Main Market Structure Models - Essay Example

Market Structure Models According to (Sloman and Sutcliffe, 2006:125), a market structure model helps to identify and show how a market is comprised or made up in terms of; The number of firms Nature of the product manufactured The effect on the efficiency of the industry The extent of the restrictions for entry The industry’s behaviour concerning pricing methods and output levels The profit margins The level in which the firm influences prices of goods The extent of the power that each firm possesses The various market structures are quite significant since the degree of their competition affects the welfare of the consumers either through benefiting them or through disadvantaging them. Market structure models are also significant owing to the performance and behaviour they influence to companies in the industry. Market models represent the real situation, they enable one to understand things that happen in real-life situations. These models help in the analysis and evaluation of markets; hence offering the benchmarks for development of businesses. Each model can be classified according to various characteristics. These characteristics may include; the number and size of companies that comprise the industry, the firm’s price control, the degree of freedom of entry and exit, the nature of goods produced, and finally, their diagrammatic illustration (Sloman and Sutcliffe, 2006:126). The various types of market structure models applied in the market include; the perfect competition market structure, monopolistic or imperfect competition market, oligopoly market structure, duopoly market structure, and the monopoly market structure (Carl, 2012: 204). Assumptions and Characteristics of Perfect Competition A type of market structure model that is the most competitive is pure or perfect competition; this market is extremely competitive. As illustrated in the above discussion, market structure models summarise the way markets are organised, and behave. Therefore, for every market structure, there is a set of assumptions or characteristics, which identify the kind of industry. The model demands that only those industries that meet the characteristics will behave the way it predicts. The various characteristics and assumptions of perfect market competition include: Several Buyers and Sellers: a huge number of buyers and sellers characterises this market. The large number of buyers and seller have no much of influence whatsoever on the market. Therefore, the degree of the number of consumers and producers is great. Their availability or deficiency does not make any difference to the market (Nellis and Parker, 2002:201). Identical and Homogenous Product: All the producers in this market structure manufacture almost the same products. This implies that consumers fail to differentiate between products from the other. Moreover, in this market, there are no distinguishing features such as brands, label, which are used to make products different (Nellis and Parker, 2002:201). Excellent Knowledge: all the buyers and sellers in this market access proper information concerning the products. This is because there are many other producers all producing similar product. Free Entry and Exit: Firms in this type of market are able to transfer resources. Goods are easily moved in and out with low cost. This allows companies in this market quickly respond to varying consumer requirements. For instance, while it is difficult to enter and exit farming, it is easy to move from one agriculture marker to another. A farmer who grows maize can easily switch to growing beans (Nellis and Parker, 2006:198). Price: all the firms in this market are price takers. They have no control over the price they attach to their products. Finally, every producer only supplies a small portion of the total industry output to the market (Carl, 2012: 204). Monopolistic Competition This is a type of non-perfectly competitive market. A market structure that is characterised by a high scale of competition by both consumers and producers. Every individual firm has its own type products. This means that such a company becomes the only seller such product in the market. However, since products are somewhat similar with others, there is a very stiff competition. This is the most common type of market in the world today. It is most common in proprietorship form of business organisation. Firms in this market, posse limited individual power. The various characteristics of a monopolistic competition market include: Many Buyers and Sellers: There are numerous buyers and sellers in this market. The large numbers of buyers and sellers who characterise this market have little significant influence on the market. Although the number of consumers and producers in this market may not be as great as in a perfect competition market, they are sufficient to be very competitive (Carl, 2012: 214). Heterogeneous Product: the producers in this market manufacture similar, but not identical goods. Consumers can easily distinguish between the outputs of each firm from another. This type of market has distinguishing features such as labels, and brands that make products different. This process of differentiating products in this market is referred to as product differentiation. Thus, this marks the biggest distinction between a perfect competition and monopolistic competition markets. Relatively Superior Information: Both the buyers and sellers of products in this market have good access to information concerning the products. This information may not be as perfect as in perfect competition market. Since produced goods in this marker are different, products have to be assessed individually and consumers usually do not find time to this completely. Instead, consumers mostly depend on word of mouth, and advertising to obtain the products they want. This creates an imperfect knowledge (Nellis and Parker, 2006:216). Comparatively