Four Market Structures Research Paper Examples
Market structures Description
This is a type of market that features one, if not all, of the characteristics of a monopoly such as supply constraints, high price levels or excessive entry barriers. Due to the type of market, it mainly entail of a single supplying firm and consumers can only buy from this single firm. Without good control or legislation, this firm has the power to increase prices without adversely impacting demand for its services/products. This kind of market is in contrast to a perfectly competitive market.Oligopolistic market
This is a situation where a certain market is controlled by a small group of firms. An oligopoly is much similar to a monopoly, where only a single company has control over most of a market. The only different is that in an oligopoly, there are at least two market controlling firms. The retail market of gas is a good example of an oligopoly because a small number of firms are in control a large majority of the market.1
The market structure in which the following five features are met:1) All of the firms sell products that are identical;2) All of the firms are price takers - they have no control of their product price in the market;3) All of the firms have just a small market share;4) The buyers are well informed about the product/services being sold and the prices charged by every firm; and5) The industry is featured by freedom of entry and exit. This type of a market is also sometimes referred to as pure competitionMonopolistic Competition
This is a type of competition where:- All the firms produce similar products yet not products that are perfectly substitutable.- All the firms can enter the industry if the profits are very attractive.
John Barron & Gerald Lynch. Economics. (London: Richard D. Irwin Inc, 1989)
- All the firms focus on profit maximizing.- All the firms have some market power, meaning that none are price takers.
This type of market differs from the perfect competition in that production does not happen at the least possible cost. Due to this, firms are left with a production capacity that is in excess. 2
Graphs for each market structure.
The following are graphs of the four market structures.
John Barron & Gerald Lynch. Economics. (London: Richard D. Irwin Inc, 1989)
Source: (Barron & Lynch, 1989)
Selecting a company from each market structure
Chesapeake Energy - Perfect competition
Chesapeake Energy Corporation is involved in exploration, acquisition, as well as the development of properties for natural gas, and oil production from underground reservoirs in the US. It has its headquarters in Oklahoma City and was founded in the year 1989. The company is involved in selling undefended products whose price is determined by market demand. In that respect, each company sells as much as they can produce. 3
Wal-Mart Stores operates retail stores worldwide in various formats. Its operations are through three segments including Wal-Mart International, Sam Club, and Wal-Mart U.S. It has approximately 72
3. Yahoo finance. “Chesapeake Energy Corporation Profile.” 14 April 2015a. <http://finance.yahoo.com/q/pr?s=CHK+Profile> (Accessed 14 April 2015)
Banners with 11,000 stores in over 27 countries. In addition, it has an e-commerce website operational in 11 countries. Wal-Mart had its headquarters in Bentonville and was founded in the year 1945. Operates in a market where firms produce similar products but not perfectly substitutable products.4
Delta Air Lines operates scheduled air flights for cargo and passengers worldwide. The company has two segments including Refinery and Airline. It operates approximately 900 aircrafts and was founded in the 1924 with headquarters in Atlanta. The company operates in a market where few large firms have significant market power.5
Entergy Corporation and its subsidiaries are involved in production as well as distribution electric power in the US. Its operations are in two segments including Entergy Wholesale Commodities and Utility. The company’s headquarters is in New Orleans and was founded in the year 1989. The company is a significant producer with a large market share in Louisiana, Arkansas, Mississippi and Texas in an industry that has barriers to entry and exit. 6
Market share of the company including the top 3 or 4 players that compete with each ofthe companies and the industry HHI
Where: Market share = (Company revenues / Total companies’ revenue)
HHI = Ms12 + Ms22 + Ms32 + Msi2
Msi2 is each company’s market share.
Source: (Yahoo Finance, 2015a)
Source: (Yahoo Finance, 2015b)
Source: (Yahoo Finance, 2015c)
Source: (Yahoo Finance, 2015d)
Interpretation of HHI for each market
Monopoly by Entergy in its area of operations where it has no direct competitor has the highest HHI of 100% followed by the Perfect competition market with 71.2% followed by the monopolistic market with 56.04%. The market with the least HHI being oligopoly that has an HHI of 33.38%.
Market structure profit margin based on economic theory
Rank 1: Monopoly: A monopoly is a type of firm without any competitors in its industry. It decreases output to raise prices and maximize profits. Therefore, it produces less than the socially optimal output level and at higher costs than the competitive firms. In that view, It should have the highest profit margin.
