Good Essay About Market Structure
Many different sellers and buyers exist within a marketplace (Hildebrand, 2009). It implies that there is competition within the market that allows price to fluctuate in response to shifts in supply, as well as demand. Besides, for almost each commodity there exist substitutes, for that reason, whenever a commodity becomes expensive, a purchaser may prefer a cheaper commodity or substitute. In any given marketplace having many sellers as well as purchasers, the supplier and consumer have an equal chance to influence cost or price of transactions (Mankiw & Taylor, 2006). In some sectors, substitutes do not exist and for that reason no competition. Within a marketplace, which has only few or a supplier of services or products, the producer (s) may control costs of products, implying that buyers do not have alternative, cannot maximize their total utility; besides, they have minimal control over the cost of commodities (Mankiw & Taylor, 2006). The paper provides an analysis of market structures to help those in authority fathom business within their area of jurisdiction. The analysis covers perfect competition, oligopoly, monopoly, as well as monopolistic competition market structures. The paper examines in detail their features, influence of entry barriers on long-term profitability of the organizations, demand price elasticity in relation to pricing of commodities, role of the administration in the market structure's capability to cost its commodities, and effect of global trade on every market structure.
It is significant to explain terms such as market entry barriers, competitive pressures, and demand price elasticity. Their definitions are prudent in understanding the discussion that will follow. High marketplace entry barriers denote the presence of high obstacles or start-up costs, which bar new competitors from entering a sector or business venture with ease (Goldberg, 2000). Barriers to entry are advantageous to existing organizations already functioning within a sector because they shield an established institution’s revenues as well as profits from being outdone by novel competitors (Sexton, 2008).
Competitive pressures are factors, which affect the competitiveness of an organization within a marketplace or sector (Goldberg, 2000). These can include suppliers or buyers' bargaining power, rivalry among available organizations, as well as the threat of novel entrants (Goldberg, 2000). Demand price elasticity denotes a measure or determination of the association between a shift within the amount demanded of a definite commodity as well as a shift within its cost (Sexton, 2008).
It is a market structure with many sellers and consumers. It is a market structure with many commodities, which are alike in nature; for that reason, there are many substitutes (Tucker, 2010). Perfect competition implies there are, if any, few barriers to marketplace entry for novel organizations, and costs of commodities are reliant on demand as well as supply. Therefore, producers within a perfect competitive marketplace depend on the prices controlled by the market; producers have no advantage (Sexton, 2008). If a firm increase or raise prices of its commodities in a perfectly competitive marketplace, the buyers may turn to a competitor having a lower price of the same product, causing any company that raises its costs to make losses and lose market share (Tucker, 2010). Perfect competition results in the allocation of resources termed Pareto-efficient. For this reason, perfect competition acts as a natural check against which to compare other market structures. Nevertheless, in reality, few companies may be illustrated as perfectly competitive. Nonetheless, it is applied because it offers significant insights (Tucker, 2010).
Characteristics of a perfectly competitive marketplace include homogeneous products. The features of services and products do not differ between producers or suppliers. The contribution of all suppliers to the market is insignificant because their production levels never alter the supply curve (Tucker, 2010).
In a perfectly competitive marketplace, all suppliers are price takers; they cannot control the market. Whenever a company attempts to increase the cost of its commodities, buyers would turn to competitors having a lower cost. Another feature is that sellers and buyers have perfect information concerning the utility, price, production methods, and quantity of products. In addition, in a perfectly competitive market, transaction costs do not exist as sellers or consumers do not incur expenses in exchange of products. In a perfect competitive market, producers or suppliers receive zero economic profits within the long-term (Tucker, 2010). Besides, producers can enter or exit the market at will (freely) (Hildebrand, 2009). It is prudent to note that in a perfectly competitive market, the role of government is insignificant as any intervention only serves to create imbalances within a marketplace. Global trade has no effect on a perfect competitive market.
