regarding price and output determination. Further, the essay clarifies whether the allocative and productivity efficiencies can be attained in the monopoly and perfect competition. Main characteristics of the four markets Monopolistic competition Main characteristics of the four markets Monopolistic competition Product differentiation Having numerous firms in the market makes, this market structure to bring out exceedingly differentiated items, however, the prices of the products are not very much different from each other. Highly differentiated products present the firms with the opportunity to compete with each other in a bid to attract and control the market. Selling cost A new firm is required to incur extra expenses regarding selling costs so as to make buyers realize the distinctions in the items. These expenses or costs incorporate sales promotion expenses; advertising expenses, pay rates of advertising staff, and so forth. These expenses need be used to convince purchasers to buy a given item brand in preference to competitor’s brands (O’Connor, 2004). Number of sellers This market structure has numerous sellers that fulfill the market demand hence creating stiff, firm rivalry and competition. The sellers are not able to control price of output because they have restricted share of the market. The products are just close substitutes and not perfect substitutes for one another (Kurtz & Boone, 2011). Freedom of entry and exit New firms are allowed to enter and leave the business sector freely. Interdependence The organizations are diverse in their sizes, and each firm has its own marketing and production policy, because of this, no firm is affected or influenced by other firms. Price and output determination Profit maximizing price and output of a monopolistic competition firm occurs in the short run at a point where MC=MR. this is demonstrated in the graph below The first diagram shows a profit of (P-T))*OM while diagram b shows a loss of (T-P)*OM. in the short run there are few firms and the firm is making a supernatural profit, However, this ceases in the long run because many firms have entered the market as a result of freedom of entry and exit. Equilibrium profit maximizing price and output, therefore, occurs at a point where AR=AC (Kurtz & Boone, 2011). In the long run, the firms only make a sufficient profit to sustain it. Monopoly No close substitutes The single firm manufactures a single commodity that cannot be easily substituted. Firm is a price maker Because the firm has a market power, it is a price marker. On the other hand, buyers are price takers. The number of sellers and buyers There is a solitary seller in the industry that has absolute control on the output of the commodity. Notwithstanding, there are many buyers in the business sector (Tragakes, 2012). Price-discrimination A monopoly firm is able to charge different prices for diverse market segment or consumers. The prices could be different for diverse geographical locations or individual consumers. Long run profit The firm has the capacity earn supernormal profits or benefits both in the short run and long run. This is possible because the firm lacks competitive seller that is able to displace it from this position (O’Connor, 2004). Barriers to entry and exit There is a strong entry into the market, and a new firm is confined from entering the market since monopoly is a one-firm industry. This implies that there exist no distinction between the firm and an industry (Kurtz & Boone, 2011). Price and output determination Being the only firm in the market, a monopolist is a price maker. Profit maximizing output and price occurs at a point where MC=MR and the MC cut MR from below. Equilibrium price is fixed at left to the lowest point of AC. Price is normally higher while the output is normally lower. Price is at point M and output is at point P Perfect competition Knowledge regarding the market The buyers and sellers have perfect knowledge about the market; they are aware of all the conditions that are present in the market. The sellers have a perfect knowledge of the prevailing market price while the buyers are aware of prices that they charge. For the assumption of uniform price to hold, Buyers and sellers should have perfect knowledge of the market. Homogeneous products The products sold in this market structure are very nearly the same or indistinguishable as other. The items are identical from one another on the grounds that they are perfect substitutes for one another. The items are splendidly comparable in quality, size, and quantity and shape (Kurtz & Boone, 2011). Transport cost There is no transport cost in the uniform price that is charged in the market. Prices that sellers charge are not influenced by the geographical locations of the buyers in the business. Barriers to entry and exit There are no barriers to entry as well as free exit; buyers and sellers are completely allowed to enter and leave the market. There is no tendency for both new and existing firms to leave the market because the firms get typical benefit of profit (Tragakes, 2012). Number