Rank 2: Oligopoly: An oligopoly is a type of an industry with just only a few firms. If they collude, they decrease the output and increases profits the way a monopoly does. However, due to strong incentives to cheat on the collusive agreements, the oligopoly firms usually end up competing. Thus, It should have moderate profit margin compared o monopoly and monopolistic.7
Rank 3: Monopolistic competition: In the monopolistic competition, an industry has many competing firms, each one with a similar but the products are at least slightly different. Restaurants, for instance, all serve food but of various types and in locations that are different. The cost of production is what could be attained if all the firms sold products that are identical, but the consumers benefit from the variety of products produced. The market should also have relatively high-profit margin close o he monopoly.
Rank 4: Perfect Competition: The perfect competition happens when many small firms compete against each other in an industry. Firms in the competitive industry produce goods at the socially optimal output level at the least possible cost per unit. In that respect, the market should have the lowest profit margin.8
7. John Barron & Gerald Lynch. Economics. (London: Richard D. Irwin Inc, 1989)
The Profit margin for each of the last three years for each company.
Where margin = [Net profit / Revenues]*100
Source: (Yahoo finance, 2015a; 2015b; 2015c; 2015d)
Company with the highest margin, lowest margin and whether that fits with theory
The company with the highest margin over the three years is Delta operating in Oligopoly followed by Entergy operating in Monopoly market. The company with the least margin is Chesapeake operating in a Perfect competition market. Thus, the results agree with the market structure theory that monopoly and oligopoly markets are the most profitable while monopolistic and perfect competition markets are the least profitable. 9
Strategy to improve profits
Chesapeake Energy - Perfect competition: as the market structure that maximizes efficiency, as total surplus determines. At a lower price, a total output is provided by perfect competition to consumers than in the other market structures. Firms produce is at minimum average cost, where P=MR=MC. Since in the minds of consumers products are identical advertising non-existent
Price competition is the only competition, yet each firm is a price taker. Ease of entry and exit by firms means that all of them, in the long run, will earn normal, not economic profits. The company should enhance profitability by managing is operations cost since demand sets price.10Wal-Mart- Monopolistic competition: more consumer choices are allowed for differentiated products than in perfect competition. Lower total output and higher prices result in less efficiency than in perfect competition. There is no production by firms at minimum average total cost. However, consumer more choices preference results to lower efficiency, and not from economic profits. In the long run do not exist in this type of market structure. As a part of product differentiation advertising is very important. The company can enhance its profit margin by increasing is product prices given is market control. In addition, the company can increase its market share given market power. Delta - Oligopoly: to explain the firm’s behavior in this kind of the market structure more than one model is needed. Than any in any other market structure non-price competition can be fiercer; on the other hand there may exist anti-competitive cooperation. As a part of the competition, advertising is important, so is development and research. These types of the market structure for technological advances are the most responsible. Price is above MC, and as long as entry is restricted and it’s possible for long-run economic profits. He company can enhance profitability by differentiating is products to serve a niche market and charge higher prices for added value. Entergy - Monopoly: In the market we have only one firm, a choice of products is not given to the consumers. All the market power is with the monopolist, and output will set at the quantity where MR=MC, in which quantity is a lower than the quantity of perfect competition market, where MR=demand. A monopolist will set its price at the same time, where the MR=MC quantity equals demand, a price that is a higher than in perfect competition, where P=MC. With monopoly, innovation and advertising are unnecessary. Long run profits are possible in this type of market structure. The company can increase profitability by producing less and charging a high price for its services.11
Barron John. & Lynch Gerald. Economics. London: Richard D. Irwin Inc, 1989.
Yahoo finance. “Chesapeake Energy Corporation Profile,” 2015a. <http://finance.yahoo.com/q/pr?s=CHK+Profile> Accessed 14 April 2015.
Yahoo finance. “Entergy Corporation Profile,” 2015b. <http://finance.yahoo.com/q/pr?s=ETR+Profile> Accessed 14 April 2015.
Yahoo finance. “Delta Air Lines Profile,” 2015c. <http://finance.yahoo.com/q/pr?s=DAL+Profile> Accessed 14 April 2015.
Yahoo finance. “Wal-Mart Stores,” 2015d. <http://finance.yahoo.com/q/pr?s=WMT+Profile> Accessed 14 April 2015.