This paper presents the description of various market structures: perfect competition, monopolistic, competition, oligopoly and monopoly market structures and their characteristics. Various goods and services are sold by different firms under varying market conditions called market structures. Market structure analysis is a significant aspect of microeconomics; it is concerned with the behavior of the market depending on various factors such as the availability of barriers to both exit and entry; market dimensions; the number of available sellers and buyers on the market; product similarity and many others (Grimes, 2012).
These are significant factors that determine the manner in which the market reaches an equilibrium position. Although economists started embracing thorough analysis of market structures in the 20th century, its actual study is thought to have been begun by economists such as Adam Smith, Alfred Marshall, and Antoine Cournot (Grimes, 2012). It is worth noting that market structure is a significant aspect that relates to engagement regulations for all participants available in the market. In this regard the structure aspect implies the regulatory framework like the kind of behavior that regulators and legislators may want to embrace. It also implies the manner in which enforcement of regulations will happen and their potential compromises to favor particular investing classes.
Perfect competition is a market structure where each firm in the market appears too small to have any influences on the market price. This means that manner in which firms view prices differs greatly from the way the market does. Therefore, in a market that is perfectly competitive, the equilibrium price is set by supply and demand forces (George & Kostis, 2004). At this point then, each individual firm determines an output level that will enable it attain maximum profits at the equilibrium price. In this market, there is no single player (firm or seller) that can be powerful enough to influence the market price without others. This is because there are many sellers and buyers in the market and none of them is more powerful than the other. Besides, every buyer and seller under this market structure has to act in an independent manner. This independence ensures that consumers get the best market price by competing against one another, and that sellers compete with one another for the dollar of the consumer (George & Kostis, 2004). It is this competition against each other that serves as one of the most significant forces for keeping the prices down. Also, sellers and buyers deal in similar products there is usually no need for advertisement and brand names since the product quality is similar. A perfect example in this case is the table salt market since salt always contains sodium chloride and so it is illogical for one brand of salt to enjoy more advantages in the market than the other.
According to Grimes (2012), another condition worth considering under perfect competition market structure is that sellers and buyers have the freedom to join, operate, or exit business at their own convenience. This freedom is significant for ensuring that no industrial producers become the sole owners of the market. The last condition is that sellers and buyers have reasonable levels of information regarding the products and their prices. In most cases, customers who are well informed will prefer shopping at stores that offer conveniently low prices. Therefore, well informed sellers will require matching competitor prices in order to retain customers. The two main characteristics of perfect competition kind of market structure is (1) huge number of small firms, and (2) homogenous product.
Monopolistic competition on the other hand is a market structure, which meets all the conditions that are present in perfect competition market structure except for homogenous products. This means that, in monopolistic competition, traders embrace product differentiation in order to acquire more customers for their products and, in turn, monopolize a small section of the market (George & Kostis, 2004). In this case, therefore, products that are similar are normally sold within a price range that is narrow. The competitive aspect in this market structure is the sellers’ appropriate actions on the product price can influence customers to overlook minor dissimilarities and eventually switch brands.
The monopolistic aspect; however, is the ability of the seller to increase the price within the narrow range that is available. The monopolistic competitor has profit maximization behavior that is similar to that of any other firm. This means that the output quantity produced by the firm is such that its marginal revenue and marginal cost are equal. There are two main characteristics of monopolistic competition kind of market structure. The first one is product differentiation where imagined or real differences are embraced among competing products within the same industry (George & Kostis, 2004). A wide range of products produced in these modern times such as personal computers, athletic footwear are differentiated. The characteristic of this market structure is nonprice competition. In monopolistic competition, there is a lot of use of various promotional campaigns like giveaways; advertising and many others to influence customers to prefer certain product over any other brand in the market.
Oligopoly refers to a market structure where only a few sellers or firms obtain the advantage of remaining dominant in the industry. In such a market structure, products may be standardized or differentiated as the case is in steel industry and auto industry respectively. In this case, the number of firms within the industry is not as significant as the capacity that a single firm can have to influence a difference in sales, output and product prices in the entire industry (George & Kostis, 2004). Most markets in the United States; for instance, are usually oligopolistic. The soft drink market; for instance, is dominated by Coke and Pepsi while the fast food industry is dominated by Wendy’s, Burger King, and McDonald’s. Like other firms, oligopolists maximize their profits at the point where they find that their marginal cost equals marginal revenue. In this case, oligopolists charge their prices depending on such sales levels. In such cases, the final price of the product is bound to be higher than how it would be under both monopolistic and perfect competition. There are two characteristics of oligopoly kind of market structure; the first one is interdependent behavior. This implies that due to the large sizes of oligopolists, the actions of one firm are usually embraced by other firms (Grimes, 2012). Therefore, if one firm; for instance, offers discounted prices on its products, other firms are likely to do the same. The second characteristic is the pricing behavior. The price issue is the main point where oligopolists have the tendency of working in collaboration. For instance, when one firm decreases its product prices, it can lead to the emergence of price wars in the industry.
A monopoly refers to a market structure in which a particular product is only sold by one seller. This market structure is the direct opposite of perfect competition. This kind of a market structure is a rare scenario in the American economy except for cable TV operator or local telephone company that tends to appear as monopolies. According to George and Kostis (2004), the reason why there are only a few monopolies in the US is because American citizens have a tradition of outlawing and even disliking them. Besides, the emergence of modern technologies has led to the introduction of products that can out-compete the existing monopolies. There are various types of monopolies that require consideration. The first one is natural monopoly, which refers to a market situation where having the product being produced by only a single firm leads to reduced production costs. The second type of monopoly is geographical monopoly.