It denotes a structure of market where large number of companies exist and each possess a small percentage of share in the market as well as slightly differentiated commodities (Hildebrand, 2009). Close substitutes exist for the commodities of any given company; for that reason, competitors slightly can influence prices. Insignificant barriers to market exit or entry do exist, and success invites novel competitors into the sector (Hildebrand, 2009).
Characteristics of monopolistic competition include availability of many large companies. The large numbers of companies meet the demand of the commodities in the market. Because large number of companies exists in monopolistic competition, stiff completion exists between these large companies. The companies do not offer perfect substitutes; even though, the commodities are a close substitute (Hildebrand, 2009). The second characteristic of monopolistic competition is that there are product differentiations. The different companies in monopolistic competition offer differentiated commodities that are close substitutes. For that reason, their prices are not different from one another (Goldberg, 2000). The product differentiation may be fancied or real. Physical or real differentiation is achieved via variations within materials used, color, or design. In addition, differentiation of a definite commodity can be connected to the shop location, sale condition, fair dealing, as well as courteous behavior (Goldberg, 2000).
The third characteristic of monopolist competition is that there is some control over the price. Because commodities are close substitutes, any price reduction of a product by a supplier attract customers or buyers of other commodities. Therefore, the reduction in the cost increases the quantity demanded. It means that the firm’s demand curve in monopolistic competition curves downward, besides, the marginal revenue curve normally lies beneath (Sexton, 2008). Therefore, in monopolistic competition, a company cannot set a fixed price though has control over price or cost. A company may sell a smaller product quantity through raising the price and vice versa by lowering the price. Therefore, in monopolistic competition, a company has to select a cost-output combination, which maximizes price (Mankiw & Taylor, 2006).
The fourth characteristic of monopolistic competition is the absence of interdependence of companies. The companies act independently. Each company formulates its cost-output policy based on demand cost (Sexton, 2008). The fifth feature of monopolistic competition is that there is non-price competition. The firms spend much on the ad as well as selling costs in order to win buyers. To increase the sales of a firm, the companies execute specific-techniques of competing rivals instead of price competition. The Ad is an illustration of non-cost competition (Sexton, 2008). The sixth characteristic of monopolistic competition is the existence of entry freedom. It is simple for novel companies to enter an existing company or exit the sector. Attracted by the earnings of the existing companies novel organizations enter the business that results in the output’s expansion; nonetheless, a difference exists (Morton & Goodman, 2003).
In perfect competition, the novel companies produce identical commodities; however, in monopolistic competition, the novel companies generate only novel brands of commodities with some product variation. Within such operation, the initial commodity faces competition (Morton & Goodman, 2003). In monopolistic competition, super-normal earnings attract in novel entrants that change the demand curve or slope for existing company to the left. The novel entrants continue until a normal profit or earning is achieved. At that point, companies have reached long-term equilibrium (Morton & Goodman, 2003).
Oligopoly Market Structure
Under the oligopoly, only a few organizations exist, which make up a sector. This select category of organizations has influence over the commodities’ price, similarly to the monopoly, the oligopoly posses’ high barriers to market entry (Tucker, 2010). The commodities, which the oligopolistic organizations produce, are always nearly identical; hence, the organizations that are struggling for a marketplace share are normally interdependent due to market forces. For instance, assuming that an economy requires just a hundred widgets and firm X produces fifty widgets, while its competitors, Firm Y supplies the other fifty. The costs of the 2 brands are interdependent and for that reason similar. Therefore, if firm X begins selling the widgets for a lower cost, receives a greater share of the market, thus forcing firm Y to reduce its costs.
Under oligopoly, just a few organizations supply the whole market. There is product differentiation in that commodities are similar though small innovations, hence making them distinctive from competitors’ commodities (Tucker, 2010). The oligopoly has high impediments or barriers to market entry. Besides, one organization's actions can influence another organization's actions as well as market conditions (Tucker, 2010). They offer high incentives for collusion since if the organizations form a Cartel or group they may make monopoly profits. For example, when organizations are never part of a group, they function as if competing in the market in which MC equal AR. Nevertheless, in a group they should all collude in setting costs, as well as output, as if monopoly in which MR equals to MC. Since high barriers exist to market entry within the market, novel organizations may not enter the marketplace and supply buyers at competitive costs. Therefore, oligopolies may produce what is termed super normal profit through increasing costs above the rate of the market and restricting output (Hildebrand, 2009).