Free Entry and Exit: Firms in this market find it relatively easy to move resources in and out. This further allows firms quick to react to varying consumer needs. There are relatively low restrictions of entry and exit into the market. Price Control: firms in this market may possess some elements of control over price because they can differentiate their product from their rivals. Products are, therefore, close, and not perfect substitutes (Nellis and Parker, 2006:218). Oligopoly Oligopoly as a type of market structure is discernible by a limited degree of competition. Oligopoly market may comprise of various markets from competitive markets to low completive markets. Consumers in this market face more choices that are limited. It is also within this market structure that the equilibrium of power changes against the consumer. For instance, this market steers the economy of the United States. Firms in this market although not as many as in monopolistic competition, they are very large, powerful, and produce large volume of goods. As compared to firms from perfect and monopolistic markets, oligopolistic firms hold huge political influence, in addition to economic power. Oligopolistic markets are characterised by: Relatively Few Sellers: There are very few number of sellers in oligopoly who are able to influence the market individually. Producers in this market are mutually dependent. This implies that the success of the firm could be affected by the actions of a rival as its own. Firms in this market control large market share. This also means that when companies control this large market share, then the actions of one firm considerably influences its competitors. Homogeneous Product: oligopoly markets such as the steel industry, their product may identical from manufacturer to another. Some oligopolistic industries, such as automotive industry, products can only be similar from one company to another. In this market, therefore, the more similar goods become, the high the level of competition will take place. This is because consumers can easily switch from one brand to the other. This can have a significant influence on the prices of products in the end (Nellis and Parker, 2002:199). Both Good and Poor Information: the buyers and sellers of this market may get good information concerning the product. The players are likely to obtain excellent information about products when the products produced are similar and identical. This translates that as products become more distinct, the more information is available to consumers for comparison. Therefore, the magnitude of information in this market will dictate how competitively the market will become. Oligopolistic firms may be forced to maintain quality products and same price in line with other manufactures. When this is done, then the consumers would have the power to make better purchases (Nellis and Parker, 2002:201). Restrictions and Barrier to Entry: Firms in this market are not allowed to move resources in and out of the market. The barriers of factor movement in this market are clearly set, and firms are required to adhere to these rules. This is a very different case from other types of markets such as the monopolistic and perfect market scenarios where there is free factor movement. In this market, branding and loyalty are an important source of competitive advantage to the firms. Situations of non-price competition may also be prevalent. The behaviour of both consumers and sellers can be explained from game theory as opposed to other types of markets. Finally, there are minimum efficient scales in this type of market (Crew, 2007:124). Monopoly This is the least competitive market of all. A monopoly can be defined as a market with only one producer of a product. Consumers of this market have the least choice of selection. They either buy from the seller or do not buy. These markets again, are characterised by high prices and low production of goods than any other market structure. The various characteristics of these markets include the following features: A Single Seller: The nature and structure of a monopolistic market entails only one seller. This market structure essentially provides the rationale of analysing industries that have one producer who controls almost the entire output (Jensen, 2000:115). Distinctive Product: because there is only one producer of a product in this market, the manufactured good cannot be compared with any other. Therefore, the products produced are unique and distinctive. For example, this type of market can effectively explain, why a company may not be a monopoly even if it produces one version (Jensen, 2000:115). The Level of Information is Largely Irrelevant: irrespective of whether the information is good or bad is fundamentally irrelevant because there is no other product to compare (Jensen, 2000:115). References Bain, J.S. (1998) Market structure, New York, NY, Greenwood Press. Carl, S. (2012) Market Structure, New Delhi, World Technologies. Chioveanu, I. (2005) Strategic pricing in oligopoly markets, Bellaterra, Universitat AutoÌ€noma de Barcelona. Cohen, K.J. & Michael, R.C. (2008) Theory of the firm: resource allocation in a market economy, Englewood Cliffs, N.J., Prentice-Hall. Jensen, M.C. (2000). A theory of the firm: governance, residual claims, and organizational forms. Cambridge, MA, Harvard University Press. Kamien, M.I. & Schwartz, N. (2002) Market structure and innovation, Cambridge, Cambridge University Press. Nellis, J.G. & Parker, D. (2002) Principles of business economics, New York, Financial Times. Nellis, J.G. & Parker, D. (2006) Principles of business economics, Harlow, England, Scherer, F.M. (1999) Industrial market structure and economic performance, Chicago, Rand McNally. Sloman, J. & Sutcliffe, M. (2006) Economics for business, New Delhi (India), Pearson Education. Sutton, J. (2005) Technology and market structure theory and history, Cambridge, Mass, MIT Press. Read More