This type of monopoly is usually influenced by the size of the geographical area; for instance, a locality can be too small to accommodate two or more businesses that are similar in nature e.g. a drugstore. The third type of monopoly is called technological monopoly. It is usually concerned with the control or ownership of an industrial or production process, method, or any other form of scientific development. The last type of monopoly is the government monopoly, which entails provision of products and services at local, state and national levels where assignment to the private sector can lead to inefficiency (Grimes, 2012). The two characteristics of a monopoly are; (1) profit maximization, and (2) sole price making.
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Real-life Examples Of Market Structures
A real-life example of perfect competition kind of market structure in New York City is the operation of taxi business. Since easy entry does not imply free entry, the local government of NY City fixes the number of licensed taxicabs to operate in the city. A real-life example of monopolistic competition in NY City is the manufacture of athletic footwear. Firms dealing in this product embrace product differentiation; some athletic footwear brands are designed to associate with certain star athletes or to appear more attractive (Grimes, 2012). Others are constructed with certain material to manage or reduce weight while others have special soles that can absorb shock. In regard to oligopoly market structure in NY City, a real-life example is displayed in soft drinks, which is dominated by Coke and Pepsi. Any unprecedented move by PepsiCo to reduce its product price can lead to price wars with Coca Cola Company. In regard to a monopoly kind of market structure, a real-life example natural monopoly is seen in the supply of electricity where the New York Power Authority takes charge. In this case, NYPA is the ultimate price maker of the electricity being supplied in New York.
High entry barriers into a market have strong influence on the long-run profitability of the firms. According to Pehrsson (2009), new entrants into any market are fascinated by factors such as market size, high profits, and growth. However, new entrants into a particular market lead to reduced pricing power of the market. Examples of high entry barriers into a market are control of key resources, economies of scale, and legal restrictions. These entry barriers are significant for reducing competition and, therefore, enable the operating firms experience long-term profitability. High entry barriers make a market more lucrative for investors who are already operating in it due to high returns.
The competitive pressures present in the market with high entry barriers to entry manifest themselves through various tactics such as new products, advertising, price, etc. However, it is worth noting that high entry barriers help to prevent competitive pressures (IAN STUMPF, 2000). In an oligopoly kind of market structure; for instance, firms are continuously under the competitive pressure of keeping their prices low. An appropriate example has been shown by Coke and Pepsi. Another competitive pressure usually common among oligopolists is competition based on quality output. Each firm is under pressure produce the best quality and at the same time remain profitable.
In perfectly competitive market, the demand curve for an individual firm or seller is perfectly elastic or flat while the demand curve is downward sloping for the whole market (Vasquez, 1998). This means that individual firms embrace the equilibrium price. This is because the intersection of market supply and market demand is the key determinant of the price. This implies that the behavior of a single firm can affect the market price of a particular product. In monopolistic competition, an individual firm has its demand curve downward sloping. This is because firms poses market power whereby they can increase prices and still retain majority of their customers. Therefore, a monopolistically competitive firm lacks adequate control over its product prices. In oligopolistic markets prices are often relatively stable. The demand is usually price inelastic in the event of a price cut. The implication is that increase of product price may render the firm uncompetitive (Vasquez, 1998). Finally, demand elasticity is the key determinant of monopoly power. The relative significance of market power decreases as elasticity decreases. Therefore, if the output quantity produced falls within the demand curve’s elastic range, then a monopoly can maximize products.
In considering the effect of the role of government on the market structures ability to price its products, government role has little effect on product pricing in perfect competition. This is because market prices in a perfectly competitive market are determined by supply and demand forces (Buttler & Collins, 1994). In monopolistic competition, government regulations are used to ensure that firms charge normal and affordable prices for their products. In oligopoly, the government, through its regulation, keeps the new firms or new entrants out of the market in order to reduce competition. In the case of monopoly, the government gives exclusive rights to a particular company to produce or supply a particular product or service. Through its regulation, the government ensures that monopolies charge product prices that are affordable by majority citizens.
International trade affects each market structure in one way or another. For instance, considering perfect competition, the government does intervene in internal trade through collection of tariffs, or taxes on the imports. If tariffs are high, they definitely affect local trade in perfectly competitive markets since product price will be high (Pagano, 2009). International trade affects monopolistic competition by influencing more differentiation of products. It also increases the cost of advertising since each firm has to advertise its newly imported products for customers to know about its existence in the market. International trade affects oligopoly in the sense that it allows firms to enjoy a broad spectrum of urbane strategic interactions. Finally, international trade affects monopoly in the sense that monopoly firms are able to make and sustain positive economic profit. In such a scenario, profits shift to domestic firms from foreign firms thereby leading general improvement in national welfare. In conclusion, this paper presented the description of various market structures: perfect competition, monopolistic, competition, oligopoly and monopoly market structures and their characteristics. Perfect competition is a market structure where each firm in the market appears too small to have any influences on the market price. Monopolistic competition on the other hand is a market structure, which meets all the conditions that are present in perfect competition market structure except for homogenous products. Oligopoly refers to a market structure where only a few sellers or firms obtain the advantage of remaining dominant in the industry. A monopoly refers to a market structure in which a particular product is only sold by one seller. High entry barriers into a market have strong influence on the long-run profitability of the firms. Examples of high entry barriers into a market are control of key resources, economies of scale, and legal restrictions and their overall effect is to reduce competition and increase returns.