Analysis on Market Structures
Principles of Microeconomics ECO204
Analysis on Market Structures
Most economists have the notion that there exist different sellers and buyers who can be found in the marketplace. The availability of sellers and buyers often brings about the idea of competition, which makes prices fluctuate due to the changes that are seen in demand and supply of goods and services. It is also vital to note that there are always substitutes for all products that are produced and sold in the market place. When particular products become expensive, buyers often opt to go for cheaper products as substitutes to ensure minimal spending capabilities on their side. Markets that have concentrated numbers of sellers and buyers often make the suppliers and consumers alike have similar abilities to make changes to the prices of goods and services (Hovakimian, 2006).
There are industries that lack substitutes, and such industries have zero competition levels, while in markets where there is only one supplier or few of them when producing different goods and services, can give producers the power to control price. In such situations consumers are often left to obey and follow the provisions of the supplier without any question because of their monopolistic nature. Such consumers have limited energy to maximize their potential and little influence when it comes to changing the prices of goods and services that are sold to them.
A monopolistic market structure is one which has only one particular seller or producer who is mandated to provide goods and services to their customers. The industry where such products are prepared becomes a single business entity, because of its capability to produce and sell products direct to the consumers. Usually, entry to such operations or markets is restricted because of the costs that are associated or other legislative due to political, social or economic matters. Most governments usually start monopolies that they want to control in the form of an industry. Essential provisions like electricity are usually monopolistic because of their importance and structure in the society (Brahma, 2010).
Barriers into monopolistic forms of operation occur because of a particular unit having the exclusive right towards a particular product or resource. The government in Saudi Arabia for example has the sole mandate and responsibility towards their oil. Monopolies also occur when various companies acquire a patent or copyright, which eliminates other players from entering into its operations, for instance Viagra and Pfizer Company.
An oligopoly market structure often constitutes different firms that come together to form an industry. Such firms that come together often have exclusive rights over their products and operate in similar ways as a monopoly only that they are firms that join hands in their quest to provide various goods and services. Oligopolies often have barriers for other operators to enter, and can control their prices when they deem possible. Most products that oligopolistic companies sell are often similar or nearly identical hence most of the companies that scramble for market share operate alone due to the forces in the market (Datar, 2012).
When an economy desires to have 100 products for example, company A can decide to produce 50 pieces and the other company B provides the remaining 50, if company A decides to reduce their prices, company B will also reduce their prices to effectively compete in the market. Such provisions often make companies in the structure to cooperate and provide goods and services that are similar while making price adjustments that affect them all to ensure equal market share in the long run.
The two most common and extreme market share forms are always the monopoly and the perfect competition. Perfect competition is a market structure whereby the market has different buyers and sellers who are available to scramble for the products and services that are on offer. In a perfect competition form of structure, most commodities are often identical and this makes it possible to have various substitutes in the market. Buyers make use of substitute goods and services when the prices of their common provisions go high or when a particular product or services are not available in the market.
Prices for a perfect market can easily be determined by demand and supply, with minimal barriers to entry when new entrants desire to taste the provisions of the market and compete with those who are already in operation. Manufactures in a perfect competition have limited leverage because prices are never determined by the suppliers but the market that often houses the customers for the products and their suppliers. In this market structure, competitors often increase their market prices by buying their products from other firms selling similar products at a cheaper price. Firms that decide to increase their prices in a perfect competition often lose their market share and profits in the long run due to few customers.
A monopolistic competition market structure is a competition that is not perfect where different manufactures and producers can decide to sell different products that are different in their quality and branding. Such products are never perfect substitutes because most of them are usually of low quality hence different from the original products from the market. In such market, most firms make use of the prices that are charged by their competitors and never consider their prices on the other prices charged by their rivals.
Coercive nations often have various forms of monopolistic competition through government monopolies. Unlike other market structures like the perfect competition, the monopolistic competition operates with spare capacity. Various models of this structure are always used to model various industries in many nations. Monopolistic competition industries can include firms selling shoes, clothes, cereals, restaurants and even other service industries that are often found in big cities. The person behind monopolistic competition is Chamberlin Edwards Hastings, who wrote an important book to the subject that was titled “the theory of monopolistic competition” in the year 1933. Robinson Joan was also able to write and publish a book on the same issue which was called “The Economics of Imperfect Competition” where the author made various distinctions between the perfect and imperfect competition.
All the market structures possess unique characteristics that make them operate in different niches without any interference. A monopolistic competition for example has many people who are producing good and services together with many clients with minimal control over prices. The structure also has few barriers, hence entry into the structure is often easy and this is similar to their exits. Finally, the market structure also gives the producers power and the ability to make changes to their prices, and this fully depends on the commodity that is being sold in the market.
A perfect competition on the other hand has many firms who have freedom to enter and exit the market without any restrictions. Firms under the perfect competition structure have normal profits and often produce products that are identical in nature. A monopolistic market structure is different from this other structures because of the strict barriers to entry and most of them usually become dominant in the market, a fact that can make them provide products and services that are of low quality.