Because of a market regulator such as government, many oligopoly firms do not always practice collusive behavior since they may be caught as well as fined heavily. The oligopoly market structure offers support for innovative deeds (Tucker, 2010). Innovation is seen as compulsory for businesses, which require creating a cost-leverage or significantly resulting in production or commodity quality over their competitors (Hildebrand, 2009). The effect of global trade on the monopoly market structure is three fold; it raises the number of products’ varieties for buyers to select, it can lower the price or cost of each variety sold within the market, and it can increase the products’ supply in the market and because of that lowering the costs for those commodities (Tucker, 2010).
Monopoly Market Structure
It is a market structure, by legal opportunity or other agreement where only one entity (cartel, firm) solely offers a specific service or commodity, dominating the marketplace and exerting powerful influence over it (Tucker, 2010). In other terms, one business entity is the industry or sector. Entry into monopoly market is limited because of high prices or other barriers that can be political, social, or economic. For example, the government may establish a monopoly over a sector, which it needs to control; electricity sector can be an example.
Another justification for the barriers to market entry is that always, the sole entity has the unlimited privileges to the natural resources (Hildebrand, 2009). A monopoly can also be created when a firm has a patent or copyright, which bars competitors from market entry (Hildebrand, 2009).
Some of the features of monopoly include the single seller. The supplier or producer of the product is one company, or person having a total control on the product's output (Tucker, 2010). The second characteristic is that there are no close substitutes. The third characteristic of monopoly is none existence of new companies. The fourth characteristic of monopoly is the ability to earn abnormal profit or proceeds even within the long-term because no fear of rivalry exists. That is to say, if a monopolist receives abnormal profits within the long-term, the entity cannot be removed from that position (Tucker, 2010).
The fifth characteristic of monopoly is that the company may sustain losses equivalent to fixed price within a short-term (Hildebrand, 2009). The loss occurs if consumers do not purchase or buy less; for that reason, it may halt production. The sixth characteristic is that demand for the products' of the company is less in comparison to perfectly elastic; thus, it curves downwards towards the right (Hildebrand, 2009). Such a curve is due to complete influence on the supply. Because of influence on the supply, it makes adjustments in the supply that brings about adjustments in the cost and for that reason, demand shifts in the opposite path. It implies, if a monopolist raises the cost of the product, the amount of product sold reduces; as a result the demand curve (AR) curves downwards towards the right (Hildebrand, 2009).
The seventh characteristic is the price discrimination. A monopoly may adjust different prices from various consumers. The policy is called price discrimination, which can be adopted dependent on many justifications such as fixing different costs at different places or charging different costs from different buyers (Tucker, 2010). The eighth characteristic of monopoly is that the company is a price-setter. A rivalry company is a cost-taker while a monopoly company is a cost-maker (Hildebrand, 2009). The ninth characteristic of monopoly is that marginal revenue is less than average revenue. If the company prefers raising the sale, it does so only if it lowers its price. It implies that average revenue always reduce whenever sale increases (Hildebrand, 2009).
The effect of global trade on the monopoly market structure is that it raises the number of products’ varieties for buyers to select. International trade has the ability to lower the price or cost of each variety sold within the market. Another effect of international trade on the monopoly market is the possibility of increasing the products’ supply in the market and because of that lowering the costs for those commodities (Mankiw & Taylor, 2006).
In conclusion, a perfect competitive market has no barriers to market entry, and it is usually a scenario in theory. The monopolistic competition has minimal barriers to market entry, and the firms have little control on prices of products. Under oligopoly and monopoly market structures, there are high barriers to market entry and the influence of government or international trade is significant. Therefore, it implies those in authority has the responsibility to correct market imbalances and can create such market imbalances to control operations in the market.
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