of sellers and buyers This market structure has various sellers and buyers. The buyers purchase the commodities thereby lessening the haggling or bargaining power that they have. For example, if one seller attempts to raise its profits by raising the price will make the consumers shift to other sellers who charge lower prices. The sellers are just price takers and not price makers. Uniform price There is a uniform price that is fixed by all sellers and buyers in the market and not by just individual effort of any seller or a buyer, therefore, the ruling market price is the same since the products are identical or indistinguishable. A business that offers its products at a price that is higher than this ruling market price can lose a larger share of its clients to the competitors. On the other hand, if the seller offers its products at lower cost than the prevailing market price it will experience such a greater demand, to the point that it cant have the capacity to manage (O’Connor, 2004). Mobility There is perfect mobility in this market structure. All the factors of production are absolutely mobile; they can freely move from one region to another and from one occupation to another. Price and output determination The profit maximizing output level for a perfectly competitive firm is where marginal cost equals marginal revenue and where the difference between total revenue and total cost is the highest. In the short run, the equilibrium output and price of such a firm occur at a point where MC=MR and the MC cut MR from below. Such a price is determined at the lowest point of AC as indicated on the diagram below. In the long run, the firm’s equilibrium occurs at the tangency of AR and AC and where AR is minimum. This occurs at that point where AC=AR=MC=MR=Price (Kurtz & Boone, 2011). This is illustrated below. Short run Long Run From the two diagrams, the equilibrium output is at Q while the equilibrium price is at P. Oligopoly Price rigidity Prices of products in oligopolistic market structure have a tendency to be sticky and rigid. For example, it normally creates price wars because if one firm makes a price cut, other firms promptly strike back by the same price cut for them to be able to be competitive thus maintain their market share (Tragakes, 2012). Interdependence Oligopolistic firms makes decisions interdependently because of few number of rivals, therefore, any little change in the price or product by one firm has an immediate and direct impact on the rivals fortunes and subsequently they need to counter by also changing their output and price. A firm that fails to counteract may lose a significant market share (OConnor, 2004). Barriers to entry There are barriers to entry to the industry due to the fact that the firms are large and benefit from economies of scale. It, therefore, requires significant capital and expertise to compete in the industry (OConnor, 2004). Elements of monopoly Oligopolistic firms control a more prominent or larger portion of the market as a result of product differentiation. Due to this, the oligopolistic firms act as a monopoly in lining output and price (Kurtz & Boone, 2011). Sellers There are few sellers who control sales in this industry, and they are capable of colluding so as to maximize their profits (Tragakes, 2012). Determination of price and output Firms in this market structure often collude when determining prices and outputs. Therefore, combining firm a and b results into graph c. The equilibrium profit and output of the cartel, therefore, occurs at a point where MC=MR. The equilibrium price is, therefore, at point P and output at point Q. Economic efficiency Perfectly competitive firms sell products at the market price due to perfectly elastic demand. They maximize profit by increasing production level until price=MC=ATC (Tragakes, 2012). Perfectly competitive firms achieve allocative efficiency because the products are offered at the lowest possible price which permits consumers to enjoy the product and also maximize consumer surplus (Kurtz & Boone, 2011). However, monopolistic competition firms do not achieve product efficiency since they cannot set a price that is equal to the minimum ATC. Such firms also do not achieve allocative efficiency because they select a price that is greater than when P=ATC. Consumers who afford such products enjoy less consumer surplus Conclusion The four basic market structures namely, monopoly, perfect competition, oligopoly and monopolistic competition have diverse features. Monopoly has just a single firm; perfect competition has several firms; oligopoly has few firms that can collude, and monopolistic competition has a large number of competitive firms (OConnor, 2004). A monopolistic competitive firm has both allocative and product efficiencies, however, monopoly do not. References OConnor, D. E. (2004). The basics of economics. Westport, Conn: Greenwood Press. Kurtz, D. L., & Boone, L. E. (2011). Contemporary business. Hoboken, NJ: Wiley. Tragakes, E. (2012). Economics for the IB Diploma. Cambridge ... [et al.: Cambridge University Press. Read More