Monopolistic structures also have high-level profits because of their capability to make choices on the prices they need to charge their consumers. Oligopolistic structures are characterized by few firms who come together and often are more similar to monopolistic firms when it comes to entry. They have strict barriers to entry and often provide goods that are almost similar while making sure that their prices are at par. Lastly contestable markets are different industries that have free entry and exit motions with low costs. The theory of contestability works together with the provisions in such industries as they often believe that the total number of firms operating in a region is never important, but the high risk of competition are and should always be regulated.
There are different examples of firms that deal in a perfect competition market structure. This is a structure that has been seen as not being realistic in the normal world because of its open nature because firms can decide to enter the market and exit when they desire. The truth is that there are no perfect markets, but only different industries that almost come close to perfection. The idea of buying different products from farmers who sell almost similar products is a good example of a perfect market. Most of the prices of the products can easily be found out without any problem as the farmers make changes to the prices in accordance to their time and place of operation.
High entry barriers to different completive operations like in the monopolistic market structures often lead to increased prices in the long run. High entry barriers are often seen by most governments or companies that have patented their products or nations that provide important goods and services to the people. When providing electricity for example, many nations have endeavored to have minimal competition leading to strict entry barriers to other competitors who desire to enter the market. With such barriers organizations and governments can easily increase their profits because they can charge different prices that they desire without any control. Them being the suppliers they always have the capability and mandate of making changes to their prices without being coerced by any institution or client.
There are often high competitive pressures in markets with high entry barriers because of the importance of commodities that are always provided for the masses. Most competitors are given high-level standards and regulations that they cannot meet, and this makes them surrender and endeavor to engage in other activities that are within their means and reach. Governments have used such options before and have managed to lock out different competitors who desire to provide essential goods and services to the people by ensuring strict regulations and entry points that cannot be achieved easily. Others have set high standards to such entries by increasing the amounts of fees or tax that are needed to be paid making most competitors to allow them monopolistic structures to continue their operations without any interference (Mahadevan, 2003).
It is vital to note that monopolistic structures that have high barriers to entry can provide low-quality products or deliver services that are not up to standard because of their single nature of being in the operation line. Nations and organizations should always be allowed to join others in providing essential goods and services as this will help them become sensitive to matters of quality and price. Monopolies often exploit their customers because they have the power to make changes without any problem.
Price elasticity often changes, and this happens when the markets in question make different changes that are pertinent to their operations. Competitive markets always have similar pricing strategies and firms that operate under such structures always conform to the prices in the market without any changes made by the players. Profits of such markets are never high because of the high competition levels that often exist. When demand for products becomes high with low supply the market usually increases their prices leading to high profits.
A monopolistic market on the other hand gives the market minimal options of making changes to their prices, and they often make decisions on the prices that they want to charge hence the profits they usually receive come as a result of the choice they make for their markets. Legalistic market structures often follow the provisions of their member firms and make price changes in accordance to the changes their members have made. Such provisions often make the market have prices that are almost aligned because when such firms consider raising their prices they often consider loosing the market share that is usually important for their operations. Lastly, a monopolistic competitive market gives producers the power to make changes to the prices of their products and this can make them have increased profits in the long run (Urban, 2011).
Governments often have a high impact on the firms that operate in their jurisdictions. All the market structures often have to follow different government regulations that are set aside by the government to ensure minimal exploitation to the citizens. It is however hard to make changes to other market structures like monopolies and monopolistic competitive structures because most of them provide essential commodities hence make their pricing relevant to their raw materials and other resources. The perfect competition market fully operates under the provisions of the government as they make decision of how different products should be priced in the market.
International trade is of high importance to all the market structures as it provides them with the opportunity to sell products and services to other people who are abroad. Through international trade those in the perfect competition can sell their products to other people outside their nation, and they can also be allowed to fix their prices, and this can make them increase their earnings without problems. This is similar to monopolistic and oligopolistic market structures.
In conclusion, market structures in economics provide the total number of manufactures who have the capacity to provide homogenous products, which are often identical in nature. The market structures are always imperfect but operate within the premise of a realistic market condition. Market structures possess monopolistic competitors, oligopolists, duopolists and monopolists who often dominate the markets. The various elements of market structures include the conditions of entry, the size and number of firms and their differentiation.
Brahma, A., Das, S., & Magdon-Ismail, M. (2010). Comparing Prediction Market Structures, With an Application to Market Making. arXiv preprint arXiv:1009.1446, (2), 1-23.
Datar, S., Jordan, C., Kekre, S., Rajiv, S., & Srinivasan, K. (2012). New Product Development Structures and Time-to-Market. Management Science, 43(4), 452-464.
Hovakimian, A. (2006). Are Observed Capital Structures Determined by Equity Market Timing? Journal of Financial and Quantitative Analysis, 41(01), 221.
Mahadevan, B. (2003). Making Sense of Emerging Market Structures in B2B E-Commerce. California Management Review, 46(1), 86-100.
Urban, G. L., Johnson, P. L., Hauser, J. R., & Urban, Glen L;Hauser, J. R. (2011). Testing competitive market structures. Marketing Science, 3(2), 83-112.